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Keys to Expense Management for Construction Companies

Brink's Money

22 Jun 2021

At its core, managing expenses is good recordkeeping. For most personal expenses, it’s relatively straightforward—you get one or two paychecks a month and have five or 10 bills to pay. 

For a business, it’s complex. For construction companies, even more so. But solving the challenge of construction expense management has equally outsized benefits.

You’ll be able to price projects effectively, keep employees and subcontractors happy, and lower the overall stress of managing projects.

So what do you need to know? And what are the keys to success?

3 unique challenges to construction expense management

Every industry likes to claim that it faces unique challenges. Construction companies have the data to back it up.

A PricewaterhouseCoopers study found that, on average, payments to construction companies lagged 83 days, or almost three months—longer than just about any other industry. 

The gap between when expenses occur and when payments arrive adds complexity to financial management. Because payment cycles extend beyond billing cycles (i.e. "Pay within 30 days of receipt"), cash flow can become an issue.

That gap isn’t the only challenge.

1. Lots of subcontractors, lots of receipts.

A construction business that relies mainly on subcontractors, not full-time employees, enjoys some benefits. Most contracts include a paid-if-paid or paid-when-paid clause that passes the risk of late (or no) payments from general contractors to subcontractors.

But the setup doesn’t make it easier to track expenses. You may have dozens of subcontractors working simultaneously on dozens of projects, each accruing costs for tools and labor and endless runs to Home Depot or other suppliers.

Receipts come back to you dusty and crumpled. Unexpected costs are called in from far-flung job sites with spotty cell reception. Neither subcontractors nor employees will be happy if expenses aren’t reimbursed because of lost receipts or miscommunicated approvals.

If you pay a subcontractor a flat fee, you may not need that pile of receipts to align on compensation. But you do need that information to learn if you priced the project accurately and how much to charge in the future.

If subcontractors charge an hourly rate, the equation changes.

2. No two jobs are the same.

One of the biggest challenges in construction expense management is assessing labor costs. Recent lumber prices notwithstanding, materials are comparatively easier to price.

But how many hours should it take to demo a bathroom? Or pour a sidewalk? Until you can quantify the expected labor output (e.g., square footage demolished per hour), you’ll struggle to predict costs and price projects accurately.

The hours of labor required for seemingly similar construction projects varies—taking down tile from a bathroom built in the 1920s is a different experience than the same work on a bathroom built a half-century later.

That makes such assessments tricky. If you’re basing estimates on your experience, all the “data” lives in your head. Even if you’re a skilled estimator, you’ll never be able to step away from the day-to-day management of projects.

Greater variability requires more financial skill and time and energy—not the first-choice activity for most construction company owners.

3. Most construction companies don’t start with a CFO.

Plenty of general contractors started out as one-person shops. Projects flowed sequentially, one after the other. Simple payment structures like half upfront, half at completion worked.

The complexity grows exponentially along with your construction firm. It may arise from a diversity of projects or the sheer number of them.

If you’re scheduling multiple teams for, say, a new subdivision build, those simultaneous—or near-simultaneous—operations will generate a cascade of costs. If you don’t have a financial management plan to match your scheduling system, you can quickly run into cash-flow issues.

Odds are, you or the owner of your construction company didn’t get into the business to be a CFO. But you don’t have to be one to manage construction expenses effectively.

Three things can help.

3 keys to manage construction expenses effectively

1. Code your costs electronically.

The quality of any analysis depends on the quality of the underlying data.

Teaching an artificial intelligence system to play like a chess master, for example, was easier than teaching it to play Go. Why? Because, in chess, it was simpler to catalog every possible move—the data was better.

The same applies to managing expenses. If the “training data” is a pile of paper receipts—and an invisible pile of missing receipts—an analysis is painstaking, if not impossible. Any comprehensive review likely requires prolonged follow-up with subcontractors or employees to clarify expenses and manually log them into a system.

Coding expenses and cataloging them electronically simplifies the process, something you can automate when the purchasing starts electronically, as with a prepaid business expense card

Skimping on data collection means financial forecasting decisions aren’t data-driven or, perhaps worse, based on incomplete or incorrect data.

It’s never too soon to start—month-over-month data is useful, but year-over-year data reveals long-term trends to ensure financial security.

2. Quantify labor output.

Quantifying labor output is tricky. Construction projects are full of surprises. But you don’t need perfect data to have valuable data. A reliable range of potential costs is enough for planning (and usually as close as you’ll get for any kind of cost estimate).

Quantify labor output at “lower” and “higher” levels. For example, a lower-level measure might be square feet of concrete poured per hour; a higher-level measure could be square feet of driveway completed per day.

The lower-level measures are project agnostic, while the higher-level measures apply to a specific type of construction project.

In either case, these measures help you estimate costs, identify top (and bottom) performers among employees or subcontractors, and weigh the impact of process improvements.

3. Create more favorable payment schedules.

When it takes a while to get paid, you’re better off spreading out the payments for a project. That way, a late payment might delay 10% of a project’s revenue but not 50%. 

A simple way to do this is to tie client payments to project milestones. For example, break up a project into 20% increments payable, say, after demolition, then after framing, wiring, plumbing, etc.

Doing so de-risks the project for you, smoothing the peaks and valleys in cash flow.

You may also want to front-load some of the initial cost (e.g., a deposit of 30% of the total estimate). You’ll reduce your need to draw on company funds or credit lines to kick off a project with material purchases. 

(On the other side of the equation, you may want to finance large purchases of equipment or materials. While you’ll pay some money in interest, you’ll have greater flexibility—a worthwhile trade-off for many.)

No project that spans many months, involves dozens of skilled workers, and has total costs in the hundreds of thousands or millions will ever be simple or wholly predictable. But not every expense management challenge for construction businesses is inevitable.

A great place to start is by automating business expense reporting, something the Brink’s Business Expense card can help solve.
 

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