Maintaining accurate job cost estimates is one of the most critical tasks for construction companies, as it directly impacts your revenue recognition throughout the project and informs your decision-making to ensure a profitable job. When estimated costs to complete are not updated for rising or unexpected costs throughout the construction schedule, it creates a mess for finance to sort through and profit fade as the job is completed.
If you’re thinking of updating your finance and accounting platform, be sure your new system includes functionality that enables you to easily track and manage job cost information.
There’s an old saying in the construction industry that the company that wins the job is the company that forgets the most. Too often, the sales team wins the contract, but without solid job cost history to help in their estimation process, problems soon start to surface.
As the bid is handed over from sales to production, additional job cost requirements are identified and the estimate changes begin piling up. Once production has identified additional costs, it puts a strain on the finance team, which has to communicate the changes, track the updates, and work with everyone to help ensure the project is profitable. In addition, these cost overruns and change order requests can have a negative impact on your customer relationships.
If you are tracking changes to your job cost estimates outside your current accounting system, on a spreadsheet, or not at all, it becomes very difficult for your finance team to understand estimated cost-to-complete updates as they occur. Without this information, they cannot talk your sales team through where the initial job estimate was off, talk your production team through cost overruns that are occurring, or inform your senior management team about why a job experienced margin fade from the original expectations.
Having insight into job cost history empowers your finance group with the information they need to clearly communicate with your entire team about when and why job cost estimate changes were made. This also enables your leadership team to understand trends in your job cost estimation and production processes in a timely manner.
Tracking job cost estimate history allows you to have control over production costs, which can help you make predictable and accurate estimates for future projects. When sales has a better understanding of job cost history, they can deliver better estimates when bidding the job, which leads to better margins, an improved customer experience, and an improved project pipeline.
Having access to job cost estimate history reporting also allows your people to make quick and accurate decisions to improve job profitability. For example, if a customer requests an upgrade after the job has started, your finance team could see an update to the material cost estimate, inquire with production as to why the change was needed, and assist in making a decision as to whether a change order for the additional cost is justified.
Many construction companies struggle through these challenges with an enterprise resource planning (ERP) system that was not designed for construction and does not have job cost capabilities. If you are considering upgrading your system, make sure you include this critical functionality.
Look for an industry-specific system built for construction accounting, such as the Microsoft Dynamics 365 Project Construction Accounting module. A modern platform like this will provide you the information needed to proactively manage your job costs and profitability, improve coordination between your teams, and enable you to bill in conformity with differing customer requirements and track key financial performance indicator reporting on a timely basis.
If you have questions or want to learn more about how construction accounting software can help your business, reach out to our experts.
