Construction is a highly unique industry with equally unique accounting needs. Ongoing and overlapping projects, variable expenses, and long lead times for work (and deposits) mean tight profit margins. Cash is king and organization is crucial. Traditionally, accounting for construction has been based on a historical view of the books and records. Moving forward, successful construction firms will use a proactive, data-based approach to accounting that relies on AI (Artificial intelligence) and automation.
For Construction Companies, Cashflow Is Key
Construction costs are higher than last year across the board, with few exceptions. Overall input prices are up 16.7 percent. Natural gas, unprocessed energy materials, and crude petroleum are the three other highest cost increases for nonresidential construction. Even iron and steel prices, which came down from last year, are still significantly higher than when the pandemic started. Changing inputs make estimating future costs even harder, yet accurate cost estimates are one of the keys to achieving profitability.
Rising interest rates are making borrowing harder, too. Most construction owners expect to pass along cost increases to customers. And even though more than half of construction firms expect profit margins to increase over the next six months, “this is no time for complacency,” said Associated Builders and Contractors Chief Economist Anirban Basu.
Most advisors recommend keeping an even closer watch on costs. This can be hard to do when the typical construction accounting function is operating from a historical perspective. More agile technology tools for accounting enable construction firm owners to respond quicker to bids and manage ongoing jobs.
The Shift to Digital
Construction usually lags behind other industries in technology adoption. Technology at the worksite and to win bids are becoming more commonplace. These are great ways to reduce risk and improve planning. Technology can help to manage risk and uncertainty in accounting and finance, too.
Technology can also help firms better meet changing regulatory and compliance requirements. Factors like new lease accounting rules, sustainability and domestic sourcing, and cybersecurity readiness for public contractors are adding new complexities. In many cases, it’s just too challenging to stay on top of these areas manually.
For most construction companies, there’s no longer a choice. Digital is the way of the future. The pandemic accelerated this shift. Ongoing supply chain issues and changes in accounting continue. The most common reasons for investing in digital transformation are to:
- Create efficiencies
- Increase profitability
- Improve compliance and regulation, and
- Cut costs
Some of the top ways that construction firms are using technology to improve accounting and finance include:
- Digital documentation
- Eliminating the need for paper and adding the instant availability of updated documents from anywhere helps to reduce costs and inefficiencies.
- Cloud-based collaboration
- From the job site to worker training to accounting, the cloud enables quick decision-making and real-time communications.
- Consolidate workflows with more integrated software
- More connected data means less manual entry, overlap, mistakes, and time.
- Automate A/P and receivables
- Better technology can produce quicker invoices, payments, and revenue recognition.
Across all industries, accounting is changing. Accounting and finance leaders in all sectors are adapting to a different environment, one that’s always changing, where uncertainty is the only certainty. To better prepare for what’s to come, the practice of accounting is shifting to a more digital, future-forward approach. Technology is powering this shift.
Influencing factors range from a more remote workforce, the need for better data security, AI, blockchain, big data, data analytics, and cloud-based skills, among others. A 2019 Sage research study indicated that almost 60 percent of accounting professionals expected to use AI to automate accounting tasks within three years.
Some of the ways that AI can influence accounting include:
- Fewer errors
- More manageable workload
- Better data
- Analyze documents, like lease contracts
- Flag potentially fraudulent transactions
- Streamline workflows
- Eliminate repetitive tasks
The impact to construction firms cannot be understated. Better, more proactive accounting does more than prepare historical financial statements and reports. It helps to anticipate what’s next and lower risks. Construction firms can identify opportunities and be better prepared to respond to changing market conditions with actionable insights.