In the construction industry, it can seem like nothing is easy. Incredibly long sales cycles, inclement weather, massive fluctuations in material costs, cutthroat competition, and countless moving parts are just a handful of the many difficulties construction firms face on a regular basis. Unfortunately, the accounting and finance side of the industry is no different.
AIA invoicing, union payroll, prevailing wage, retainage, revenue recognition and more not only make the accounting department’s job harder, but requires the investment in systems capable of handling such features.
Many Controllers and CFOs in the construction space struggle with finding the right software to implement that not only fits into their existing tech stack and goals, but also empowers users to manage these construction specific processes. This often results in companies either tying together multiple systems with integrations and clunky APIs or managing off of spreadsheets.
Neither scenario is ideal and leads to data lags, increased manual labor, and potential for error.
While this is not a complete list, some of the key issues that are complicating the construction industries finance and accounting departments include:
- AIA Invoicing
- Schedule of Values
- Change Management
- Revenue Recognition
- Job Costing
- Work in Progress
- Prevailing Wage
- Union Payroll
1. What is AIA Invoicing?
AIA stands for the American Institute of Architects. Founded in 1857, the AIA now bolsters roughly 100,000 members spread across the globe. The institute has a collection of contracts that are widely used throughout the industry, which helps standardize many of the complex agreements that take place amongst construction firms, their suppliers, their clients, and subcontractors.
Because of the need for standardization, there are strict guidelines as to how AIA invoicing and billing should be handled. There are two key forms involved, G-702 and G-703, which together form the Payment Application (or Pay Apps for short). These Pay Apps help ensure that subcontractors are receiving payments for portions of the project completed.
The G-702 lists the amount agreed upon before change orders, dollar amount of change orders, total contract amount, value of work completed, retainage, payments due, balance to finish and more.
The G-703 continuation sheet lists line-item details based on the schedule of values. The schedule of values is essentially a document that itemizes the list of all work items on a project and their associated costs. Form G-703 provides a more specific breakdown of the payments listed in G-702 and serves as a continuation of that form.
Unfortunately, filling out AIA invoicing forms G-702 and G-703 can be extremely time consuming and repetitive. Typically these are completed on a monthly basis, but sometimes performed more often. Investing in AIA billing software can drastically reduce manual labor and headaches involved with the AIA process. Features of AIA billing software can include automations, simplified calculations, quality assurance, and more.
2. What is Change Management?
The only constant is change, and the construction industry is no different. Project scope, organization, work execution methods, contracts and risk allocation, and control methods are all factors subject to change. However, introducing changes in the middle of a project can have drastic impacts on project success. Scope creep, budget fluctuations, and scheduling conflicts are just a few of the issues that may arise through the introduction of changes. Studies have shown that an increasing number of changes in a project lead to a decreased likelihood of staying within budget. Because of this, it’s essential to have procedures in place to standardize, organize, and control changes within the project.
Change management software helps organize the process, and ensures a standardized workflow to minimize the risks and costs of initiating change. Having change management software allows you to submit, review, request, and approve changes all from a centralized platform. This streamlines the process, provides visibility to all important parties, and keeps your project and budget on track.
3. What is Revenue Recognition?
Revenue recognition is the process of recognizing revenue based on the completion of certain tasks in a contract, rather than as a lump sum at the completion of the contract. This process is particularly common in industries that involve long-term contracts and projects (like construction and architecture). Proper revenue recognition is essential to construction businesses because it helps paint a clearer picture of the financial health of the organization than traditional cash-basis accounting might.
For example, if a construction firm accepts a 2 year contract worth millions of dollars, they might not see any cash flow during year one. This could skew their books to look like they are deep underwater financially. In reality, they have earned roughly 50% of that revenue in year one. Revenue recognition realizes that half the contract’s value has been earned, even if cash has not yet been exchanged.
The most common method of revenue recognition is “percentage-of-completion”. With this method, revenue is recognized as a percentage of contract completion. If a contract is worth $1M, and 25% of work has been completed, then $250k in revenue will be recognized.
How can the proper technology help with revenue recognition?
With ScaleNorth’s Construction for NetSuite SuiteApp, you can automatically calculate revenue recognition in NetSuite based on percentage-of-completion while reducing manual calculations, errors, and effort.
4. What is Retainage?
Retainage is an amount of money specified in the contract (typically 5-10% of each recognized payment) that is withheld until the completion of the contract. While it is intended to create incentive for seeing the project all the way through, it’s not without controversy. Many complain that it adds unnecessary complications to an already difficult accounting landscape. Other critics point out that retainage is often not paid out until the completion of the project, rather than individual tasks. For subcontractors or similar parties that are only involved with a small portion of the overall project, it can mean waiting months or more between the time they finish their task and the time they get paid.
Regardless of where you stand, retainage is a big part of the industry and is essential to manage correctly. Retainage software can help your business automatically generate invoices with line items for retainage, reducing the workload and complexity of this industry specific task.
5. What is Job Costing?
Job costing is a way of determining what direct and indirect costs add up to the total cost of performing a job. It takes into account labor, materials, and overhead at a high level, but can include more specific breakdowns such as the cost of hardware versus the cost of lumber or machinery rentals.
Proper job costing is important in understanding where your money is going, and where there is room for improvement. Not only does it give you insight into each individual project, but it allows you to evaluate how one project is performing versus another. It’s particularly important in the construction industry due to the litany of types of materials, contractors, subcontractors, architects, engineers, partnerships and more that come into play with a typical project.
While job costing is extremely important, having the software that optimizes it is equally crucial. For starters, job costing software helps businesses automate reporting and revenue recognition. Job costing software also allows you to quickly compare and contrast time frames, projects, and tasks for utmost visibility. You’ll have more accurate forecasting and budgeting than ever before, which not only fortifies your bottom line but improves the customer experience as well.
Because job costing takes things like overhead and supply chain into account, it’s inefficient to be used as its own standalone system. Instead, it operates best when tightly integrated with HR, project management, supply chain, inventory, and other software systems. Even better if all of these are handled within one single platform like NetSuite.
6. What is Work in Progress (WIP)?
Work in Progress schedules utilize transaction price, costs incurred to date, projected cost to complete, and billings to date in order to help managers track critical profitability metrics. They compare these costs to determine if a project is over-billed, under-billed, or on budget relevant to the amount of work completed. Detailed and accurate WIP reporting is essential to remaining within budget, but it’s a concept many businesses are still struggling with. In fact, roughly 50% of all construction firms are still utilizing spreadsheets to manage their Work in Progress. Using spreadsheets leads to duplication of manual labor, typos, and poor reporting capabilities.
By implementing a system like NetSuite to simplify and streamline WIP, you can decrease manual labor, automate calculations and processes, drill down into detailed reports, setup KPI alerts and more.
7. What is Prevailing Wage?
Prevailing wage is essentially a price floor on workers’ wages in a geographic location. For example, if the government is initiating a project in Los Angeles, CA, the laborers they staff on the project need to be guaranteed appropriate wages relevant to the local Los Angeles market. The government could not undercut the local wages to get away with paying workers less. The same applies to worker benefits. It is important to note that prevailing wage rates are based on market standards, not minimum wage. The standard rate of pay for a certain task is likely higher than minimum wage in most areas.
The purpose of prevailing wage is to essentially protect workers by supporting livable wages and benefits. However, it also helps improve the quality of the labor provided, ultimately improving the final products for the rest of us to enjoy. This leads to higher ROI for the taxpayers.
Managing prevailing wages can be a time consuming process, particularly for large scale projects operating in multiple jurisdictions (i.e. the development of roads or pipelines that span across city and state borders). Accounting and payroll systems that automate and simplify prevailing wage management help reduce the manual labor involved while helping prevent your business from coming under regulatory scrutiny.
8. What is Union Payroll?
Unions are an extremely important part of the construction industry but do bring complications to the accounting and payroll side of business.
For starters, unions require accurate time tracking which can be difficult in an environment where people are out in the field or there are multiple job sites. Having a cloud based system that’s accessible from anywhere (including mobile) is extremely beneficial for accurate union payroll.
Second, different unions will have different requirements regarding wages, payroll processing methods and dates, and other key operational differences. Being able to easily manage all of these variables is crucial to remaining compliant.
With NetSuite, not only can your employees utilize the time tracking features from anywhere in the world, but you can manage rules and workflows around specific employee’s payroll requirements with ease.
The construction industry has countless regulations, requirements, and hoops to jump through just to operate efficiently and remain compliant. In today’s day and age, it’s essential to have the right technology to help your business navigate this difficult operating environment.
ScaleNorth’s Construction for NetSuite SuiteApp bundle allows firms to manage all of these construction specific accounting tasks directly within NetSuite. Plus, NetSuite’s robust functionality natively provides you with advanced accounting and finance, reporting, inventory and supply chain management, HR, CRM, marketing, and more.
Gone are the days where you had to manage your construction business with an ever-increasing number of spreadsheets and siloed point systems. With ScaleNorth’s Construction for NetSuite ScaleApp, you can manage nearly every aspect of your business, plus get best in class software that assists with change management, AIA billing, retainage, revenue recognition, schedule of values, job costing, prevailing wage, and more.
This type of best-of-breed solution is essential to remaining competitive and efficient in today’s complex operating environment. Afterall, the quality of your team’s craftsmanship only goes so far if the back-office operations are struggling. ScaleNorth’s Construction for NetSuite SuiteApp gives you access to the world’s leading cloud ERP system, and can tightly integrate it with a project management platform like Procore, allowing you to streamline your business and operate at its highest potential. In an industry full of cutthroat competition, having this type of best-of-breed technology in your corner can mean the difference between success and failure.