How Accounting Can Provide More Value to Your Construction Business

John Vogelpohl
January 25, 2010 — 1,088 views  

Is your accounting department helping your construction business run like a well-oiled machine? If you said no, perhaps your accounting gear needs a little maintenance.

The four key functions in your office are accounting, estimating/sales, production and administration/sales. (You can put sales in either place.) All four functions are interdependent, like gears, and each one meshes with the others. If one gear becomes stripped or broken, the other gears cannot function and they all lose all their value. Accounting should be a core function, not a box on the organizational chart that indirectly relates to production.

Think of accounting as one of the gears of your business. The machinery starts when your estimating team produces an estimated price. When the job is awarded, this estimated price becomes the basis for the estimated cost in the cost subsidiary. Accounting maintains this cost subsidiary. In a perfect world, a historical, effective bidding methodology is used, so that a clear bridge between costs per estimate and budgeted costs exists, allowing jobs to be managed properly.

And in that perfect world, the accounting department accumulates the cost subsidiary using the exact same terms as the cost budget, and creates financial statements for administration that also use these same terms. As a result, all parties can share the same apples-to-apples information so that estimating can refine their assumptions, production can learn how to enhance performance and management can reasonably assess effectiveness of estimating and production and distinguish problems between estimating and production. Sounds simple, but it can be much harder to execute.

Your accounting department has two basic roles: processing transactions and reporting information. Recording transactions is the basic work. It should be done as close to perfect as possible. Bills must be properly authorized, received and paid, and customers need to be invoiced and the cash collected.

These transactions must then be reported in ways that are meaningful and useful. It is in this process that accounting departments are valued or reviled. The accounting department should never be "the tail that wags the dog."

Your accounting department should be attentive to and responsive to the needs expressed by your project managers and foremen – and provide them with meaningful information. Accounting needs to call meetings to better understand the users' needs, educate users when needed, be open to being educated and deliver the needed product. In that context, other team members must be willing to take time and effort to respond and advise, as well, as partner in getting that product.

Providing high quality information to drive success in production must be the focus. The financial statement must report what the job costs are (with the same burdens, same cost allocations and same pricing) in the same way the cost books report them. When this occurs, it's a thing of beauty. You have the right and obligation to expect job-by-job visions and financial performance records to reconcile. In a properly functioning system, they will ... exactly.

John Vogelpohl

Rea & Associates, Inc.