4 things you must get right in construction accounting

After decades of seeing contractors fail and grow in the construction industry, we know that a good construction accounting system is one of the best determinants of success. This week, we’re discussing the four things you must get right to in construction accounting.

Topics we cover in this episode include:

• Why good communication is crucial for accounting
• The importance of document control
• How workflows and systemization support your construction accounting
• How the right technology can help you get your accounting right 

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Rob Williams, Profit Strategist | IronGateESS.com
Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | McWins.com

TRANSCRIPT

[00:00:00] Rob Williams: Welcome to the Contractor Success Forum. Today we’re talking about four things you have to get right in construction accounting. And who is here to talk about it? We have Wade Carpenter, Carpenter and Company, CPAs. And in the other corner we have Stephen Brown, McDaniel-Whitley Bonding and Insurance Agency. And I’m Rob Williams with IronGate Entrepreneurial support Systems.

And so today we are talking about the four things you’ve gotta get right in construction, accounting. And we’ll start with Stephen, is it important as a bonding guy to have all your construction accounting right?

[00:00:42] Stephen Brown: Well, that’s an excellent question, Rob. Yes, of course it is important. Hey, it is everything and I think it’s a great topic, Wade. I’m looking forward to you leading us through us. What’s kind of a overview of your points here?

[00:00:56] Wade Carpenter: Okay. Well, as I started thinking about it, I mean, and I know this sounds incredibly self-serving, but in my 30 plus years of construction accounting, I believe the construction accounting is the one determinant of a successful construction business. The ability to get your accounting right.

And almost universally we hear contractors that, they want more information. They want to get job costing but don’t know how to get it. They want to understand the numbers and how to make use of it. A lot of times they don’t know how to get there. Or even if they did, they just, they can’t put the system in place. So it’s one of the big issues that I see all the time.

[00:01:37] Rob Williams: One of the points is, why do we wanna even get it right? I had a business partner about 20 years ago, he hired the cheapest temp he could get to do his accounting. And when we got together, his books were a mess. They were bad. He was the operating partner at that time, and after about a year or so, we looked at books and, they were horrible. They were so bad you couldn’t tell anything. But he said, all right, would you rather know your cost or would you rather be cheaper? And he thought I’d say cheaper. He wanted the best things.

No, I’d rather know my cost and be a little bit higher on my cost, so I’d know how to price it. I don’t know what to do with it if my costs and stuff are not right. It’s more important for me to know what the costs are, then be the very cheapest.

So I guess the way he was looking at it was, well, I’m just gonna charge as much as I can and get, so it doesn’t matter what the–

[00:02:33] Stephen Brown: I got, I’ve got money in the bank. I’m doing great. But you know, thing is you know, that expression garbage in, garbage out. Like you were saying, these books were horrible. The thing that drives me crazy is when I tell a new client that needs bonds, that you really need a good construction oriented CPA to put together a year end financial statement for you on a review basis.

That person will help you get your system set up right so you’re not getting garbage out. And what’s the use of paying an accountant to do something if you’re not doing it right? But I see it all the time.

[00:03:08] Rob Williams: Yep. So, so anyway, let’s not keep them waiting. They’re all in here. What you have to do to get it right?

[00:03:16] Wade Carpenter: Well let’s just talk about some of the challenges first, if that’s okay. Because what today is really, it doesn’t matter what system you’re on. Whether you’ve got a great accountant in-house or what we’re trying to do remotely. If you don’t get these four things right, you’re never gonna get your system like you need it to be.

And so, the few challenges I wanna talk about first. The first is many contractors are not as tech savvy as they could be. Covid’s brought that out. Even doing Zoom meetings has been challenges for a lot of contractors. And they’re all used to going, driving six o’clock in the morning, a construction job meeting. There’s a lot of things the technology can do and we’re gonna talk about that.

The, contractors hate paperwork in general. They don’t wanna work in the field all day and do paperwork all night, especially when they hate it to begin with.

[00:04:07] Stephen Brown: Hate it.

[00:04:08] Wade Carpenter: Yeah. So whether we’re trying to work with you or you got an in-house accountant or whatever, you have to make it easy to get the paperwork, but the paperwork has to get there.

Number three, I would say, and we’ve said this many times on this podcast, construction accounting is not taught in schools. I hear all the time about, especially as our practice is taking contractors all over the country. We are hearing everywhere contractors have the inability to find a qualified construction accountant or bookkeeper, much less a CFO level support. So I don’t know if you guys have seen that too.

[00:04:45] Stephen Brown: No, absolutely. A good construction accountant is a good thing to find and hard to find. It’s an art form working with contractors. I know I’ve been doing it all my life, and Rob, you was one. So, so anyway, you know what I mean. I’m not disrespecting contractors.

But you know, this whole thing about paperwork and communicating and getting things started right, it really hits home to me because it’s just not that hard. Just get the right advice. Don’t stress about it, just talk to the right construction oriented accountant, CPA, and get it done right, and your bonding agent can help you with that.

[00:05:26] Rob Williams: Yeah, Stephen, having a construction oriented CPA is great because I’ve actually had problems over hiring controllers and CPAs. I hired people outside of the industry and then those systems and processes did not match us at all.

We even had a consultant come in and tell us that we had amazing accounting flows and stuff, but nobody took the time to read any of them. We had like equivalent of a billion dollar manufacturing corporation that we, nobody could use any of it. So it just wasn’t relevant. So anyway, it’s a right fit thing. It’s not like hiring up because you can overhire the wrong people and I’ve seen that many times.

[00:06:09] Wade Carpenter: Well, you’re actually leading right into my point on that second challenge. Construction accounting is not learned in school. You can learn basic accounting, but there are nuances to that. But you know, what happens when you got that bookkeeper, whatever, and they leave, or the next one comes in and, they want to change the system?

It’s a constant flow. I know you know what I’m talking about Rob, there.

[00:06:30] Rob Williams: Oh, I’m laughing because every time I hired a new person, the old person’s is automatically wrong. It doesn’t, it’s wrong. It’s wrong. I’ve never had–

[00:06:40] Stephen Brown: Yeah I’m here and I saw the problem. Yeah. And so Wade, how do you just put together a playbook for a new client to get them started?

[00:06:51] Wade Carpenter: Well, that’s what, like I said, there’s a couple more challenges I wanna talk through and then we can walk through these four things. You know, the paperwork, I think contractors in general still love their paper and going paperless, but you know, they don’t understand how they could possibly do accounting if your accountant isn’t in the office or doing it remotely. But they’re so tied to the paper, they hold themselves back, if that makes any sense.

The next one, I guess I would say, there are people that do this in my space and they don’t understand the importance of doing the job costing. I probably shouldn’t say this, those that are on like QuickBooks Online, trying to do bank feed accounting and get job costing, you’re going down the wrong path. I will just say that right out loud because you are never gonna get good job costing auto QuickBooks Online unless they make some serious changes.

Even though that’s what they say they do not do it well. And I guess the last, thing I would say, many contractors try to find somebody local, but they don’t realize that outsourcing stuff like this could actually provide them better information than hiring somebody in house and having that constant turnover or somebody’s out sick or on vacation or whatever and everything comes to a halt.

So those are some of the challenges I see. Any thoughts on that?

[00:08:07] Rob Williams: A lot of thoughts on that , so.

[00:08:09] Stephen Brown: I like the outsourcing comment. I have out-of-state clients that just really don’t want the local community to know their business, what they’re up to. So that’s one point. But also outsourcing is something that sounds more difficult than it is, right. Wade?

[00:08:27] Wade Carpenter: Well, there are challenges especially when you’re doing it remotely. And it’s easy to say, hey, I can just walk to this person’s desk and just hand them a piece of paper or talk to them.

[00:08:38] Stephen Brown: Right.

[00:08:38] Wade Carpenter: That actually leads beautifully into, the four challenges.

Good communication

[00:08:42] Wade Carpenter: The first challenge I would say is the communication piece.

As I said before, COVID made this more apparent than ever because sometimes when you weren’t in the same office with people, people were having to figure out how to communicate again. But it’s always been a problem with construction and it’s critical to get the information to the accounting staff to get this in the accounting records correctly.

There’s many ways to do this better. Zoom meetings, obviously you could do email, instant messaging apps. There are certain things that, like I’ll talk about on the technology part, but communicating things like accounts payable, job costing, you gotta make it easy, as we said before, for a project manager to help you get the information.

If they don’t, they’re not gonna give it to you.

[00:09:26] Rob Williams: That is so true. That’s just destroyed so many companies. And then the systems put in place that, I know I’ve said this on some other episodes. The systems that the field will put in place to get around the office’s system are often a whole lot more complicated than what the system is.

So if you don’t have something that makes it easy for them or, and it makes sense it just will blow up. It’ll blow up. I don’t know how long it’ll take. They may act good for a little while, but if it’s making their life miserable in there, they’re gonna figure out other ways to do it.

Document Control

[00:10:01] Wade Carpenter: Yep. I guess point number two, I would say, document control, that kind of goes right into the thing. Tracking documents efficiently is one of the key things to getting it right. And I’ve actually got a General Contractor that’s doing close to a hundred million dollars a year in revenue.

They’re so tied to the paper that it takes them three days to get pay apps out and it’s just sad. But–

[00:10:26] Rob Williams: You’re talking about the physical paper as opposed to electronic? Yeah.

[00:10:30] Wade Carpenter: And they spend so much time running down all this paper. It’s just, but getting control of your documents, knowing where the stuff is, putting your hands on it quickly and efficiently when you need it, that is key to getting it right.

And there are many expensive construction accounting systems out there that can do that. But one point I wanna make today is you do not need one of those really expensive systems, you can reproduce that yourself if you do it right.

[00:10:58] Rob Williams: A lot of those systems, I’d have to comment, having purchased very many of these systems and implemented very few of them, the implementation process of those, you see this dream, this picture they did, but just to get there was–

[00:11:15] Wade Carpenter: Yeah.

[00:11:16] Rob Williams: –just a bear. If you didn’t have a champion of it, you almost had to hire the people in there. So you know, it’s a big subject. It’s sort of a sore subject for me of buying the big thing at the trade show that you see.

[00:11:29] Wade Carpenter: Right

[00:11:29] Rob Williams: I was the guy that would come home, oh, look what I bought. And everybody’s oh no, Rob bought something else trade show.

[00:11:36] Stephen Brown: Well, I would say definitely I’ve had a lot of clients make decisions on accounting software that did not consult their accountant, and I don’t understand it. But I would definitely say get input from your construction oriented CPA on what systems to use because they use it all the time and they have to get into your systems and get the information that they need. So when they’re high on something, it’s not any other reason than it’s easy to work with.

[00:12:05] Rob Williams: What are they high on?

[00:12:06] Wade Carpenter: Are we talking about that joint check thing again?

[00:12:08] Rob Williams: The joint!

[00:12:10] Wade Carpenter: No. But you know–

[00:12:12] Rob Williams: Somebody’s high on joint checks. Wait a–

[00:12:13] Wade Carpenter: –know. I guess what I would say is a lot of the off the shelf products that are not these high end systems, they don’t tailor themselves to construction. And so things like the accounts payable system, things like that, or receipt management, tying it to a job and a cost code is unheard of.

And even the biggest name players out there in this space, do not do it. So believe it or not, we had to develop our own system to handle things like coding payables with phase code, cost code type structure and things like that. So I guess that’s what I would say about the documents. Any thoughts on that?

[00:12:55] Rob Williams: Yeah, the documents were, for me, again, the right systems. We had residential and we had, AIA type stuff. We had all kinds of different systems and different coding things that made it really confusing for us. And then you had the engineering systems. So yeah. Anyway, that’s, that was it on the those document controls and which type of business and what industry. And if you’re overcrossing Industries boy, it gets really complicated because they don’t look anything alike.

[00:13:22] Stephen Brown: That’s right.

Workflows and systemization

[00:13:24] Wade Carpenter: Well, the third thing, and I think all three of these all kind of are interrelated, so when we talk about one, they lead into the other. But you know, the workflow and systemization.

Classic example, you got say two or three estimators in your company. One does it on their handwritten sheet. One of them does it in Excel. One of them bought this little program off the internet and they’re all doing estimates differently. Or you hired a bookkeeper, we kind of said this before, they had their own system. Your next bookkeeper, they didn’t last six months. The next bookkeeper came in with their own system, they changed the system.

And it’s, it just is never consistent. We talk about this all the time. We’ve had episodes on checklists and, getting these workflows right. But we also can’t say, for this type of contractor, it’s always a cookie cutter, this or that.

We have to understand how you work because construction companies can be very different. And the way they like to work, we try not to override that, but we want to marry the way they work to the accounting system that you have. And so that takes a little bit of time and thought, but you can develop these systems.

[00:14:34] Rob Williams: That’s a great point. The systems and when I learned about things, oh, this is purchase order and this is a variance purchase order, I thought that was the way to do it and it didn’t work when we were cross industries, because you had different things to keep up with. So being able to have somebody that can analyze it in different ways is really tough because most people I know that I’ve run into, they’ve seen the way they did it in their company, and that’s the only way to do it. And then you get a new person and it throws it out. So there are multiple right ways to do it.

And in the accounting thing, gosh, maybe the world’s getting better about it, but they were adamant about this is how you do it and it’s the only way to do it. And that would, we got stuck there often. I was one of the people also because I had done things for 20 years one particular way, and then we got all the computers and stuff.

[00:15:29] Wade Carpenter: Well, the one thing I would say about that is, you’ve got to pick a way, and when you do, you gotta make everybody stick to what you’re doing. They can’t change it every time you turn around. If you’re gonna make a change, talk to everybody and make sure that’s a good change. And don’t just on a whim, go buy another piece of software or, and I’m just as bad at Rob talking about buying software.

I’m just as bad at that too. But I just, I love the technology, which actually leads into number four. Which is the technology. And all these things, as I said, are interrelated, but.

Technology

[00:16:03] Wade Carpenter: The technology has really come a long way, especially in the construction space. Again, so many contractors still do their job costing on a spreadsheet, and it’s sad. All these programs are not contractor specific. And we had to develop our own software for accounts payable to do this. The things like receipt management for most of these– I won’t use any names, but there’s some big names out there, if they do a job costing, they do not do like cost code type management. They’ll do account level but not cost code.

The receipt management, the accounts payable, some of these other systems we’ve had to build based on like, contract tracking, change order management, purchase orders, which nobody talks about.

But the technology is out there. Things like time tracking, there’s apps you can put on your phone, we said before. But if the people in the field are not using it or– they have to, stick to it. And I think Rob mentioned, one time on one of the episodes, he’s he had somebody go from one house to another house, and it was really hard to tell, you know when the house is right next door, which–

[00:17:07] Rob Williams: Oh, all the time. Yeah. Yeah, that, that’s probably one of the biggest breakthroughs I’ve seen is some actually fairly accurate ways of doing that with all the mobile technology now, and tracking and those kind of things. So yeah, we definitely didn’t have that. So.

[00:17:24] Wade Carpenter: Well again, and that also leads into the other stuff, the vehicle equipment tracking. There are apps you can put on your phone or GPS apps you can attach to your equipment, hour meters and stuff like that, that we can put on equipment. So the technology has come a long way and it can definitely be helpful. But don’t just get wrapped up because a salesman says it’ll do this and that. Talk to some of the users, find out what you need and develop a system that makes sense.

[00:17:54] Rob Williams: Yeah. All right. Well, those are really good points. I know we’ve been kinda long today, I think, but this is really important for people and that’s why they’re here to find out some of these things. So, Wade, you have any wrap up thoughts?

[00:18:06] Wade Carpenter: I’ve seen some great turnarounds from contractors that have struggled for years to when they get a solid system, they can be super profitable. And it’s just rewarding to me to see somebody that just had their life in shambles to get to that point.

So, getting construction right is really not easy always, but those that do benefit significantly. So I hope the listeners take this to heart and really if you’re, I think going into 2023 as we’re recording this, maybe this is the year you get it right. I hope it is.

[00:18:42] Rob Williams: 2023. The year to get it right. You got it. All right. Getting it right on the Contractor Success Forum. So we appreciate everybody coming to hear Stephen Brown, McDaniel Bonding and insurance agency. And Wade Carpenter, Carpenter and Company, CPAs and Rob Williams with IronGate Entrepreneurial support Systems.

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So thanks a lot. Go check us out and you can make some comments on there, and we’d love to hear from you. And thanks for listening to the Contractor Success Forum. We’ll see you on the next show.