Construction Accounting Software

The construction industry differs greatly from other industries. Cash moves differently on a job site. In construction, a single project often involves hundreds of subcontractors and numerous suppliers. General bookkeeping cannot navigate this maze easily and this is the pain point that construction accounting software can fix.

Key Takeaways

• Unlike other accounting software, construction accounting software is built around projects and not just calendar periods. This makes features such as job costing and retainage as first class features.
• General purpose tools such as Quickbooks are difficult to scale as your project grows, with numerous subcontractors and compliance regulations.
• The best construction accounting software can easily integrate with estimation, payroll and field operations hence data can be entered once and available everywhere.
• Custom construction accounting software is most suitable if your organisation follows unique workflows. However it needs large budgets and a reliable development partner.
• Emerging trends such as AI, automation and mobile first UI/UX is reshaping how construction finance works. This includes invoice processing to predictive job costing.

What is Construction Accounting Software?

A financial management system specifically created for construction firms that generate, spend, and report revenue is known as a  construction accounting software. It can fulfill all the characteristics required by construction . Some basic tasks include managing basic accounting tasks including general ledger, accounts receivable, and payroll. Job costing, retainage, modification orders, subcontractor compliance, and work-in-progress (WIP) reporting are some of these aspects.

Why Construction Companies Need Specialised Accounting Software?

Project-based accounting vs. period-based accounting

In most businesses, you measure things in accounting periods. In construction, however, the measure is the project. Invoices, timesheets, materials purchased, and equipment costs must be coded to the right job and cost code. Without it, you don’t know which ones are money makers and which ones appear to be a lot of work.

Monitoring all projects also helps you to report revenue accurately. For example, if you are using the “percentage of completion,” then your books should be able to account for the real cost of work done in weeks or months against what was billed last month.

Cash flow challenges

Cash flow is the “lifeblood” of any contractor and is always being challenged from multiple sources:

• You may bill Owners and General Contractors who will “30-60-90 days (or more)” pay you after you bill them, but you must pay your crew and suppliers weekly.
• Retainages: This is where they (the owner) will hold back 5% – 10% of each payment you make on each invoice until the project is almost complete. On larger projects this means you could have considerable amounts of your funds sitting in escrow for months on end.
• Unrecorded change orders: If the change affects the budget and/or contract due to scope changes and you agree verbally to changes, you’re working but not paid because you’re not recording the change in your accounts.

Compliance, audit trails, and tax requirements

Construction companies deal with a lot more rules and regulations than most other companies. Everything from 1099s and the IRS for subcontractors to insurance certificates for everyone on a job to lien waivers from contractors and subcontractors to certified payroll reports to prevailing wage rules requires accurate records. Tax rules for long-term contracts further complicate things. An accounting software for construction company can track all your financial transactions.

Signs You’ve Outgrown QuickBooks or Excel

There may be many contractors who use either spreadsheets or QuickBooks as their initial tool; this works well for a smaller contractor with a few projects. However, when the company expands beyond the small contractor stage the limitations become apparent. Look for some of the following red flags:

• It takes you several days to reconcile all of your job costs from various spreadsheet.
• At best you can review your profit/loss on an individual basis by project once the book closing process has been completed.
• Tracking progress billings and retainingages requires additional spreadsheets (not all of which are understandable to everyone) where there is also only one person able to enter information into them.
• All change order documents have the potential to “fall off” somewhere in transit between the field and the office.
• All certified payrolls and union reports are manually prepared.
• When your lender requests work-in-progress reports you are unable to provide them.
• More than one person is editing the same document/file and no one trusts the most recent version.
• The accounting data is separate from your estimating/project management systems, therefore everything is double entered.

If two or more of the above items seem like something you experience regularly then it is time to consider using specialized tools. It may take a little longer for a company looking for construction accounting software for small business but it will save much more than it cost.

Key Features to Look for in Construction Accounting Software

While evaluating the best software for your business, these are the features that matter the most.

Job costing and budget tracking

Your accounting software should be able to calculate the cost of any given job. It should let you set a budget by cost code, keep track of actual cost inputs from things like payroll, accounts payable, equipment costs, and material purchases, and regularly compare those actuals to your budget. It also needs to track committed costs (such as purchase orders and unpaid subcontractor invoices) so that you can identify potential cost overruns right away.

Progress billing and AIA-style invoicing

The typical method of billing out the majority of construction contracts at the completion of a job. You should be able to use Schedule-Of-Values Billing, Percentage-Of-Completion Invoicing, Stored Materials, and AIA style G702 and G703 forms with your software. These will save you many hours on each and every bill and reduce dispute by the owners.

Accounts payable and receivable

Keeping track of money owed in construction is hard. Before you can make a payment, you have to follow a number of steps to make sure that all vendor and subcontractor invoices are properly processed against their corresponding POs, lien waivers are applied, and insurance expiration dates are kept track of. Of course, there are just as many steps on the receiving end as well.

Payroll and certified payroll

Keeping track of money owed in construction is hard. There are a ton of reasons why you need to do a number of processes before sending payment—ensuring that they’re all billing against the POs, getting lien waivers, tracking expiring insurance, etc. Of course, there are just as many steps on the receiving end as well. You should look for Aging Reports, Automated Reminders, and Tracking of Receivables to keep track of how much you owe and when.

Change order and subcontractor management

You want to be able to complete all steps in the change order process from request to approved to updated budget on one platform. You also want it to track all of the compliance documents (like proof of insurance), automate your pay applications, and create 1099s for each subcontractor because those will help you ensure they follow through on their promises to you.

Retainage Tracking

If you are holding retainage against your subcontractors, the owner is holding that money; if you are holding retainage against the owner, then you hold that money. If you’re retaining with your subcontractors or being retained by the owner, your project management software should be able to show the amount of retainage due each under each contract, allow retainage to be released as you satisfy certain milestones, and display all this information in an easy-to-understand format.

Financial reporting and WIP reports

The most important report to a lender and surety is the WIP schedule. It checks to see if each job is overbilled or underbilled by comparing the contract value, costs to date, billings to date, and estimated cost to finish. Beyond WIP, search for customizable dashboards, job profitability reports, and cash flow forecasting.

Integrations (project management, estimating, CRM, banking)

When you’re building a bid, you want to integrate your accounting software with your estimating software so it has a budget for every number, and you want to integrate it with your project management software so when the foreman or project manager keys it in in the field, it updates your finances and your accounts.

Mobile Access

Project managers and superintendents usually have an office on the construction site, but mobile access lets accounting enter invoices, run timesheets, upload purchase order receipts, and review budget reports from phones on the construction site.

Which features does your business require?
Contact our team on mapping your workflows with the right solution

Construction Accounting and Project Management Software: Do You Need Both?

Contractors often ask whether they should buy construction accounting and project management software as a single platform or as separate tools. The answer depends on how your company works.

Accounting-first vs. project-management-first systems

An Accounting-Driven Platform begins with the General Ledger and Financial Controls, and then adds Project Features such as Job Costing and Billing.

A Project Management Driven Platform will begin with Scheduling, Documents, Requests for Information (RFI), and Field Collaboration, and then add financial Modules on top. Generally an accounting driven platform is going to have a stronger emphasis on compliance and reporting. Generally, a project management driven platform has a stronger focus on user adoption in the field. Understanding what type of business model your organization employs, can help narrow down the options when looking at platforms.

When an integrated platform makes sense

A single application (i.e., an “all in one” platform) fits smaller to mid-sized contractors who are looking at sharing information through their estimating, procurement, field operations, billing and accounting processes. With multiple departments working off the same data there will be no duplication of entries, fewer errors and a real-time view of each job/project.

When separate tools work better

Small companies with an established accounting application can continue to use this while integrating project management or other field-based applications around it. Using existing systems and then adding new ones as needed is a cost effective way to implement your solution needs if those additional tools integrate properly.

Integration checklist

• Bidirectional data flow: Changes that are made in one system, update automatically in the other.
• Cost code alignment: Both the systems utilize the same cost structure.
• Scheduled synchronization: This sync ensures that data is shared between two software systems at fixed intervals.
• Change-order and budget updates: Approved changes automatically reflect in the project budget and accounting systems.
• Role-based permissions: People can view only what they should.
• Audit history: Each and every edit is logged.

Our team at Experion can help construction companies bridge accounting, ERP, and field systems into a single, reliable flow of data, so finance and operations finally views the same picture.

Custom Construction Accounting Software: When it Makes Sense?

Off-the-shelf software packages provide solutions for many common tasks, yet they will never be able to meet every requirement. Contractors working in highly specialized markets may find that their unique work-flow has no package available that meets their requirements. It is at this point that the use of custom construction accounting software becomes an option.

What is custom accounting software for construction?

Custom construction accounting software is customized based on the contractor’s workflow, Chart of Accounts, Reporting Requirements, and Integration Requirements. In contrast to customizing your workflow to fit into the constraints of the packaged software, the packaged software is customized to fit into the structure of your workflow.

Benefits of custom construction accounting software

• A perfect fit for unique workflows – If you operate within a specialty trade, have a unique method of billing or have a unique approval path, your custom software will handle these types of issues internally.
• Improved control over approvals and reporting – You determine how each transaction should be approved and which reports are reviewed by management.
• More complete integration – Customized software provides the capability for tighter integration to other tools such as Estimating Systems, Enterprise Resource Planning (ERP) systems, Field Service Management systems, Customer Relationship Management (CRM) systems, etc., which you are currently using.
• Competitive Advantage – Proprietary Dashboards and Automation provide you with valuable information and speed that your competition does not possess.

Risks and tradeoffs

Customized software is typically not the correct answer to every company’s needs. Be truthful about the financial implications:

• Higher initial investment than a monthly subscription-based solution.
• Longer time frame required to implement the software compared to off-the-shelf solutions; often measured in months instead of days or weeks.
• On-going maintenance and update responsibilities are placed upon you including Security Updates/Patches and Compliance Updates.
• Reliance on the Development Partner that selected you makes the selection of the proper partner vital.

Build vs. configure vs. buy

As a simple decision-making framework to determine whether you should Build, Configure or Buy:

• Buy when there is a good fit with an existing packaged product for 80% or greater of your business needs and your company uses relatively standardized business processes.
• Configure when the Platform/Software Solution offers sufficient functionality to support the core operations of your business and you require custom fields, workflows, reports, or integration capabilities above the core.
• Build when your Workflows are a true Differentiation, your business has unique Compliance or Integration Requirements or you intend to sell the software to other businesses.

Book a discovery call with us to evaluate your options

Building Construction Accounting Software: Features by Business Type

The type of construction company that you operate affects the priorities when it comes to selecting an appropriate Accounting Software for your Building Construction needs. Below we will outline how the Requirements vary when looking at Building Construction Accounting Software by Type of Construction Company.

General contractors

A General Contractor requires Multi-Project Job Costing, Subcontractor Management, Progress Billing (Billing customers based on percent completed), Retainage and Reporting (Reporting Across all Projects within their Portfolio). Visibility to Committed Costs is crucial since most of a General Contractor’s Spend goes through Subcontracts.

Home builders and developers

Home Builders & Developers require Land Development Budgets, Lot Level Costing, Draw Schedules, Construction Loans and Community Level Reporting. Home Builders & Developers also track costs Per Lot/Per Home and reconcile lender draws to actual spend.

Specialty contractors

Most Specialty Contractors (Electrical, Plumbing/HVAC etc.) perform both Project Work and Service Work. As such they require Service Billing, Recurring Maintenance Agreements, Equipment Tracking, Dispatch and Technician Time Allocation Tied Back to the Right Customer or Job.

Commercial contractors

Commercial Contracting adds AIA Billing, Compliance Requirements (Union Payroll), Long Approval Chains, Heavy Documentation Requirements and Increased Reporting Demands from Owners and Sureties.

Technology Used in Construction Accounting Software

Modern accounting software uses new technology that allows users to perform their jobs faster with fewer risks than older, traditional desktop application systems.

Some of those modern technologies are:

• Cloud Computing: Field personnel can see live data at all times along with office personnel regardless of location; also offers more flexibility and automatic upgrades.
• AI/Machine Learning: Allows for estimating costs based upon previous projects, identify trends or outliers, and make better forecasts.
• OCR (Optical Character Recognition): Reads receipts, invoices, and liens into structured formats eliminating or reducing manual entry of the same type data.
• RPA (Robotic Process Automation): Repetitive processes such as routing invoices, completing 3-way matches, preparing recurring journal entries will be automated.
• Cyber Security/Access Control: Will protect financial information using encryption, MFA (Multi-Factor Authentication), and RBAC (Role Based Access).
• Digital Payments/E-Signatures: The payment process is accelerated when paying vendors, collecting from owners, and approving Change Orders and Lien Waivers.

Together these new technologies shorten the amount of time required to move a transaction completed in the field into the General Ledger.

How to Choose the Right Construction Accounting Software Development Partner?

The right partner is a critical part of building customized software. It’s just as important to find the right technology.

• Industry Expertise in Construction: A partner that has knowledge of the construction terminology and industry standards.
• Case Studies, References & Delivery Track Record: Ask for case studies and check their delivery track record for similar projects and other ERP Systems.
• Integration Expertise: The software needs to be able to integrate easily with estimating, payroll and banking systems.
• Access Control & Audit Readiness Practices: Check that they are implementing best practices around security and auditing (access control and audit ready).
• Communication & Transparency: Be sure to identify clear discovery processes, demo’s and communication prior to starting this process so there will be no surprises.
• Ability to Scale: Make sure your partner can provide updates and scale the system as you grow.
• AI & Automation Capabilities: Find a partner that is capable of developing modern features such as automatic invoice capture & predictive analytics.

How does AI improve construction accounting?

AI is as important to construction accounting as it is in any other trade.

• Faster invoice processing: AI provides immediate help in matching the incoming invoices to the correct jobs, cost centers, etc., and tech like this will also highlight anything that isn’t the norm that may require a manager’s attention.
• Better cost forecasting: AI is able to learn from previous jobs and provide a more accurate cost to complete (CtC) figure instead of a guess.
• Detection of anomalies: Can rapidly detect duplicate invoice, unusual/unauthorized charges and crazy spending budgets before any damage to the bottom line can be incurred.
• Cash flow prediction: Lets you schedule the time you will be getting paid and warns you of inability to service cash outflow.
• Natural Language reporting: Allows a manager to ask a question in regular English and get a response from real-time data already in place.

AI agents are gradually entering the field of construction accounting

Like some of the industries, Artificial Intelligence (AI) is creeping into construction accounting too. Here’s an Agent receiving the Invoice and matching up with Purchase Order and checking the Subcontractor’s Insurance status, running it through the approval process, paying on time, and only meeting the humans when required. Less drudgery and more time on analysis. There will still be the need for human supervision to approve, but the productivity gains could be enormous.

Challenges Construction accounting software solves

• Compliance: Compliance refers to the on time filing of tax documents and corresponding payrolls. Compliance software integrates these checks into the day to day work hence mistakes are avoided.
• Manual Processes: Manual processes include antiquated excel spreadsheets and paper based timesheets. These processes are cumbersome since they rely on handoffs between people and are full of errors and delays. Automation is beneficial here, snce it speeds up the month end close date.
• Accessibility of data: Since data is spread across multiple locations, stakeholders never attain the latest data. They often end up relying on outdated numbers. A central source helps project managers to have access to the latest data to make smarter decisions.

Future Trends in Construction Industry Accounting Software

The market for construction industry accounting software evolves quickly. Some trends worth watching are:

• AI-powered financial forecasting and analytics: Financial forecasting powered by AI provides an accurate prediction of margins, cash flows and overall project outcomes.
• Automation of invoice processing and reconciliation: Contactless workflows will be the default and not an exception.
• Cloud-based accounting and real-time financial reporting: Month-end surprises will reduce and live dashboards become the standard.
• Integration with ERP and construction management platforms: All data related to finance, operations and field data converge into unified systems.
• Predictive job costing and risk analysis: Software has the capability to warn you which jobs are likely to get overrun and the reason behind it.
• Mobile-first financial management: Construction sites have approvals, receipts and budget checks that happen from a phone.

Contractors adopting these capabilities early on, will gain an edge in margins and credibility  with both lenders and owners.

With years of expertise in proptech, our team can guide you with crafting AI- ready accounting solutions.

Conclusion

Selecting construction accounting software allows different groups to determine the best fit based on size, workflow, and long-term growth strategy. Construction contractor accounting software may work for a firm with less than five active projects. A rapidly expanding construction company may require a complete business management system, which includes project management and accounting functions. The ability to help an organization’s employees work together toward a common goal using a single, unified financial and project management system, may offer the organization a competitive edge. The construction accounting software selected should have good job cost reporting, retainage tracking, and system integration.