Construction and Real Estate Development
Functions You Need in Construction Accounting Software
As construction firms evolve, they quickly outgrow their first generation accounting software packages.
That software was likely purchased when there was not a lot of capital on hand and not a lot of business to keep track of. If your firm needs to upgrade, making the decision can be daunting. Here are some considerations that can help you determine if you really need to change or if your current software still has some life left in it.
Progress Billings and Retainages: Construction bills are generated sometimes for what seems like an arbitrary amount that goes against a larger contract value. Your accounting software needs to store the total contract value somewhere, and allow you to bill against it.
Retainage sometimes is withheld from billings as a job progresses. Using off-the-shelf software will require your bookkeepers to manually deduct the retainage and keep track of it. Good construction-specific accounting software will always:
- Let you put in the full invoice amount;
- Make an automatic accrual for the retainage;
- Deduct it from the invoice, and
- Put it in a separate, unbilled revenue account for tracking, collection, and proper financial reporting.
Cost Estimates and Contract Values: Some off-the-shelf software tries to lump your firm's project cost estimates with your total contract values, and convince you that they are one and the same thing. However, the very nature of construction accounting is that costs are accrued separately and compared with contract values along the duration of each project to determine interim profits.
Your software should let you enter an estimate for the total contract cost, that can be revised, and let you enter a separate total contract amount, which is what your firm will earn by doing the work. Project costs should be able to be tracked as a percentage of the total project cost easily. And it should be available in one easy-to-find report. If it is difficult to get a percentage of completion in your software by comparing each project's total cost-to-date with the estimated total project cost, avoid that software.
Change Order Income and Change Order Costs: Almost all construction companies can benefit by distinguishing between change orders on the income side with customers and change orders your firm grants to those who are doing some work on your project. Even if there is no formal written subcontract with your vendors, and you are not calling them subcontractors, your company should still keep committed costs accurate, well-managed, and as complete as possible.
Additionally, as your firm's income can jump significantly with one approved change order, it is critical that the software allow you to easily track multiple change orders individually so they don't get confused. When evaluating software, be sure the reporting you get clearly identifies change orders and allows your bookkeepers to drill down to see all the individual approved and pending change orders.
Over-Billings and Under-Billings: Sometimes called Work In Progress, over- and under-billings must usually be shown on your financial statements and your tax returns in order for your firm to stay in compliance with industry standards and tax laws. Although a savvy controller can make these journal entries so that the books meet requirements for the year-end review, good construction accounting software should calculate the over- and under-billings automatically and list them as assets or liabilities.
AIA Billing Documents: The AIA billing document is so common that you should insist that any construction accounting software package you are using print the form on-demand right from the forms or reports menu, filling in the blanks with your project financial and accounting data without any extra effort. The big names in construction accounting software all will generate AIA billing forms on-demand, saving a lot of time.
If accounting software you are considering cannot perform these functions, your bookkeepers will have to, creating a lot of unnecessary work. Shop wisely.