There are two parts to pulling in a profit for every construction business: ensuring adequate income and managing expenses. The expected revenue from each construction project is fixed from the time it begins, which puts the onus on expense management to ensure a project’s cash flow and ultimate profitability.
Unfortunately, contractors often underestimate the costs of doing business and wind up short on cash partway through a project. If this happens, contractors may have to pause construction while figuring out their finances, leading to delays, further project costs, and a lot of ill will from owners and construction industry partners.
Following are some steps contractors can take to manage their expenses well, stay within budget, and pull a profit on their next construction projects.
How to Manage Construction Expenses
Construction expense management is the process of ensuring spending stays on track during construction projects. Thorough planning, followed by ongoing monitoring and analysis, can help construction companies stay within their budgets and protect cash flow from the beginning to the end of each project.
Estimation and budgeting
Thorough estimation goes a long way to a successful project. Efforts in the pre-construction phase could identify hidden aspects of the project and thereby save money, time, and strife later on down the line.
Thorough estimates consider
- site characteristics,
- as much detail as possible about the owner’s ideas and preferences,
- local labor patterns,
- and any other information that could impact the construction schedule or project costs.
Accurate estimates grounded in analysis of previous projects, combined with research on the proposal at hand, pave the way for successful budgets.
The project budget should account for every known contractor cost throughout the project, including
- and equipment rentals.
General contractors should leave room in the budget for unknown business expenses, too.
Accurate expense tracking
To assess the current financial standing of a construction project, its managers must regularly compare current expenses to the overall budget they’ve established. The complexity of each project makes tracking difficult. Employees continually order and purchase new materials but struggle to keep paper receipts. Meanwhile, ongoing equipment and vehicle costs accrue, and subcontractors add their own business expenses into the mix.
Contractors must set up an expense management system for tracking all costs as they come up so they can continually monitor progress and ensure the project is staying within budget. Expense tracking software provides a systematic approach to integrate expense reports and record-keeping into office and job site workflows.
Tracking takes a team effort – processes that build expense tracking into the daily workflow help employees get on board to maintain spending records and expense reports to communicate new expenses as they arise.
Truss builds expense tracking into the spending routine. Any user who makes a purchase with a Truss card receives a text message reminding them to take a photo of the receipt and upload it into the expense tracker.
The tracking system should include all the varied expenses that come up on a construction project, including:
- Labor – hourly tracking for all employees in the field and office
- Materials – all raw products that go into building, including light fixtures, lumber products, steel rebar, and more.
- Overhead – including office rent, utilities, fuel, permits, vehicle and equipment costs, insurance etc.
The ultimate goal for expense management tools is the ability to create regular reports so managers have an accurate and ongoing picture of the project’s progress for better construction cost management.
Software and Automation
Spreadsheets are a standard tool for tracking daily project expenses, but they may create as many problems as they solve. When each team has its own separate expense tracking sheet, the data is often inaccessible to other teams. Information doesn’t integrate between teams to create a big picture. If all the data is to be reconciled, administrative staff must manually input numbers into a common system, creating delays and opening up the whole system to input errors. Accounting software minimizes manual input and data silos.
Automated expense management software offers a solution to share the wealth of knowledge between teams, integrate it seamlessly to educate project decisions, and put an end to data re-entry. Expense reporting software can create daily reports so construction managers can keep tabs on spending consistently to educate next steps.
Cloud-based solutions offer the further benefit of ensuring the most recent information is accessible to all team members, from anywhere and at any time, with minimal manual processes involved. Truss offers cloud-based payment solutions that make ingoing and outgoing payments visible in real time to team members with appropriate permissions, so managers can make informed spending decisions and protect cash flow.
Monitor Cash Flow
Expense tracking helps keep tabs on where the project sits compared with its budget goals at any given time. There is one further metric that’s essential to construction expense management: a healthy cash flow.
Cash flow is the movement of money into and out of a project. At any given time, adequate funds must be available to cover upcoming expenses. Without a healthy cash flow, contractors can’t pay their bills and a project may stall until more money comes in.
Cash flow problems can arise when too little money comes in or too much money goes out. Unexpected or sudden expenses may impact a project’s cash flow on one hand, or on a late payment on the other. In either case, keeping close tabs on cash flow can help managers identify shortages before they occur and actively avoid bigger problems.
Maintain a cash flow document that tracks current and upcoming expenses, along with expected payments and dates. Keep the cash flow tracker current to track trouble spots early. Have a cash flow backup plan to help the project through tight financial spots.
Finally, establish good billing techniques to protect cash flow. Invoice promptly and properly, and consider revamping your accepted methods of payment. Digital payments through Truss can speed up the payment process by avoiding administrative delays, check mailing time, and bank holds, helping to protect cash flow.
Benefit from Project Management Tools
Construction project management software can help keep tabs on each task throughout a project. By using Gantt charts and other scheduling tools available through the software, project managers can monitor project progress, manage budget and schedule adherence and implement cost control measures to spot coming conflicts in time to avoid them.
Further, project management tools offer a central location to store construction drawings, documents, RFIs, photos, change orders, and communications so that any team member can access them anytime via mobile technology. This wealth of knowledge can help to avoid costly errors and delays.
Project management tools offer advantages that extend past the current project – they allow for systematic collection and organization of information on how the work gets done. This data can be used to improve performance over time and educate future project bids.
The key to making the most of project management tools is using them to their fullest. Each team member must be responsible to input information into the program so that the information there is complete and current.
A Systematic Approach to Construction Expense Management
Expense management is critical to the success of construction projects. Contractor success depends on solid financial management, including accurate estimating and budgeting and careful protection of profit margins. Project teams must work together to track expenses throughout a project to make sure to stick to the budget.
Automating systems for more consistent cost tracking and faster invoicing helps to eliminate errors and protect consistent cash flows. Digital invoicing and payments through Truss makes payment quick and simple, so that contractors can access their funds and keep projects on track. Finally, project management tools help improve overall efficiency through communication and planning.