Accounting’s main function in Construction is to properly manage the financial stability of the organization. One of the tools that accounting uses to do this is the construction job schedule. This schedule shows the performance of each construction job. Project management works with accounting to furnish the contract amount, change orders, and estimated total cost. Communication is key in keeping the job schedule accurate and correct. The accounting manager’s job is to review and analyze the numbers to determine the profitability of each individual job and maintain an effective job schedule. There are several ways to do this:
Over/under billing needs to be determine by the accounting manager; it is his/her job to make sure that all change orders and contract amounts are correct. Problems arise when you have entered the costs and exceed the billing amounts to the client in any period. Cash flow issues are another problem that will affect your month to month financial stability. It may be the most single important accounting short term issue that you will come across in your job schedule and weekly cash flow.
To determine if you are under billed you must review the “Cost and Estimated Earnings in Excess of Billing” column of your spreadsheet. As you review each job, keep in mind that if you have a larger numbering in a job column, then it should send up a red flag. Your organization does not want to “finance” the project for the client. So it is your job as a manager to maintain balance regarding the amount you are billing. Then compare it to the invoice you receive from vendors and sub-contractors.
To effectively maintain that balance you must develop a system that will incorporate project management into your job schedule. Meet once a month to go over each job to determine what you need to change (i.e. executed change orders, additional jobs, etc…). Having meetings with your project management personnel will only help to eliminate the problem of having too little income to cover outstanding accounts payable invoices each month.
Each month, input your actual cost incurred to date. It should always be less or at the same cost of the estimated total cost. To maintain an effective job schedule you must, as a manager, determine why your actual costs are not in line with your estimated costs. One way to determine that is to review what has been cost coded to the various jobs.
This will help because it will determine if there was a mistake in coding or a mistake in keying the information in by your accounts payable clerk/assistant. If a mistake has been made and then corrected, then check with project management to determine whether you need to execute a change order. Vendors and subs do not submit their invoices based on an executed change order to the client from your organization. Therefore proactively make sure the work has been done. Then you must issue a change order to the client immediately. This not only a project management or construction management issue. It’s a company issue each functional group within the company needs to address.
If your company is a for-profit entity, your work as an Accounting Manager/Controller is to keep your bottom line black (profit). That should be your focus. You must be able review your job schedule to determine your job by job profitability. Keeping your overhead low will not solve the problem, if your jobs are not performing at the required level. Although job profitability is a project management function, effectively managing the job schedule by reviewing profits in a period is extremely important. It is also critical to recognize profits in the proper period if your company utilizes accrual based accounting.
If too much profit is taken in a period, then it could hurt you down the road when unforeseen costs hit. For example, one job could jeopardize the overall company profitability for the year. Ways to combat this is to determine a proper amount to reorganize in the period. If there seems to be a lot of revenue that a certain project could take on, then review and verify its accuracy. Sometimes previous costs have not been taken into account. It could require that you take a greater loss in addition to the cost that have currently hit the present job. Following up once you review the schedule could save you and the company down the road.
For Construction Accounting, the Job Schedule is the single most important factor pertaining to profitability and stability. When you are a good steward of the company’s finances and maintain an effective job schedule, you can only perpetuate the confidence of others in your organization. This leads to more profitable months in the years to come.
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