Construction Accounting

Construction Accounting Software takes a wider view of the world than standard accounting systems. The industry requires additional business controls to be in place to ensure that stakeholders can rely upon the reported results.

Construction projects themselves introduce complications. They may involve large value contracts that are executed over a number of financial periods and effect profit reporting.

Of more concern to the business is changes in scope (or Variations) being greater than the project's Gross Profit. Unless variations are managed properly the viability of the business is at risk. Purpose built Construction Accounting Software should manage these and produce the required Notices through the three stages of Ballpark, Submitted and Approved. This ensures that should either the Head Contract or Subcontract be disputed then the required paperwork is in place to help the business justify its claims in a court of law.

Construction involves other risks that can cause cost increases or time delays or both. Firms need to manage these risks and ideally the software would incorporate a Risk Management system to ensure the key items of work, decision or verification are properly managed.

Taxation Laws of Australia (and probably elsewhere) are another reason why construction accounting is different. Tax treats certain construction specific transactions in a special way. This is true of:

• Goods & Services Tax (GST) on Progress Claims
• Retentions

The software also needs to be flexible as construction projects can range from Small Jobs to $Billion conglomerates involving staged development. The Contracts themselves can either be Lump Sum, Cost Based (construction and project management) or they could be traditional invoice based activities involving the Sale & Inventory of materials.

Construction companies generally fail for liquidity reasons - despite the appearance of trading well. Therefore, Construction Accounting Software should focus on providing tight liquidity management with current liquidity status for all projects being always available. Good project managers will aim to maximise the income from their projects (under the terms of the contract). However funds received prior to expenditure should not be confused as "profit". They are "project prepayments" and should be clearly reported as such.

A proven approach is to report on current "earned value" by projecting both Income and total Project Costs to completion. This is often referred to as Earned Value Project Management. 

Traditional accounting assumes that the client is only invoiced for work provided. Companies would then overestimate their profits and pay tax on them. Later they would have to do reversals when all the activities required to complete the project required payment.

In summary, Standard Accounting Systems - like work order management software, fails to provide what the industry requires; namely a package that mitigates disputes, manages risks, conforms to industry Taxation requirements, handles all contract types, and accurately reports liquidity and profits. These functions can only be met through specialised Construction Accounting Software.