The way your accounting system is set up could make or break your construction business
For the past several years, working with construction companies, I have observed a scenario that prompted me to write this article. I have watched companies that had the potential to do exceptionally well, unfortunately close business within 2-5 years. The worst part is that some of the reasons for failure could have been avoided if only the business owner had a financial advisor by their side to walk the risky entrepreneurship route.
Who is this article for?
Construction company owners, general managers, project managers, superintendents, estimators.
This article is particularly important for you if you
• Do not have cost control measures in place.
• Compile financial statements at year end
• Have never compiled financial statements for your business
• Have no idea how to manage costs in your construction business
COST CONTROL OR COST REPORTING IN THE CONSTRUCTION INDUSTRY
The difference between cost control and cost reporting in the construction industry
Cost control refers to the process of managing and keeping track of project expenses in order to stay within a budget. This includes monitoring costs and identifying ways to reduce them, as well as making sure that all costs are properly documented and tracked. Cost reporting, on the other hand, is the process of providing information about project costs to stakeholders. This may include creating reports that show the current status of project expenses, as well as identifying any areas where costs may be overrunning the budget. In summary, cost control is the active process of keeping costs within a budget while cost reporting is the passive process of reporting the cost status to stakeholders.
Key differences between cost control and cost reporting in a construction business
1. Purpose: Cost control is focused on managing and reducing expenses to stay within a budget, while cost reporting is focused on providing information about project costs to stakeholders.
2. Role: Cost control is an active process that is carried out by project managers and other members of the construction team, while cost reporting is a passive process that is usually carried out by accountants or other finance professionals
As you can see, both cost control and cost reporting are crucial for decision makers in the construction business. You cannot chose to do one and ignore the other.
In my experience working with construction companies in Botswana, the majority of small to medium size companies tend to practice cost reporting. Source documents are given to an accountant once a year to prepare for taxes and that’s it. The reason you are in the construction business in the first place is to make a profit. Given the high risk of construction projects, having financial information instantly at your disposal is paramount for decision making and profitability of the project.
If you need help setting up an accounting system that will help you have access to timely decision making information contact us.
In the next blog post we shall introduce you to tools every construction company must have to facilitate timely decision making.
