All construction companies, in some form or other, possess an accounting system that collects and reports the data necessary to prepare company financial statements. Unfortunately, we often find that accounting systems fail to collect and provide the data necessary to effectively manage the company’s construction projects. An effective accounting system must provide data for the company as a whole, for each project, and for each piece of heavy equipment. Accounting systems that fail to report this data quickly enough for management to analyze and make corrections in a timely manner is simply reporting costs.
For cost controls to function effectively, management should analyze accounting data and take corrective action in a timely manner. This can only occur when the data itself is timely, e.g. committed costs are entered into the purchase order system before the issuance of purchase orders. The profitability of the project can be preserved and enhanced if cost overruns and other issues such as waste are identified and addressed early in the construction process. We find that this proactive approach is an unmistakable attribute of the ‘best in class’ companies.
The following key components indicates the accounting system is designed to provide management with quality information to proactively control costs:
- Estimated costs, cost-to-date and committed costs are all updated at least weekly, for both job costing and equipment tracking.
- Reports are optimized for quick identification of problems. Ideally, ‘management by exception’, the flagging of transactions or situations that fall outside expected norms, limits or expectations, is utilized.
- The individuals responsible for each step of the recording and reporting process are clearly identified, and strict controls and procedures are in place to reinforce the reliability of the data.
- The reports are accessible to all levels of production management, including front-line supervisors. Preferably, the accounting software ‘spits out’ the needed data and reports on demand.
The design of any effective system of controls should take into account the trade-off between needs of management and the costs of implementing and maintaining the system. Management will have to decide on the proper level of detail for the job cost system, based on the size and complexity of the jobs performed, while recognizing that projects can quickly get out of control without timely information.
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Call Alex Leonardo or Rick Captain today at 561-998-7770
