In the construction industry, accurately tracking project progress and effectively managing finances are critical to ensuring the success and profitability of a business. One method that can greatly support construction companies in this aspect is percent-complete accounting. By implementing this accounting practice, construction business owners can gain valuable insights into project profitability, make informed financial decisions, and improve overall financial management.
In this article, we will delve into the benefits of percent-complete accounting and how it can significantly benefit your construction business.
1. Accurate Project Profitability:
Implementing percent-complete accounting allows construction companies to accurately assess project profitability at any given point in time. By comparing the percentage of work completed to the percentage of costs incurred, you can determine whether a project is on track to meet its budget or if adjustments are needed. This information allows business owners to make informed decisions about resource allocation, cost management, and pricing strategies, ultimately improving the company’s bottom line.
2. Enhances Financial Decision-Making:
With percent-complete accounting, construction business owners gain a clear understanding of the financial health of each project. By analyzing the revenue earned to date against the costs incurred, they can identify potential cash flow issues before they escalate. This enables proactive decision-making to address these issues promptly, ensuring that projects are adequately financed to completion. Moreover, the insights gained from percent-complete accounting help prioritize projects that generate the most profit, thus driving the overall growth of the business.
3. Improved Financial Forecasting:
Accurate financial forecasting is crucial for construction companies to plan and manage their resources effectively. Percent-complete accounting provides the data needed to create reliable project forecasts. By analyzing historical project data, you can determine trends and patterns to predict future project outcomes more accurately. This allows for better cash flow management, resource allocation, and strategic decision-making, reducing financial risks and maximizing profitability.
4. Strengthened Financial Management:
The implementation of percent-complete accounting systems encourages disciplined financial management practices within construction companies. Regular and accurate tracking of project progress and costs enables early identification of potential issues, such as cost overruns or budget deviations. This empowers business owners and their teams to take corrective actions promptly, minimizing the impact on project profitability.
5. Enhanced Project Estimation:
By analyzing the actual percentage of work completed against the estimated values in percent-complete accounting, construction business owners can improve the accuracy of project estimates over time. This knowledge allows for more informed bidding and pricing decisions, leading to increased competitiveness in the market. Accurate project estimation leads to higher margins, reduced rework, and improved project owner satisfaction all contributing to the financial success of the business.
Conclusion:
Implementing percent-complete accounting is a game-changer for construction businesses. Although converting to this method of accounting seems monumental, it really comes down to the creation of the Work-in-Process (WIP) job schedule. This schedule allows for accurate tracking of project profitability, informed financial decision-making, improved financial forecasting, strengthened financial management, and enhanced project estimation. By adopting this accounting practice and leveraging the insights gained, construction business owners can bolster profitability and ensure the financial health of their companies. Invest in percent-complete accounting systems and take your construction business to new heights of success.
If you’d like some help preparing your first WIP schedule, check out our WIP Creation Course.