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Date Posted: 2/18/2002

Integrated Estimating & Accounting Systems

 
 
By Dan Levine, CPA
Knowledge Partners, Inc.


Overview

When it comes to Construction Financial Management (CFM), developers and contractors typically fall into one of two groups--(1) those that consistently know where they stand with regard to job profitability and cash flow and (2) those that do not know until it is too late. Best-in-class developers and contractors know that accurate and timely job cost information is the key to effective job oversight. Waiting around for your accountant to determine the “bottom line” after year-end is totally inadequate and unacceptable in today’s competitive, fast-paced, low-margin environment.

One of the best sources of information available to Owners and Project Managers responsible for job oversight is the Work-in-Process (WIP) Report. The WIP Report is generated using data provided by an organization’s accounting department, as well as its estimating department. Because the WIP Report is so vital to decision making, it is very advantageous for an organization to be able to produce timely, accurate WIP Reports in an efficient manner (e.g., at the press of a button).

To achieve this capability, many developers and contractor have turned to technology. In particular, software applications designed specifically with CFM in mind, have helped estimating and accounting departments collaborate more closely and achieve the goal of generating “on demand” WIP Reports.

The process of integrating estimating and accounting operations is worthwhile, but by no means simple. Some of the benefits and challenges associated with such an endeavor are discussed below.

The WIP Report

(Click Here to preview or download)

The WIP Reports (also known as a “Construction-In-Progress (CIP) Report” or a “Schedule of Uncompleted Contracts”) is designed to give readers a comprehensive financial overview of all jobs in progress.

Sureties, banks, auditors, the Internal Revenue Service and other third parties regularly require WIP reports prior to making bonding, lending and other decisions.

WIP reports are required by internal and external stakeholders because job-to-date profitability for each job is calculated based on the percentage-of-completion (POC) method. This method involves calculating a percentage by dividing (a) job-to-date costs (which comes from your accounting department) by (b) total estimated costs for the job (which comes from your estimating department). This amount is then multiplied by the total contract amount for the job. The result represents the amount of revenue you have earned on a given job. By comparing this amount to what you have actually billed on the job, it can be determined whether the job is “over-billed” or “under-billed”--two conditions that have a great deal of meaning in the construction/development industry. WIP Reports can be compared to older versions to identify jobs that are experiencing profit fade or other negative trends.

Owners and Project Managers that take the time to understand WIP Reports give their organizations a significant advantage. Consequently, it is important to be able to produce and distribute accurate WIP Reports on demand.

The WIP Report presents information in a number of columns. Interestingly, all the information for a given job is derived from just four primary pieces of information, as follows:

1. Total Contract = total expected revenue associated with a job.
2. Total Estimated Cost = total expected costs associated with a job.
3. Job-to-Date Costs = total actual costs incurred to date for a job.
4. Job-to-Date Billings = total actual billings date for a job.

A quick review of the sample report (and use of the column references at the top of each column) make it easy to see how the amounts are calculated. Because these calculations are relatively simple, the greater challenge is figuring out how to retrieve the four primary pieces of information in a timely manner, as often as needed. This challenge is met through the use of an integrated estimating and accounting system.


Integration

“Integration” is a big word which means that accounting and estimating departments will “share information” to achieve certain objectives. It really does not mean much more. The accountants will still be accounting and the estimators will still be estimating, but now they will be more closely connected though shared information. There are three basic ways in which this sharing occurs.

“Static” Data

In an integrated system, the estimating and accounting departments share “static” data. Static data is a fancy term to describe information in the form of lists (or masterfiles) that one or more of the departments will reference from time to time for the purpose of creating financial transactions. For example, the estimating department may reference a list of jobs and a list of cost codes while developing an estimate for a new job. Similarly, the accounting department may reference its own list of jobs and cost codes, as well as a vendor list when processing an invoice. Because there is significant overlap in the masterfiles required by the two departments, it is practical and wise for the departments to build and reference a single list. In doing so, a common “language” evolves for use by both departments. This common language eliminates the need for each department to maintain its own list and will help minimize discrepancies between allocations made by each department during various phases of the construction cycle. Without a common language, the estimating department might budget for “form work” under cost code 03-045 (Formwork), but the accounting department might allocate the actual invoice to 03-970 (Concrete Materials). Such discrepancies result in meaningless variances and distort the WIP and other reports.

In addition to the estimating and accounting departments, the purchasing department must be considered. During the buy-out phase of a job, the purchasing department must allocate purchase orders and subcontracts to the same cost codes to which the initial estimates were allocated. Failure to do so will, again, result in meaningless variances.

Streamlined Cost Coding

The burden of coding invoices and other costs to appropriate cost codes often falls on the shoulders of the accounting department. An integrated estimating and accounting system can help minimize this burden in the following manner. The estimating department creates a budget for a job using the masterfiles (discussed above) which are central to the integrated system. Once the job is awarded, the estimating department (or purchasing department, if one exists) begins the take-off (or buy-out) process. Each time a line item is bought-out, purchase orders and subcontracts are created and allocated against the initial estimate. The integrated system facilitates this allocation because it allow a user during the take-off process to refer to the initial estimate entered by the estimating department. Some integrated systems actually automate the take-off process based on initial estimates. Finally, when an invoice for payment arrives in the accounting department, no guesswork is required by the accounting department to code the invoice to the appropriate job and cost code because the integrated software allows the user to link the invoice against the appropriate purchase order or subcontract which, in turn, has already been linked to the correct job and cost code during the buy-out process. The integrated system allows all three departments to share static files and helps ensure consistency in cost allocation, throughout the costing cycle. The result: accurate WIP reports.

Reporting

Finally, an integrated system provides a means for a single user to easily extract the transactional data from three different departments (i.e., (a) estimates from estimating, (b) purchase orders and subcontracts from purchasing and (c) actual costs from accounting) into one report. Further, this process can be repeated as often as necessary with no additional effort. No one has to build a spreadsheet or verify formulas are correct each time a current WIP Report is required. Once an agreed-upon report formatted is developed within the integrated system, it can be used repeatedly. Also, data filters can be applied to report designs to instruct the report to only include certain jobs or transactions (for example, only those jobs showing a loss) so that users can hone in on particular problems. The result: timely WIP reports.

Challenges

There are a number of benefits associated with integrated systems (as discussed above); but there are some real challenges to consider, too.

People

Technology is not a “silver bullet”. It will not magically fix financial management or other problems. If estimators do not estimate well or purchasing managers do not purchase wisely or if accountants do not enter invoices accurately, no amount of technology will do the trick. Prior to adopting an integrated system, it is important to build a team of individuals to “take ownership” of the integration project. Typically, these individuals have the knowledge, skill and desire to adapt to new technology. It is a good idea to assemble a team representative of all affected departments. You do not want to let individuals from the accounting department unilaterally create the cost code structure the estimating department will use for accounting and vice versa. Finally, with regard to the qualifications of persons within the organization, consideration should be given to utilizing system integrators or consultants outside of the organization, not tied to a specific product.

Processes

Before attempting to streamline or simplify a business process through the use of technology, it is good idea to actually sit down and look at the processes you want to improve. At a minimum, the implementation team should qualify specific problems inherent in a given process (for example, it is extremely time consuming to manually match invoices to purchase orders). A bolder approach is to actually quantify problems (for example, it requires 50 man-hours per week to process invoices) and set goals for measurable improvement. If measurable improvement is not desirable or attainable, one must ask whether the costs and efforts of implementing a new system are warranted. System integrators and consultants can add significant value in this area, as well. Do not recreate the wheel.

Technology

Once a qualified team has been assembled, processes have been examined and performance goals have been set, it is appropriate to commence the process of software selection. Because there exist so many technological alternatives in the market place, it is useful to compile a list of “system requirements” to be used to evaluate the various alternative. A system integrator or consultant will be able to hone you in on a “short list” of system alternatives given the organization’s size, volume and level of sophistication.

There are other sources of help, as well. In particular, Accounting Software 411 (www.as411.com) offers an independent list of consultants, customized software research with side by side comparisons and many other helpful resources.

Conclusion

Never before has sound financial management been so important to developers and contractors. In today’s competitive, fast-paced, low-margin environment, accurate and timely information is critical for job oversight and decision-making. Owners and project managers desperately need this information, as well as bonding, lending and other institutions. Armed with technology, estimating and accounting departments, as well as others, are collaborating to share data, streamline internal processes and find ways to readily produce and distribute information to the right person in the right context. Doing so provides valuable opportunities to nip problems in the bud.



For more information regarding this article contact:
Dan Levine, CPA
President
Knowledge Partners, Inc.
kpi@attbi.com

Knowledge Partners, Inc. specializes in all aspects of Construction Financial Management. Knowledge Partners, Inc. is comprised of CPAs and Consultants focused on improving the bottom line for contractors and developers throughout Florida.
 
 


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