How Construction Accounting Can Help Strategically Mitigate Business Risk
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One of the accounting department’s greatest assets is its ability to assess risk and avoid it. Construction accounting personnel are generally risk-averse despite working alongside the adventurers who push construction projects forward.
But, too often, construction accounting takes a backseat to the rest of the company. Rather than just balancing books and ensuring that payroll goes out, the accounting department could be more proactive and lean into what it does best: recognize and mitigate risks.
Construction Accounting Strategy and Risk Mitigation
We wanted to know what accounting departments could do to improve their companies’ outlooks, especially in these wild times of high interest rates and labor shortages. To get our answers, we tapped some of the top experts in leading accounting firms throughout the country. We spoke to experts from Forvis, RSM US, and Crowe LLP.
These experts graciously answered our questions, provided insights, and gave opinions about the outlook of construction and its accounting function, as well as some advice for taking a more proactive role in today’s construction industry. Here’s what we found.
Increase Cash Reconciliation Frequency
One way that accounting divisions can be more proactive in reducing risk is to increase the frequency of cash reconciliation. Nick Grandy of RSM suggests that companies reconcile cash balances quickly every day. He says that companies should quickly check the balances, compare them against yesterday’s amount, and look for any potential discrepancies to avoid fraud and take action.
“If your checking numbers are out there and somebody's printing checks and you don't have a positive pay solution set up, [daily reconciliation will] help you catch that earlier in the cycle. And if you catch it earlier, hopefully, you can take action to prevent either further issues or to help mitigate that risk,” Grandy told us.
Improve Forecasting (and Use It!)
Cash Flow forecasting is critical to making the best decisions with the money you have on hand and the money you expect to get in. It’s important to have a true grasp of how it all works to avoid the risks associated with unpaid subcontractors and high-interest credit lines.
Grandy suggests using ERP software to create a rolling forecast that reaches at least 13 weeks out. This will allow companies to analyze when their invoices are typically paid by project owners or general contractors.
If they know their invoices are usually paid 93 days out with a particular project owner, they can better account for the subcontractor invoices that roll in every 30 to 60 days throughout the 13 weeks and potentially avoid lines of credit or contractor liens.
Promote the Right Projects
Choosing the right projects can go a long way to reducing risk, and the accounting department is in a prime position to educate the rest of the board. For example, the projects the government is funding through money earmarked by legislation are largely unaffected by high interest rates or materials costs. These are reliable projects that are sure to come to fruition.
According to Grandy, “The government's not going to typically cancel a highway project because interest rates are up or material prices are up. The highway still needs to be built, so we're going to go build it.”
Brent Kirkpatrick of Crowe LLP says, “That's government money that is earmarked, it's going to be spent, it already is being spent. If you look at the industries that are projected to grow the most in the next four to five years, it's the road builders, the heavy highway, heavy civil type projects.”
Kirkpatrick also added that data centers will continue to be a big push, and potential safe projects for CFOs to lobby for: “15 years ago, we didn't view fiber optics in data as maybe infrastructure, but the reality is today, it's infrastructure.”
Not every contracting firm has the ability to dive into roadbuilding or data center projects, but taking note of where safe money is being spent is a great way for accounting firms to reduce risk.
Start Succession Planning
There are few things as risky as uncertainty, and unfortunately, the construction industry is full of it. People will be retiring from the industry in droves over the next few years, and that can cause concern for not only the actual labor force but also the executives and back office team members who make sure to keep the fires burning.
Internally, it’s a good idea for the accounting department to start preparing for the future. But it’s more than simply choosing the next longest-tenured employee. The brightest minds leaving universities today want to work for cutting-edge companies that employ AI and the latest technology. If the accounting department is stodgy and stuck in the same ways for 40 years, the industry will hardly have a chance at attracting these young people, perpetuating the problem for another generation and creating long-term risks companies can’t afford.
Understand State Border-Crossing Taxes
The largest and potentially most lucrative projects currently underway have a serious problem. According to Kirkpatrick, the manpower required to build them simply does not exist. This means that companies from all over the country will be able to backfill local labor forces, sending crews into other states for extended periods of time.
This creates a tax risk that only construction accounting firms are equipped to handle.
“If a contractor who's not based in Ohio, for example, is working on the [Ohio] Intel site and they are bringing workers in from all over the US to make sure they have the right team on staff, those people are going to be in Ohio for a significant amount of time. There's going to be some sort of payroll tax and income tax ramification to those workers that the accounting team would 100% need to be on top of,” according to Kirkpatrick.
His suggestion? Investing the $400 to $500 that the CFMA’s guide to state and local taxes cost to help the accounting department better understand payroll for these employees.
Promote Service-Based and Recurring Revenue Projects
Another practical option for reducing risk is to implement serviced-based divisions and recurring revenue or subscription-based services. Whether it’s a repair division, seasonal services, restoration emergency services, or even home inspections, these divisions diversify revenue streams, providing cash flow stability and seasonal balance.
This also makes the company more attractive to private equity investors. According to Mike Trammel of Forvis, “They’re getting into construction not because they love construction risk, but because they want recurring revenue.”
Trammell also added, “Private equity tends to place a greater value on that because that’s recurring billing. You probably don’t need to work very hard to win that client and win that work, and there probably isn’t a huge amount of risk. So that work tends to be more favorable.”
Lean On Technology for Real-Time Data
Looking forward is helpful, but sometimes, the best decisions (and least risky) are made with the data we have right now. Real-time data helps companies understand exactly what’s going on in the moment, and it can only be truly real-time with the use of technology.
Jamies Tancos of Forvis told us that real-time data can help fix mistakes as well as avoid them. She says, ”You need to write the ship because this job's going to go south if you don't or you're bidding way too skinny, or whatever the case.” She continued, “We've got this other job here that's exactly like what we're bidding right now, and it was a catastrophe and this is why.”
Having that data on hand, whether it’s through an ERP or a CRM, creates a “lessons learned library,” as Jamie described it. That’s something that can only be achieved with technology that stretches far beyond the capabilities of Excel, helping contractors avoid major risks.
Also, legal risks associated with contract language can also be avoided with technology (to a degree). Brent Kirkpatrick told us that Crowe LLP is rolling out software, Pro Contract Manager for Construction, that uses AI to read and dissect contracts, comparing them to industry and company standards to ensure everything is assessed for risk. While this might be outside the realm of the accounting division, it could be a tool that the division uses to better understand what contracts entail.
“I think another common theme moving forward is how do I reduce my tech stack? I'm now on a best of suite or best of platform and now take advantage of cloud and APIs to just really minimize that burden and the risk of having a very disconnected technology stack,” Schneider says. “So, that's another risk mitigation strategy that I see contractors taking. Let me get out of this best-of-breed world and find a common platform that we can all make everyone happy on.”
Streamline Your Tech Stack
As new technologies and software come along, construction companies tend to gather them into a tangled mess of implementation. Kathryn Schneider of Forvis believes this is an area where accounting divisions can help mitigate risk by simplifying the tech stack.
Accounting divisions and CFOs should advocate for modern ERPs, CRMs, cloud tech, and APIs that fully integrate with one another. Data can be shared across these platforms without duplication and re-entry, reducing the margin for error and creating better, more complete data sets that companies can actually use the way they were intended.
But, just peeling back the layers of the old software and data systems can be convoluted, too. It involves complicated software subscriptions, license keys, and data reconciliation to make happen—all risks in their own right.
Consider Cash Reserve Investment
Instead of mitigating risks, construction accounting divisions may have a chance to make a calculated one—investing.
Many construction companies are sitting on large cash reserves as they’re waiting for delayed projects to start. But the benefit of this high-interest world we’re living in is that short-term investment vehicles are turning 5% yields, and construction accounting divisions may want to suggest these investments.
Brent Kirkpatrick tells us why SDI insurance is necessary: “Subcontractors right now are finding it tougher and tougher.” He adds, “They've taken on a lot of work, probably more work than they should have in a lot of cases. And so I think a lot of subs are actually struggling right now to get work done and get it done with high quality and to meet schedules.”
Brent Kirkpatrick tells us, “It's been forever since you could get 5% on a CD, a short-term duration investment vehicle, or making sure you're using some treasury ladders. You can do short duration three, six, nine, 11-month treasury ladders to earn 5%, 6% on your balance.” He continued, “Nothing's a hundred percent risk-free, but fairly high risk-free returns on to help maybe weather some of these short lulls that they may have with projects being pushed.”
And no one in a construction division is better-suited to spearhead this move than the accounting division.
Advocate for SDI
Finally, construction accounting divisions should be advocating for general contractors to carry SDI policies. Subcontractor Default Insurance protects the prime contractor against subcontractors failing to hold up their contractual obligations.
Accounting Firms Can Step Up and Take On a New Role
We mentioned that accounting personnel are typically good at recognizing and mitigating risk. With the approaches mentioned in this article, construction accounting divisions can step up into a stronger, more influential role at their companies while also reducing the chances of risks impacting the bottom line. And there’s no one better suited for the job.
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