Construction Accounting Software

 

Construction accounting is unique. Contractors need to track detailed costs by job and manage complex payrolls, among other things. In response to these requirements, roughly 100 applications vendors exist to serve the market. These range from low-end solutions for small companies to large enterprise resource planning (ERP) systems. There are also unique vendors for different trades and divisions—general contractors, heavy/civil, MEP etc. We wrote this guide to help make sense of this complicated marketplace.

Here’s what we’ll cover:

What Is Construction Accounting Software?
What Type of Buyer Are You?
Benefits and Potential Issues
Market Trends to Understand

What Is Construction Accounting Software?

Construction accounting software offers sophisticated functionality for job costing, complex payroll processing, equipment management, subcontracting and other financial management processes. Systems are typically designed around a job costing module, which allows accounting staff to allocate job costs by job and CSI code. This capability is the core difference between construction accounting systems and the generic accounting systems that are more popular in other industries.

Many contractors may start their business with generic construction bookkeeping software, such as Quickbooks or Peachtree, but they will upgrade to an construction-specific system once they reach a certain level of sophistication—typically when they exceed about $3 million in revenue or more than five concurrent projects of meaningful size. 

The core of any top-rated accounting system includes: job costing, general ledger, accounts payable, accounts receivable, purchase orders, payroll management and financial reporting. Other common add-on modules include:

• Fixed asset accounting
• Equipment tracking
• Inventory management
• Contract management
• Time tracking

Accounting software for a construction company will also support the industry's primary billing formats: time & materials, AIA, progress or percent completion, cost plus and retention. When accounting is implemented as part of a broader suite of applications, the system will often be integrated with service management, project management, project scheduling, document management, cost estimating, fixed asset accounting, equipment tracking, inventory management and time tracking. 

What Type of Buyer Are You?

To sort through the 100 or so systems out there and start your comparison, it helps to identify yourself with one of the specific types of buyers we see in the market:

Upgrading from Quickbooks. A majority of the buyers we speak to are small contractors evaluating construction-specific systems for the first time. They are currently using Quickbooks, Peachtree or another entry-level package. However, they are growing and need more sophisticated job costing and payroll management functionality. There are excellent mid-range solutions for this type of buyer. The most important thing for these buyers is that they find an affordable construction accounting software package price.  

Large construction enterprise. Large firms tend to have multiple corporate entities and need to consolidate their financials. They also tend to have different units performing different types of work (e.g. GC, MEP, Civil—all under one parent firm). Finally, they have many users and many different types of users. Generally, these firms are seeking to modernize by replacing aging legacy systems.

Service contractor. Service contractors typically seek systems that combine accounting and field service management. So, in addition to core accounting, they require service dispatch, scheduling, service contract management and spare parts inventory management. These contractors also self-perform work, so they have specific labor-related needs. A well-established set of vendors offer financial software for contractors. 

Heavy/civil contractor. Heavy/civil contractors also have very unique requirements. They perform unit billing, and need a system designed to bill this way. They also have substantial requirements around equipment management, fixed asset accounting, materials management and dispatching and tracking work crews. A specialized set of vendors serve this market well.

Benefits and Potential Issues

Construction accounting systems provide great benefit, if implemented and adopted correctly. These benefits include:

Improved visibility. Modern systems will provide better insight into the profitability of individual jobs, and the company as a whole. This results from more accurate collection of data—fewer errors—as well as better reporting tools to explore the data in the system. Job costing alone will provide a tremendous improvement in reporting relative to generic accounting systems. 

Better estimates. By gaining a better handle on job costs across projects, the firm will be better informed when developing estimates in the future. Job cost reports from historical jobs will help identify material and labor cost trends, unanticipated costs and areas where jobs tend to go over budget. All this leads to greater cost control. Estimators can incorporate these factors into their bids going forward. 

Fewer errors and less double entry of data. When contractors have inadequate systems in place, they typically resort to creating a range of spreadsheets to track job costs and other information not handled by the accounting system. This results in double entry of data, errors in the spreadsheets and lost information. When all of this information is handled in a single accounting and job costing system, there is a substantial reduction in errors.

The primary issues that tend to surface with new construction accounting software result from poor selection and implementation processes. Many buyers see technology as a quick fix to their challenges. In reality, even the best accounting package for construction industry is not a panacea. Only a combination of the right solution, a well-executed implementation and adoption process will fix their problems.

When selecting a new system, contractors need to reconsider their business process first, and then find the application provider that will most closely map to those processes or automate a new, more effective set of processes. They also need to get a wide set of users involved in the selection process so that each user feels invested in the new program and will adopt it when it goes live. Finally, contractors need to invest in proper training so that new users get up to speed on the system quickly and realize early benefits from the new system. 

Market Trends to Understand

These market trends should be considered when evaluating a new accounting and job costing system.   

Technology modernization. When we talk to buyers who are upgrading from an existing system, they typically tell us that legacy technology is at the root of their challenges. Systems built on proprietary databases or outdated programming languages often fail to meet firms’ needs for data export, integration and reporting. This tends to be a bigger challenge for large contractors, but all buyers should consider the platform technology of each product. 

Business intelligence. Construction accounting systems have evolved from simply recording transactions to providing key insight into the performance of the firm, project by project. Business intelligence refers to the more sophisticated analytics available in leading systems. Users should be able to run ad hoc reports and slice and dice data from the system to answer critical questions about the business. 

Increasing suite breadth. The term “construction accounting software” understates the breadth of functionality offered by most systems today. Leading systems offer project management, project scheduling, estimating, bid management and service management. Vendors continue to expand the breadth of their system through development and acquisition. Buyers should weight integrated suites versus best-of-breed applications.

Note that we do not mention software as a service (SaaS) as a trend in this market. While we are proponents of the SaaS model, we have not seen credible SaaS accounting software for construction business applications yet. We believe that the SaaS model will eventually make its way into construction accounting, but for now that is not the case.