To try to solve the challenges of construction financial reporting, contractors often take the step of obtaining or upgrading accounting software, often deploying software that aligns with the construction trade; generic accounting software is typically not adequate for commercial contractors.

The software also must be sophisticated enough to integrate with other programs, notably estimating and billing systems. The software also must allow all users can drill down to enter and use data.

But while having the right software is often helpful, it’s only part of the solution.

PEOPLE OVER COMPUTERS

The biggest part of the solution lies with construction project managers, because proper financial reporting starts with PMs in the field analyzing and inputting data. Incorrect or untimely reporting will gum up the works. If that basic task is not done professionally, it wreaks havoc in the firm’s financial statements.

The people using construction software become are pivotal, as they provide accurate information to enable their company to prepare proper, complete financial reports and when they alert the home office when something in a project isn’t going as planned and must be adjusted.

Project managers, though, aren't integral by accident. Leadership of the firm must empower and equip them to do the right thing. Even as they upgrade software, contractors of all types and sizes need to be sure their internal controls and processes can provide the appropriate financial accounting and reporting.

Construction firm leaders also must both require and empower project managers in the field to provide financial data promptly and accurately.

PRACTICE PRECISION

From the viewpoint of a surety company, a lack of accountability makes for dysfunction in financial reporting. Delayed or inaccurate information from the project site causes problems in the financial data that reaches the surety.

Why does that matter to the contractor? Imprecise, ambiguous or late financial reports can cause the surety’s decision-makers to doubt the contractor’s sophistication and reliability.

And that matters because a contractor’s pattern of financial reporting is what gives the surety either the confidence or reluctance to issue future surety bonds.

In fact, sometimes surety professionals or bankers advise a contractor to hire a financial officer and/or improve financial reporting. Surety companies and banks have a unique window into contractors’ financial reports, because they depend on the information to extend surety bonds and credit lines.

An example of issues contractors need to deal with proactively might look like the following:

A contractor bids a pipe construction project, creating an itemized list of the elements of the job: pipe, gravel, labor, equipment and so on—with detailed data in the estimate as to how much gravel is needed, what equipment will be used and the charge for it, etc.

The contractor’s accounting system includes costs for each item and subtotals for various costs. This approach has been used for decades so that the job can be reviewed by project leaders, senior executives and CFOs—before, during and after a job.

Once the contractor wins the bid and the job starts, project managers post data from the site. This leads to periodic reports using the project management and/or accounting software system(s). The contractor’s senior management must train and incentivize PMs to work this way, and PMs must be disciplined to do it all the time.

This information is vital for the home office to match to purchase orders for the project—and, most important, to bill the project.

This same data is vital for work-in-progress reports, which are part of the contractor’s financial report for the project presented to the surety. All this data must be tied together, which is one of the valuable aspects of accounting software.

If a project manager is not on time or not posting the right data, though, not even the best software in the world can rectify the financial reporting issues.

The project manager also is responsible for pointing out issues:

• Information from the jobsite isn’t available for some reason.
• Incurred labor costs reach 50% when the job is only 30% done.
• The estimate calls for 500 feet of pipe to be laid daily and the current pace is 300.

This type of information from the project manager helps the contractor determine if there’s an execution and/or estimation problem.

Note in all of the above that it’s not the software system getting the job done. It’s the people operating it who make the software effective.

Improving financial processes—from the software to the training of the people who operate it—doesn’t seem vital victory at first look, but it can mean a contractor can gain opportunities to grow the business, which is a win for everyone.