Construction Accounting Software: Key Features and What To Look For

Commercial contractors manage large and complicated budgets that can have slow payment rates and volatile costs. They also have to accurately allocate job costs based on specific factors such as project, phase, or cost codes. Compliance requirements add another layer of complexity to construction budgets, since contractors have to track measures such as prevailing wages and apprentice hours. 

Construction accounting software includes features that allow contractors to measure and track all of these elements. This article explains what construction accounting software is, what features to look for and how contractors can choose the best solution.

Construction Accounting Software vs. ERP

ERP (Enterprise Resource Planning) software works to bring a business’s core processes into a single spot for easier management. Typically, ERP systems handle payroll, supply chain, and analytics at a company-wide, operational level. 

Construction businesses face a unique challenge for financial management that ERP systems alone may not be able to manage: because each project is so unique, they should be treated like a separate business unit within a company. Each project involves different people, prices per unit of work, and contractors have to conform to the financial reporting requirements of each individual client. This is where a separate accounting system can come in to help parse out the intricacies.

A good example of how these pieces fit together is with project invoicing. Say a company is managing change orders and invoicing at the project level. Contractors have to first negotiate costs with your project team, including the owner, the architect, and maybe subcontractors.

Decisions made within the project team then have to be routed through the company-wide financials, to inform the accounting teams and the banks and all of the true financial stakeholders to now move the money and transact. So, while an ERP could handle the final stages of the process, an accounting system specific to the project would be required to handle the first stages of financial management.

The best solutions go beyond simple spreadsheet capabilities: They use data analysis and predictive modeling to help make better decisions about resource allocation so contractors can reduce costs and increase revenue. 

Job costing features allow contractors to manage multiple projects by accurately tracking costs. They can designate expenses for specific projects, phases or cost codes. This helps prevent unintentional cost overruns. Construction accounting software addresses issues such as incremental billing, change order management, and subcontractor and vendor management.

Common Financial Challenges in Construction

Construction accounting software typically includes features that address common accounting issues.

Fragmented Financial Data

Multiple contractors, vendors, jobsites, suppliers and departments are involved in large construction projects. Because of this, financial data is often siloed in various systems and forms — from multiple applications and spreadsheets to paper receipts. This disjointed process interferes with accurate cost forecasting and effective decision-making. 

Complex Billing Processes

Construction companies often use progress billing for long-term projects. In this method, contractors bill as they complete a phase of the project, although a portion of the payment may be withheld. Those retained payments need to be reconciled later. This complexity makes the overall billing process more difficult to efficiently manage and can lead to lost revenue or billing errors. 

Change Order Tracking

Large construction projects frequently experience modifications to a project's budget or scope. These can be due to factors such as supply chain issues or unexpected cost increases. Contractors need to track and document these changes to ensure their records are accurate and prevent disputes.  

Legal Compliance

Construction companies must comply with multiple industry, local, state, and federal requirements that range from paying prevailing wages and hiring apprentices to contributing to union funds and managing subcontractor and vendor risks.

Core Features of Construction Accounting Software

The best construction accounting software provides real-time data for actionable insights.

WIP (Work-in-Progress) Reporting

WIP accounting tracks costs and revenues throughout the construction project lifecycle. Instead of waiting until the end of a job to determine profitability, WIP accounting records expenses as they occur. This gives a holistic overview of a project and measures expenses versus revenues earned during a specific period. 

The WIP can provide early warning signs for the overall financial health of a project. Consider a job that on a cost basis appears to be 95% complete, but it's still underbilled. The WIP could identify a potential issue, like maybe there are change orders still in the works, and indicate if the job profit is about to fade. By identifying potential issues early on, the project team can work proactively to get the project back on track.

Retainage Tracking

Retaining a portion of a payment — usually 5% to 10% — until terms are met is common in construction projects. Retainage tracking functionality in financial management tools automates the process so retainage can be billed as soon as possible. This feature helps prevent lost revenue and gives contractors a clearer understanding of future cash flow projections. 

Project-Based Accounting

Every construction project is unique, which means contractors have to deal with varying processes, materials, and equipment that change based on the project.

Construction accounting software allows project managers to use job costing. This is a project-based accounting method that assigns specific codes to every expense related to a project. This improves decision-making by providing a detailed breakdown of expenses that can be used to generate more accurate estimates and profitable bids. 

Integration With Scheduling or Project Management Tools

Accounting is an integral part of effective construction project management. Construction accounting software integrates with scheduling and project management tools to automatically sync labor hours, purchase orders and more to eliminate redundant work and improve coordination between accounting and operations. 

For example, information from worker data is contained in whatever workforce management system the contractors and subcontractors are using, and has to be verified and reconciled and cost-coded effectively. 

Technology has helped marry digital captures of time cards to the rest of the accounting process. Using workforce software, superintendents or foremen can track which workers are on which project, the cost code to be used, and how many hours they’ve worked from a smartphone or tablet. Doing so onsite in real-time and being able to share it with other systems is a powerful tool that integrates accounting with project management.

How Construction Accounting Software Solves Industry Pain Points

Construction accounting software eliminates many industry pain points by automating much of the manual work involved in project-based accounting. It provides a single source of truth and a centralized repository of a construction company’s financial information. Data analysis capabilities give contractors visibility into trends that can increase their profitability. 

Improved AI capabilities have given new power and direction to the benefits of accounting software. When processing invoices, accounting teams can pull up an invoice, fill out as much of the information including the date of the invoice, the vendor, the amount and whether the proper amount of sales tax was charged. In this way, AI can cut out a lot of the manual activities in the invoicing processes, automating it for faster and more accurate invoicing, which can help to achieve faster payment times. 

Subcontractors can benefit significantly from accounting software that can help them generate and track lien waivers. Lien waivers act as a sort of receipt of payment — as a subcontractor gets paid, they submit a lien waiver acknowledging that they relinquish the right to put a lien on the property for that portion of work. Owners may require GCs to collect lien waivers from subs before they will issue payment. Accounting software can help subs to create and keep track of lien waivers easily, which can help keep payments coming on time. 

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What To Look for When Choosing a Solution

Switching to construction accounting software from a general accounting application or a spreadsheet can be laborious and time-consuming. When evaluating vendors, contractors may want to analyze these features: 

• Ease of Integration

  Accounting software should work with the tools contractors already use, such as project management apps and time-tracking software. 

• Mobile Access

  Contractors spend a lot of time in the field, so solutions with mobile access and offline capabilities will make it easier to track costs on the go. 

• Scalability

  Construction companies can grow quickly, and need a solution that will work as they add projects, employees and locations. 

• Audit Readiness

  Contractors need to be ready for audits on short notice. Real-time tracking eliminates last-minute scrambling. 

Tips for Transitioning From Spreadsheets or Basic Tools

Transitioning to a new system can seem overwhelming, but contractors can simplify the task by taking a structured approach. Contractors can make a smooth transition and eliminate the potential of losing important data with a few strategies.

• Accounting departments can clean up data to eliminate inaccurate or duplicate entries before they begin.
• The entire team can be trained on how the software works and the procedures for logging expenses.
• When the accounting team customizes reports, they'll have access to valuable and actionable insight.
• Efficient workflows and procedures that enforce best practices, such as updating expenses in real time, will increase adoption across the company. 

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