How Construction Businesses Can Better Manage Their Money

Kirsch CPA Group

Apr 09, 2024

For construction businesses, financial management is notoriously complex. Contractors have to deal with the ebbs and flows of their respective markets, project-based pricing and collections, rising operating costs, and various other factors — not the least of which is bad weather!

Yet effective financial management is essential for your company to thrive. Here are some ways to better manage your money.

Follow Strong Billing Procedures

Healthy cash flow — one of the most important aspects of financial management — depends on your business’s ability to both meet contractual obligations and receive timely payments. To this end, establishing a standard billing schedule for every job will make managing accounts less complicated and help you keep track of monthly revenue.

When drafting contracts, clearly include payment amounts and when they’re due — as well as penalties for late payments. Equally important, clearly outline a process for change order approvals and invoicing that allows you to bill for additional work as soon as possible. Diligently follow the billing schedule as projects or project phases are completed.

To help ensure prompt payment, make sure invoices are well-designed, detailed and include any necessary proof-of-work documentation. If you don’t already, offer electronic payment options to make paying quicker and easier. Last, be sure to set up automated reminders to regularly follow up on unpaid invoices.

Excel at Materials Management

Effective financial management also depends largely on how cost-efficiently you procure, store and use construction materials. Implement strategies to optimize all three of these actions while minimizing waste.

Begin by taking a hard look at how you capture, organize and share materials-related data across your projects. Do you have a centralized system for doing so? Are you tracking losses and proactively addressing how to prevent theft, mistakes and mismanagement? With the right system in place and technology supporting it, you can minimize excessive and unnecessary spending on materials.

From there, be sure you’re addressing the timely delivery of materials. Supply chain slowdowns or disruptions aren’t in the news as much anymore, but they’re still a challenge for many contractors.

Some construction companies maintain inventories of critical and long-lead items to ensure they’ll have the necessary materials as jobs come up. But doing so entails paying for storage facilities and investing time and resources into inventory management. Another strategy is to diversify your supplier base and include alternative local suppliers who can deliver materials of similar type and quality.

Keep a Close Eye on Labor

Nearly all businesses need to confront the tricky issue of “rightsizing” their workforces and paying employees competitively. Construction companies have the added challenge of doing all this in the midst of a seemingly never-ending skilled labor shortage.

One thing that can help is quantifying your labor needs as precisely as possible. Determine how many workers are needed to complete each typical job task or how many are needed to work on each phase of the types of projects you usually perform. Obviously, you’ll need historical data to make such determinations, so be sure you’re capturing this information.

Compensation, benefits and taxes are also major factors. Indeed, knowing your true labor costs — often referred to as labor burden rate — is a mission-critical financial-management activity for construction businesses.

Embrace Technology

Using up-to-date and secure financial management software and mobile devices tailored to the construction industry can help streamline financial activities related to estimating, job costing, payroll and invoicing. The right combination of tech assets can help:

Automate calculations and processes,
Create more accurate estimates,
Track a variety of costs and accurately allocate them to projects, and
Generate the necessary documentation for your records, as well as for financial reporting.

As always, however, selecting the right tech tools for your construction business’s distinctive needs and comfort level is the hard part. Choose your purchases and upgrades carefully — always with the goal of improving the clarity of your finances and your control of them.

Lay the Foundation

Managing cash flow, materials, labor and technology costs for your hardworking construction company may seem as difficult as laying a solid foundation on unstable soil. But with the right personnel, policies, procedures and computing tools in place, it can be done. Kirsch CPA Group would be happy to help you review your construction company’s approach to financial management and target areas for improvement.

Schedule an appointment to learn how we can support you