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Contractors, how is your accounting software working for you?

Jan 5, 2012

Most people working in the construction sector have never experienced a recession like this one. Seeing companies that have been around for decades disappear and lives shattered has been painful.

There are many factors that contribute to the demise of a construction company. While some cannot be avoided in a recession due to overwhelming external factors, some of them can be prevented if specific internal factors are proactively addressed.

Usually accompanying a collapse is an ineffective accounting department that does not provide timely and accurate information. This is often due to a construction company owner’s lack of appreciation for the importance of the accounting and finance function. Moreover, this weakness is often directly related to not having the appropriate accounting software in place.

While you may have been able to get away with sloppy accounting when the economy was humming, times are different now. Everyone is at each other’s throat when it comes to price, resulting in shrinking profit margins. In this demanding marketplace, having to wait for your accounting department to deliver real time accurate information is simply a recipe for failure. If this situation sounds familiar, it might be time to consider upgrading your accounting system.

Although it might seem illogical to plan a software system change when times are slow, now actually might be the best time since you are more likely to have adequate time to devote to the project.

Before considering specific attributes to look for in your construction software selection, let’s lay out some general concepts to think about.

What to consider before a software upgrade

It’s important to match the sophistication of the system with the primary user of it. Unfortunately, it is not unusual to see an expensive accounting software package sitting on the shelf at a construction office. Usually the head accounting staff member is not a degreed accountant or CPA. Often this individual does not have the ability to implement the system effectively so they abandon it.

While it might seem like the software provider should provide an easy turnkey, up-and-ready error-free system, the success of the system depends strongly on the individual who champions it within the construction business. A good rule of thumb is that the salary of your primary accounting system user should be near double the cost of the software (including implementation and training). Five years ago this ratio might have been 1:1 but today many construction software vendors are practically giving away the software just to build their client base. So if you are looking at a system that will run about $30,000-40,000 to install and your top accounting person earns that same amount you could be setting yourself up for a fancy-looking box to remain on your shelf.

Next, consider the culture of your construction company when it comes to a teamwork mentality across departments. What is the tolerance for change? Is everyone only concerned about their own area or is there a cooperative spirit of doing whatever is necessary for the benefit of all? A successful system-wide implementation requires buy-in among all areas impacted, such as project management, human resources and marketing because there will be internal process changes as a result of the new system. On a related note, if you do not think you need any process changes then you probably do not need a new software system.

Finally, lay out reasonable time tables and expectations for the new system’s implementation. Even the best software and successful implementations involve some measure of the U-curve effect. This is where you feel like you are spending a lot of time, money and frustration as you slide down what seems like an endless hill, but if done correctly, your software implementation takes off into an upward trajectory. This upswing brings about greatly enhanced financial visibility that is timely and improves the management and – as a result – the profitability of the business.

Choosing the right accounting software for your construction company

In choosing the right software for your construction company think hard about the level of integration you think is required. Are you using Excel spreadsheets to transfer information from your accounting software to be able to get job information to your project management team and other departments? If so, if it produces timely and accurate information and does not require additional staff, then the nationally recognized software packages like QuickBooks or Peachtree are probably good choices and are likely the least expensive. However, if you find Excel spreadsheet “creep” everywhere with significant duplication of effort then it is time to consider a construction package that integrates across departments.

Once you make a decision to move to a package specifically designed to meet the needs of a construction business you will have two basic tiers of software to choose from: the best-of-breed system and an integrated modular system.

The best-of-breed is typically for very large construction companies with substantial IT and accounting departments where budgets are not too much of a hindrance. The integrated modular system incorporates much of the best-of-breed functionality but tends to be more affordable. Moreover, integrated modular systems do not require an in-house IT department since implementation services, maintenance and support are typically provided by an outside vendor. The remainder of the article deals with an integrated modular system environment since the vast majority of construction companies considering an upgrade from QuickBooks and Peachtree fall into this category.

Features to look for in a construction accounting software package

While not exhaustive, following is a list of features you should look for in choosing your construction software:

• A centrally located job screen where everyone on the team, as well as top management, can manage their jobs in real time.
• Detailed job budgeting with complete customization based on cost types /phases or categories.
• Ability to produce an integrated work-in-process report in accordance with GAAP percentage of completion accounting to accommodate bonding and surety institutions reporting requirements.
• Excellent change order management.
• A completely integrated job costing system with all other modules such as accounts payable, receivable and payroll.
• Ability to generate integrated AIA billing.
• Payroll that can handle multi-state, multi-rate, multi-rate distributions and can handle effectively prevailing wage and certified payroll reporting as well as union and non-union reporting.
• Ability to accurately factor in labor burden and overhead rates.
• An integrated subcontractor control module to track such things as insurance expirations, RFPs, bid management etc.
• Integrated service management and dispatch capability.
• Ability to handle wireless data collection at the job site such as touch screen portables that allow personnel in the field to send and receive information from your construction accounting system.
• Integrated project management to include labor and resource scheduling and document control.
• Built-in alerts to warn of potential job troubles.
• Integrated purchase order and inventory control system designed for contractors.
• Complete paperless functionality.

One of the key benefits a construction company should see as a result of the integration of these features is complete document control. If your software allows for documents to be easily created, scanned, and dragged from email into a well organized job folder structure, then your staff will use the system.

At this point you might be wondering what these features mean to your actual construction business. Here’s a real-life scenario that will help you understand how these features can help you.

Imagine yourself sitting at your desk reading email at the end of a busy day. As the owner of a roofing company, you receive a pressing call from a long-standing customer – a commercial property manager – who is upset because your crew installed the wrong color shingles at the job site.

To make this scenario more interesting, it is 6 p.m., the project manager can’t be reached via personal digital assistant (PDA), your purchasing agent and accounts payable clerk are both gone for the night, and your controller is on vacation.

Fortunately, with the system you now have at your disposal, you can easily stay at your desk and handle the problem yourself.

Securely and easily log into your construction accounting system and click on the central project management job screen. Find your job by quickly searching the job list via job code, name or address. Once you have the job screen open, view your job summary, supporting revenue and cost reports, as well as all needed job documents. The following documents should be available at your fingertips: a signed contract, submittals, RFIs, transmittals, change orders (approved and pending), email correspondence, subcontractor agreements, purchase orders, vendor invoices, employee hours (regular and overtime), billings, and WIP schedule.

Because of the new paperless procedures in place for material requisition, purchase, and receipt verification, you can verify for the commercial property manager – during your call – the shingle color by clicking on the following documents:

• Signed customer proposal / signed job contract
• Material listing used during vendor bid process to procure job items
• Subcontractor agreement, if used (did they supply the roofing shingles?)
• Purchase order with each item description (did your staff order the right color from the shingle vendor?)
• Vendor invoice with item description (did the vendor bill your company for the correct item?)
• Shipping document that accompanied the materials delivery (did the correct item arrive at the job site?)
• Schedule and / or job notes indicating which crew member received and checked the color prior to installing the roof

If you find the color was correct on the signed proposal yet ordered incorrectly by your staff, you might want to start the process of replacing the roof. You’ll need to start an internal change order with the proper item, make a schedule entry holding your project manager accountable to remedy this error immediately, and enter a job note of your interaction with the commercial property manager whose contact information will already be attached to the job.

If you have full familiarity of your construction accounting system, you will want to open the bid management area of your software; allow the system to search for the vendor that offers you the best price for this item. Simply auto generate and issue a purchase order via email to the system-selected vendor. Remember to verify the job number on the bid / purchase order so the proper commitment reflects on the central job screen.

While recognizing that no system is perfect, most of them incorporate the majority of the features listed above.

Still not sure which software to select for your business?

To help narrow down your software decision the next items to consider are general price ranges and ease of use, especially in light of your accounting department’s capabilities. If your accounting department is primarily familiar with a QuickBooks environment, then you will most likely want to have a package that incorporates a drill-down capability as much as possible.

Moving past the technical requirements that most of the good construction software packages provide to some degree or another, it is important to consider the company producing the software and how accommodating they are. The unfortunate reality is that there are software companies that are happy to sell the software and then disappear.

Since every package will have certain missing links it is important to consider what type of support you require from your own personnel, third-party programmers and / or local consultants.

As you consider which software company to buy the new package from, consider several factors. How long has the company been around and how financially stable is it? It is never a good thing to become an “orphan” of a package that is no longer available. How large of a customer base does the software company have? Do they have a knowledgeable staff and a willingness to put the customer first? Is this the only package they handle or just one of many? Software companies that focus on one package generally tend to offer better overall support services.

As a firm with a dedicated IT consulting group consisting of CPAs who install numerous accounting packages, we have seen firsthand that one of the great advantages of a modular system is that you have the ability to work at a pace that is the most appropriate for your particular situation. Some situations call for an approach where only a few modules are brought in initially. Once success is achieved with those initial modules you can move on to a higher level of integration.

Ingredients of a successful software implementation

The following characteristics are typical of a successful implementation:

Your team’s motivation

Teamwork within your company before, during and after the implementation is highly important. Your team members must have a desire to improve the processes of your business. Everyone’s voice is important. Many tiny details that make up your current day-to-day business tasks lie within your data entry clerks. A personable consultant will help facilitate productive interactions among your staff and all will feel like they contributed to a successful implementation. While some staff members may be very stubborn at first, these “passionate” individuals are often the ones who stick to new processes and procedures as long as they had the opportunity to contribute to the new system.

Open communication with your software consultant before and during the implementation

The goal of your team is to be open with its software consultant so they can gather the information needed to design and train on an improved system. First, task your team with documenting their current duties surrounding sales, operating and accounting processes, especially those time-consuming manual ones. Hire a consultant to help if this is not getting done. The best money-saving tip? Time is money, so communicate complete information during team meetings. Oversights in sharing tasks can cause costly re-construction of new business processes.

Secondly, during the construction of your new software system, we may be able to determine, through communication, that some processes in your existing system are already perfectly done and can be brought forward “as is” into the new system.

Third, pain points must be resolved with bright ideas and smart solutions. Communicate all pertinent information to your software consultant. Remember, your consultant doesn’t immediately know your business’s unique twists and turns. Most software consultants have been exposed to numerous and varied business practices – good and bad. They can advise you as to which practices will add value to your system given your company’s unique issues. Finally, challenge your software consultant regarding potential expansion of your system given your business’s future plans.

The keys to effective integration

Let’s move on to basic operating and accounting system design. Even with integrated multi-faceted tasks, we need to create an easy-to-use, flowing system.

Three areas of a fully integrated construction accounting system should be closely examined, questioned, and even argued. These areas are estimating, central job screen and financial reports.

Estimating

An agreed upon structure between your estimators and project managers is the first key attribute to a successfully integrated system.

Estimators need critical details so proposals are complete and accurate. The company needs profitable signed contracts. Your bidding, procurement and project management people depend on accurate, timely, and profitable estimates. The extensive details contained in the estimating system must be summarized and automatically transferred into the bid management and project management areas of your system.

This summary becomes identifiable and manageable steps and tasks are set so the job can be done. Everyone on the team should have access to view the central job screen and do their work in real time.

Serious advice: Don’t allow the extensive details of your estimating module to creep into your job center. Find a useful, condensed ground. You want your people to easily know where to enter time and costs. You will find many errors – well beyond the norm – if the system is too detailed and time consuming to use due to a huge list of possible cost categories. The time needed to fix mismatches between original budgets and actual costs is valuable. It is essential that the construction accounting system selected allows for easy edits of data entered.

Consider for a moment this scenario: Your company provides a touch screen laptop to the job superintendent. The laptop will give the superintendent the ability to enter purchase orders and crew hours remotely. Do you think this employee will enter material costs and job time to the proper cost categories if the list is gigantic? Honestly, you are lucky if they enter the information to the correct job number!

Central job screen

The next key attribute is the team’s agreement upon document routing, approval and management. To manage profitable jobs, all revenue and cost information, as well as all documents pertaining to a job, must be easily accessible via the central job screen. The most successful integrations are within companies that embrace paperless document control. Your new system should easily allow users to drag and drop documents and emails into your system job folders. Organize your email correspondence within the job system so others have full access. The best documented contractor wins.

Another key attribute to be agreed upon is resource scheduling practices within the system. Seeing your job tasks such as scheduled receipt of materials, as well as employees, subcontractors, and equipment, in a central job screen is very important. Contractors use various methods to properly time resources. A secure method where users, both remote and internal, can access schedules and documents must be provided. Remote communication should be a given in today’s environment. Provide your field employees with electronic devices that allow sharing of data, such as schedules with job tasks, service tickets, time entry, purchase orders, and equipment maintenance records.

Financial reports

The last key attribute to a successfully integrated construction accounting system is the summary of your profit centers within the financial reports. Remember, management can always go to the job center for the details that support the summaries. Summarize and structure your general ledger chart of accounts to focus on the results of your profit centers and leave room for future growth.

As an example, profit centers can be government vs. commercial vs. residential. Alternatively, your financial statement structure could be dictated by your insurance company, which requires a breakdown of your services into insurable categories. Your financial statements must be designed to show a clear snapshot of which centers are making money and which ones are not so you can react in a timely manner to a changing business environment.

The end result of a successful implementation should be the right system design with trained people effectively performing their jobs. Continue to hold each person accountable to procedure changes and push to hit your goals.

The implementation’s complete … what now?

With everyone now successfully working on the new system, remember to allow your staff to call for help when needed. Maintain communication with your consulting firm. Your software consultant now knows your business requirements and personnel and will be helpful as your company changes over the years.

Your new system will probably need to grow. Renew your annual software maintenance, install system upgrades, and train new employees. The primary reason for failure is usually employee turnover and lack of knowledge transfer between old and new staff. Do not lose the disciplines that are in place to keep your system in balance and producing critical information.

"Contractors, how is your accounting software working for you?," written by Stephen K. Ball, CPA, CVA, CCIFP, and Christina P. Haiss, CPA, MCP, CITP. Published in "Construction Accounting & Taxation," September - October 2011, copyright (c) 2011 Thompson Reuters/RIA.