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Construction Accounting Methods: The Difference between Construction Accounting and Financial Accounting (Part 2)

Construction Accounting methods

One of the reasons I often hear cited by people I speak with as to why they’re using financial management systems for construction accounting is that their Corporation dictated it. The finance or IT group, after making a significant investment in a financial system, wants to standardize all accounting and won’t even entertain alternate systems. Most non-construction types don’t understand that construction accounting is unique and its hard to convince them otherwise.
So if you still think you can use a financial reporting system for construction accounting, and my last post didn’t set you straight, this one will. Here are two more reasons why financial accounting systems can’t moonlight as construction accounting methods.
Financial systems are geared around single-year accounting.
They are meant for annual reporting. Every year, you close the books, report the numbers and zero out the budget. Funding for construction projects must be tracked across multiple years, since the duration of most projects stretches beyond 365 days.
Construction management systems are different than financial accounting systems. You can track financing and expenses on a 10-year (or longer) project and the system will maintain the multi-year accounting. A robust system will be designed out of the box for multi-year construction projects. To satisfy the finance team’s needs, you should have the ability to report and pull information out of these systems and reconcile it back for the accountant who needs yearly information.
For example, construction on a new school will begin in 2010 and end in 2012. The 3-year project will cost $100 million. The developer uses e-Builder as its project management system. As the project progresses, invoices are paid out and commitments are made. When 2010 comes to a close, accounting wants to know how much money was spent this year. With its reporting functionality, those numbers can easily be extracted. After all, the only thing accounting cares about is that $22 million was spent in 2010. A report is run and the project progresses into Year 2.
Financial accounting systems make it tougher to manage multiple project funding sources.
Many facility owners are all too familiar with the headaches of managing funding from a variety of sources. For example in the construction of a higher-education facility, alumni may provide a hefty amount of funding for a new biology building, but their donation comes with stipulations. For example, they might require that another university fund match their donation dollar for dollar, or that the school spend its own (or the state’s) money first. You have to have a way to track and manage these stipulations so when your foundation checks on the progress of the project, you can report back what money (and how much) has been spent. It’s difficult to do this with a University accounting system – after all, it is designed to manage things like enrollment, tuition revenue, and payroll, not construction funding.
Why Construction Management Software
Construction management software, especially ones like e-Builder that are designed for owners, have the capability to address multi-year, multi-funding source situations. Accounting systems are not designed to do that. There is no means to keep tabs on what money is used first, second, etc. They will simply report on you how much money was available at the beginning of the project and how much money is available today.
So do yourself a favor – look into the reasons why you’re still trying to manage construction accounting with your organization’s financial software, and consider making the switch to a system that is geared specifically to address these (and many other) challenges.