5 Reasons to Separate Project and Business Financials in Construction

Like most things in construction, the industry has a unique challenge that most ERPs don’t account for: tracking financial health of multiple projects individually, while still understanding the financial health of the entire business.

This complexity demands a separate financial management solution rather than relying solely on an ERP, which typically covers accounts payable, and company financial reporting but may not fully cater to the unique financial requirements of each construction project.

Project Financials vs Business Financials: Key Differences

Here's a breakdown the differences between project and business financials:

Company Financials

• Scope

  Covers overall business expenses like administration, salaries, and utilities, not tied to specific projects.

• Purpose

  Provides a broad view of the company’s financial health for strategic planning and compliance.

• Systems

  Managed with generic ERP systems for various financial tasks.

Project Financials:

• Scope

  Focuses on income and expenses, like materials and labor, specific to individual projects

• Purpose

  Tracks and manages project budgets and expenses accurately.

• Systems

  Uses construction-specific software tailored to the unique needs of each project.

Importance of Separation:

• Clarity and Efficiency

  Separating these financials ensures clarity, prevents fund misallocation, and improves project management.

• Client Trust

  Helps maintain transparency and trust with clients about project fund usage.

Why Project Financials Require Separate Tracking

For growing contractors, understanding the distinction between project-level and company-level financials can be a daunting yet crucial task. When these financial management processes are not clearly separated, it can lead to challenges that hinder growth and efficiency.

Financial Coordination

As companies scale and take on more projects, the oversight required becomes more intricate, with dedicated teams managing each project yet relying on a centralized finance team. This creates a one-to-many relationship where one CFO or accounting team serves multiple projects, leading to potential misalignments and coordination challenges. 

Without distinct financial processes, managing multiple projects simultaneously becomes more complex, as financial personnel must balance company-wide objectives against project-specific needs. This can lead to confusion and inefficiencies, as teams struggle to prioritize and coordinate financial activities across the organization, ultimately impacting the effective execution of projects and the company's overall financial health.

Cost Management

Through cost tracking and management, construction firms can uncover critical insights that can influence the project's overall financial trajectory, potentially averting budget overruns or identifying areas for cost savings.Cost management in construction involves predicting, analyzing, and controlling the costs associated with delivering a construction project.

To understand a project’s cost, financial managers need to allocate costs and label them based on the type of cost;  Direct costs which are directly tied to the construction activity, such as labor costs or the cost of materials, and indirect costs, like site security or administrative expenses. 

Reduce Inefficiencies and Delays

When financial lines are blurred, processes such as signing an invoice and turning it into a check can become convoluted, involving multiple steps that lead to significant delays. This overlap can result in days lost, as the absence of clear financial coordination extends the time needed for approvals and authorizations. 

Without distinct financial management, the complexity of handling multiple projects simultaneously creates a chaotic flow of information, making it difficult to maintain streamlined operations. Consequently, these inefficiencies not only slow down financial transactions but also hinder the overall progress of construction projects, affecting timelines and stakeholder satisfaction.

Minimize Risk of Financial Mismanagement

Mismanaging finances becomes significantly more likely when project and company finances aren't clearly separated. Without this separation, there's a lack of awareness about the financial processes specific to each project, leading to incorrect assumptions and decisions. 

For example, team members might assume they will receive payment immediately after submitting an invoice, without realizing the detailed steps involved in processing payments. These assumptions can lead to financial mismanagement, as cash flow and budgeting do not align with the actual financial procedures.

Furthermore, when teams fail to manage project-level financials distinctly, they may not clearly communicate the nuances of contract agreements, increasing the risk of errors and misallocations that can jeopardize both project outcomes and client trust.

Stakeholder Alignment

Most financial systems aren’t structured to align the varied interests of different stakeholders. Emerging contractors must balance the needs of project managers, accountants, and clients, which becomes increasingly difficult without distinct financial channels.

For emerging contractors, recognizing and addressing these challenges is essential for sustainable growth and success in the construction industry. By implementing separate financial management systems for projects and the parent company, contractors can achieve better financial clarity, streamline operations, and enhance stakeholder relationships.

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The Role of Software in Tracking Project Finances

Having a project-level solution helps capture the complexity of construction management and shows how internal and external stakeholders collaborate. Such solutions are designed to meet the unique needs of construction projects, offering tailored tools that are often lacking in generic ERP systems.

This lack of a tailored approach can cause inefficiencies and inaccuracies, as generic ERPs do not address the specific requirements of construction projects, such as unique financial reporting and client-specific needs.

Simplifying Financial Operations

The complexity of construction projects often demands a system that can adapt to the ever-changing landscape of budgets, contracts, and change orders. Relying solely on an ERP for project management can create confusion, as the project manager must also facilitate financial discussions with clients and subcontractors before tracking them in the ERP or accounting system.

For example, in construction, an estimate represents the value evaluated and approved when creating a contract. However, in an ERP system, the estimated value might reflect the contract value against which they track actual costs and values. This situation highlights the difficulties that arise when the ERP system lacks construction-specific features.

Integration with Construction Workflows

Another significant challenge is the integration of financial workflows with project operations. While generic ERPs offer robust features for general financial management, they often lack seamless integration with construction-specific workflows. This approach can lead to data silos and communication breakdowns among project teams.

Granular Reporting and Visibility

Project-level financial tools provide detailed reporting capabilities, allowing for a more precise tracking of financial data at the project level. This granularity ensures that financial teams can monitor expenditures, assess project health, and make informed decisions based on up-to-date information.

Getting granular with reporting tools allows financial managers to analyze historical cost data, identify trends and make data-driven forecasts. This predictive approach can significantly enhance the accuracy of budgeting and cost estimations, providing a solid foundation for financial decision-making. 

Additionally, firms who utilize cash flow projection reports can anticipate and strategize for future financial needs, ensuring that resources are allocated efficiently. Incorporating earned value analysis into this framework offers a robust method for assessing project performance and progress, comparing planned work with what has actually been accomplished and the costs incurred.

The Path to Financial Clarity

Construction projects demand specialized financial management that a one-size-fits-all approach cannot efficiently handle. By distinguishing between project and company financials, construction firms can better navigate the complexities of their industry, ensure accurate financial reporting, and support sustainable growth. 

By integrating dedicated project-level financial tools and methodologies, construction companies can streamline their operations, enhance stakeholder collaboration, and ultimately drive success in an ever-evolving industry landscape.

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