The financial aspects of a construction company should expand beyond the accounting department. It is imperative that a team approach is developed, and Project Managers take an active role in job cost analysis from estimation through job completion. Effective project managers who can understand the underlying financial data, will have more success in controlling costs, improving profitability, and managing cash flows across the company. Regardless of the financial climate - accurate financial reporting is not only a valuable management tool, but is imperative for your bank, job pre-qualification, and bonding companies.
In a recent training seminar, Meaden & Moore presented a basic overview of construction accounting and a roadmap of key best practices for project managers to more effectively analyze job cost trends. The main goal is to better educate individuals on the front lines of a job, in order to give them the knowledge and tools to provide accurate and timely financial information to the accounting department and use the available data from the accounting department to more effectively manage jobs and help improve margins and cash flow.
Here is a list of 6 tips that could benefit every project manager:
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- Know the details of your job contract and communicate with the team that is in the field.
a. Work performed outside of the contract may lead to unapproved change orders and cost over-runs that cannot be billed. - Basic construction revenue recognition policies.
a. Understanding how job costs drive revenue, profits and cash flow will help effectively manage the ebbs and flows of a long-term project to spot issues sooner and ideally mitigate those issues. - Timely access and analysis of standard financial reports.
a. Detail Job Cost Reports; including estimated costs and hours to actual.
b. Accounts Receivable Aging.
c. WIP Schedule.
d. List of unapproved/unpriced change orders. - Identify unusual job cost fluctuations/deviations.
a. Profit margin estimate to actual and changes over time.
b. Unusual over/under billings that could indicate change order, customer, or costing issues.
c. Old AR and retainage – PMs can help get AR collected a lot quicker than office personnel can sometimes.
d. Cost to date and labor hours actual to estimate (does % complete accurately reflect job progression) – does the data match up with the PMs on-site knowledge? Is there a potential issue with overruns they can head off before it gets worse? - Develop a checklist of key questions (Job Cost “Report Card”) that PM’s can review with job foreman in order to draw conclusions regarding unusual variations and help determine changes that need communicated to accounting and updated in the job schedule.
- Perform a review of actual financial performance to expected and determine the cause or causes of any significant fluctuations – and think about how to avoid profit fades or duplicate profit gains on future projects by possibly changing or adding processes, procedures, or improving communication.
- Know the details of your job contract and communicate with the team that is in the field.
The team approach and communication are the key to accurate analysis of job cost detail. Developing project managers to take the lead and become an integral part of the financial reporting process will lead to more accurate reporting to see your business through any economic climate and provide them with tools to help manage their projects more effectively.
If you need assistance or have questions about implementing best accounting practices for project managers and other members of your construction team, contact us. We can help you put together a training course or offer specific guidance to meet your needs.
