Effective financial management for contractors involves taking a project-centric approach to keeping track of expenses.
In this guide, we discuss practices that can facilitate accurate tracking of project costs, income, payroll, and financial reports.
Implementing these practices can help you with successful business management in the construction industry.
Establish an efficient project accounting system
Effective construction cost tracking begins with a robust project accounting system.
Project accounting is the tracking of all costs related to a certain project throughout its duration.
This involves creating detailed budgets, categorising costs, and allocating resources specific to the project. Using project accounting can provide clarity on what projects are going to be costlier and you can use this information to plan accordingly.
Regular updates and reviews enable proactive identification of potential cost overruns, allowing for timely adjustments and mitigating financial risks.
Itemise costs
Accurate construction cost tracking is vital for financial transparency. Categorising costs in a detailed manner provides insights into fund allocation.
Common categories include:
- the cost of raw materials
- subcontractor wages
- construction equipment
- permits.
Itemising expenses within categories offers you a granular view of your costs, neatly assigned to a part of the business, aiding in precise tracking and analysis. This paints a clearer picture of where you may be overspending and where adjustments may be needed.
In a construction project, costs can be categorised into direct costs (such as materials, labour and subcontractor costs) and indirect costs (such as permits, insurance and overheads). This distinction allows for a more detailed analysis of construction costs, helping you identify areas where you’ll need to make adjustments to spending.
Collaborative communication
Effective communication is essential for successful cost tracking, so create open lines of communication between project managers, business leaders and subcontractors. Regular meetings ensure alignment on project goals, budgets, and potential challenges, creating a more collaborative and transparent working environment.
Streamline subcontractor management
Subcontractors constitute a significant portion of your construction costs, which means clear and transparent agreements with subcontractors are crucial. Ensure your contracts specify payment terms, deliverables and variations.
It’s also crucial to outline performance expectations, quality standards and timelines. This level of detail ensures a shared understanding of project requirements, reducing the likelihood of misunderstandings or disputes down the line.
For instance, the agreement should set out the standards for materials, workmanship and adherence to safety protocols.
You should also regularly review subcontractor performance and invoices to identify potential discrepancies, addressing them promptly to avoid financial setbacks.
Real-time tracking of costs
Utilise construction management tools for real-time tracking of your construction costs. Cloud accounting software, for example, allows for automated expense tracking, project scheduling, and budget monitoring. These features can help enhance efficiency in your business operations, reduce errors, and provide a comprehensive overview of each of your project’s financial health.
Monitor cashflow and working capital
Maintaining a healthy cashflow is essential for your construction operations, so you should regularly monitor payment schedules, invoice processing, and timely receipt of payments. Efficient cashflow management ensures that you have enough money on hand for ongoing expenses and new growth opportunities.
Implement change order controls
Construction projects often undergo changes over time, necessitating adjustments in scope and costs. A robust change order control system involves documenting and approving changes to the original project scope. Proper communication with clients about adjustments or cost updates is essential.
Risk management
Market fluctuations, regulatory changes, and unforeseen challenges can affect construction costs. Developing a comprehensive risk management plan can help you anticipate and navigate potential pitfalls, safeguarding your business’s financial health.
Audits and reviews
Periodic assessments of project budgets, costs, and financial statements can identify discrepancies and areas for improvement.
By establishing routine internal audits and financial reviews, you enable informed decision-making and more accurate cost tracking.
Consult with experts
Consulting with construction accountants is paramount for accurate budgeting and project success. At Venthams, we pride ourselves on our in-depth industry knowledge, which allows us to guide you through challenges like material price fluctuations and regulatory changes.
By implementing these comprehensive practices, we can help ensure your sustained success and profitability in this ever-evolving sector.
Talk to us about your construction costs.