5 Key Metrics in Construction Bookkeeping You Must Monitor
The construction industry, characterized by its dynamic projects and multifaceted operations, demands a vigilant eye on financial health. From residential builders to commercial construction giants, understanding the intricacies of financial metrics is vital to ensure sustainability and growth. As in any robust structure, the strength of a contracting business is often concealed in its foundation – in this case, its bookkeeping.
Let's delve deep into the realm of construction bookkeeping and uncover five critical metrics that every contractor and construction business should monitor.
1. Job Costing Accuracy
Why It Matters: Job costing is the heart of construction accounting. Ensuring that your estimated costs are closely aligned with actual expenses determines your project's profitability.
How to Monitor: Regularly compare the initial project estimates with real-time expenses. Use specialized construction accounting software that offers features to track costs related to labor, materials, equipment, and overhead as they're incurred.
Contracting Types that Benefit: General contractors, specialty contractors like plumbers and electricians, and large-scale developers all need accurate job costing to price their services competitively while ensuring profitability.
2. Work-in-Progress (WIP) Reporting
Why It Matters: WIP reports offer a snapshot of the financial status of ongoing projects. It helps in identifying projects that are underbilled or overbilled, which can affect cash flow.
How to Monitor: Implement monthly or bi-weekly WIP reporting, examining underbilled jobs (potential revenue) and overbilled jobs (potential liabilities).
Contracting Types that Benefit: Civil engineering contractors, large-scale builders, and renovation specialists can significantly benefit from WIP insights to maintain a steady cash flow.
3. Overhead Rate
Why It Matters: Understanding how much it costs to run your business outside of specific project costs helps in bidding projects more accurately.
How to Monitor: Calculate the overhead rate by dividing total overhead costs by total direct costs or labor costs. Keep a keen eye on trends over time, aiming to decrease this rate by enhancing operational efficiency.
Contracting Types that Benefit: HVAC contractors, masonry specialists, and commercial builders should watch this metric to ensure their bids account for all business costs.
4. Gross Profit Margin
Why It Matters: This metric reveals the profitability of your projects after considering direct costs, helping you understand if you're charging enough for your services.
How to Monitor: Subtract direct costs (like materials and labor) from the revenue of a specific project and then divide by the revenue. A decline in this percentage could signify rising costs or underpricing.
Contracting Types that Benefit: Residential home developers, landscaping contractors, and infrastructure construction companies need to track this to maintain profitability.
5. Days Sales Outstanding (DSO)
Why It Matters: DSO indicates the average number of days it takes clients to pay their invoices. A high DSO can lead to cash flow challenges.
How to Monitor: Divide the total outstanding receivables by the total sales for a given period, then multiply by the number of days in that period. Consistent follow-ups on overdue invoices and implementing strict credit policies can help in reducing DSO.
Contracting Types that Benefit: All contracting businesses, especially those with long-term projects like commercial developers and civil engineering contractors, should monitor this to ensure smooth operations.
In Conclusion:
In the world of construction, numbers tell a tale – of successes, of areas needing attention, and of potential growth. By focusing on these five key metrics, contracting companies can not only ensure that their current projects are profitable but also that their business foundation remains unshakably strong for future endeavors.
For construction entities seeking to refine their bookkeeping practices or those aiming to harness the power of insightful financial strategies, Ledger Management is at your service. With a deep understanding of the construction industry's unique challenges, we're here to assist in elevating your bookkeeping game and to propel your cash flow with dedicated CFO services. Ready to embark on a journey of financial mastery? Connect with us here.