When does construction-specific accounting and operations software start to make sense for HVACR contractors? It varies. Some businesses approaching $50 million in annual revenue are able to get by with off-the-shelf bookkeeping applications. But they are the exception. In general, construction-specific software systems start to make sense financially for contractors with more than $5 million per year in revenue and at least 10 employees.
Generic accounting software typically lacks features needed for job-based financial management. Simply tracking debits and credits, paying bills, and running payroll is not enough for even smaller contractors. For both new construction and for service work, they need a number of specific accounting tools that off-the-shelf software does not provide.
These tools provide the visibility needed to know whether the work a contractor is performing is making money or losing money. Without that basic knowledge they cannot hope to manage their way to predictable profitability.
Here are several key business symptoms that point to the need for more sophisticated software tools:
• Inability to easily and accurately identify projected versus actual versus budgeted costs for a job while it is in progress.
• Manual calculation of key financial measurements for projects such as work-in-progress billing or cost-to-complete.
• Recent replacement of a bookkeeper with an on-staff accountant or accounting staff.
• Bookkeeping or accounting functions manually charge labor, material, and equipment costs to the appropriate jobs.
• Entering the same data multiple times into different applications.
• The use of numerous home-built spreadsheets that only specific individuals know how to use or modify.
Benefits of a Construction-Specific Solution
Accounting software helps most with your bottom line — i.e., the cost reduction part of the profit equation. Benefits of investing in construction-specific accounting software include:
Streamlined business processes: Most contractors start looking for new accounting software because they recognize that their existing software is causing bottlenecks in the flow of information, which can lead to bottlenecks in cash flow and workflow. For example, it’s not uncommon for the same data to be entered many times by different people because the software in use is not specific to the needs of a contractor.
Consider a change request on a new construction job. A supervisor in the field might log the change request in the company’s software, most often a spreadsheet or project log application. This same information is then transferred to the office, where it must be entered as a transaction against the job. Once the change request is approved, it is likely entered yet again by the field supervisor or project manager in their software as an approved change order. Without construction-specific software, the same piece of job-related information might make its way through several hands and several different applications and spreadsheets. Each transaction not only takes time, it presents the opportunity for error or omission. The trail of unprofitable construction jobs is littered with change-order work that was performed and never billed because information slipped through the cracks.
This is just one example of the problems associated with the need for multiple data entry. Many others can be cited, such as delayed billing because invoices from the field have to be “re-keyed” into your accounts receivable software; or poor cash flow because percentage complete amounts have to be re-entered into a work-in-progress report. Software built with contractors in mind accommodates the fact that information generated from the field and transactions generated in the office must be connected in order to facilitate efficient operations and optimize cash flow.
Job cost accounting: Construction-specific software is considered “construction-specific” primarily because it is built around the concept of the job. It is obvious that construction is fundamentally different from other industries, such as manufacturing, because the work done in construction is done in large chunks. Jobs can take a long time to complete, require special financial arrangements (i.e., retention and work-in-progress billing), and usually involve many partners working in collaboration.
The list of rules, methods, and practices that make construction accounting different is long and evident to anyone who manages the books for a contracting business. The reason for most of these differences is the fact that the flow of cash is uniquely tied to the flow of work in each project, and that the work itself is unique to each job.
Business intelligence: Construction-specific financial management software not only helps contractors perform existing functions better or faster, it also helps them work differently. Few construction or service companies have the time to pore through job data and look for patterns of job performance that point to better ways of doing business. But this type of business intelligence is exactly what companies need in order to grow.
More sophisticated construction software products will provide the intelligence needed to turn data into actionable information. They will have business intelligence built-in to help flag potential problems, anticipate when profitability on jobs is threatened, and help owners and managers identify their organization’s opportunities for better performance. In short, top-tier software products for the industry will help contractors manage by exception — presenting the exceptional events that are most important to their operations and that require their attention most urgently.
Finally, although accounting software is clearly focused on cost control and the bottom line, by improving that bottom line, you will be working in a better cash position. That allows you to invest more in your business development efforts to grow your top line.
Questions to Ask Before Buying
Once a contractor has decided to invest in construction-specific accounting software, he should start asking himself two types of questions: ones that identify the type of software needed, and some “gut-check” questions to be sure his company is ready to implement new software.
Here are a few things to consider when determining what type (features and functionality) a business needs:
• What business processes do I want to improve? List the functional areas that you would like to streamline and connect across your business; for example, accounts payable, equipment management, human resources, project management, etc. Most construction accounting software will provide solid job-based accounting but might not address all the things a contractor needs.
• Where and how will the software be used? If you plan to implement software for office use only, then traditional Windows-based software that loads directly onto the user’s computers and onto a main server will work fine. However if you want to easily access your software from remote locations, and especially if you plan to use multiple types of devices (tablets, smartphones, etc.) for mobile access, you should consider web-based (cloud) software. In general, cloud-based software will allow users to access the full extent of the applications from any device with no special software needed — just Internet access and a web-browser.
• What software do you want to keep? If you are not planning to replace certain software, such as project logging or scheduling applications, you should identify these and check with potential vendors to see if they support integration between their product and the ones you intend to keep using.
To help ensure that they are ready to make the move into more sophisticated business software, ask yourself these “gut-check” questions:
• Do you have the time to manage an implementation? Buying business software is not like buying off-the-shelf applications. Most systems, when implemented, are tailored to match the particular operations and processes in place in each unique business. This takes time, and will take the time of key people in your organization.
• Do you have the people in place to make use of the software you are purchasing? Many software systems have an extensive menu of optional modules or features that can look very attractive when making the purchase. But too often, there is no one in the company in a position to take advantage of them. For example, if you do not have a full-time service manager, it probably does not make sense for you to purchase a sophisticated preventive maintenance application as part of your system.
How Much Will it Cost?
The amount of money you should spend on your business software depends not only on your current size, but also on how much you expect to grow over the next several years. Costs can be broken into three broad categories: software licenses, implementation, and ongoing support and maintenance.
Licenses for typical business software can range from a couple thousand dollars per user to well into five-figures depending on the number of modules or features purchased. For a typical mechanical contractor with both new construction and service business, a user license for a decently equipped system from a leading software vendor will be somewhere close to $5,000.
Implementation, including transferring your data into the new system and training your staff, will cost anywhere between half and 1.5 times the cost of your licensing. Budgeting for roughly the same cost as your software licensing is a safe bet for implementation. Finally, expect to pay roughly 20% to 25% of the list price of your software every year for ongoing software maintenance and support.
When calculating your costs, be aware that there are two general schemes for providing licenses. Named licenses are tied to specific users and/or computing devices, while concurrent licensing allows as many individuals access to the software as you have purchased licenses. While concurrent licensing incurs a small amount of incremental management on the part of the system administrator, it is a small price to pay for more flexible access, especially if you are purchasing cloud-based software that allows access via any connected device.
If you are considering cloud-based software, be aware that the cloud is not synonymous with subscription-only pricing. One can still purchase and own software that is served over the Internet, even if it is hosted by a third party, and you never actually install any software on any device. If you are considering “renting” purely subscription-based business software, you can expect to pay a bit less initially, but more over the life of your system.
In Part 2 of this article (March), I will cover what to look for in a vendor, integration, security issues, and how long it takes to implement construction-
specific financial software.
Read part 2: "Finding, Implementing Construction-Specific Financial Software".
Wayne Newitts is marketing director for Dexter + Chaney, a Seattle-based software development company that has been providing computer and software solutions to the construction industry for over 30 years. An engineer by training, Wayne has been involved with the development and marketing of business software for over 15 years. He can be contacted at firstname.lastname@example.org, and more information on Dexter + Chaney is available at