The Role of Strategic Accounting in the Construction Industry

Success in the construction industry hinges not only on the quality of workmanship but also on effective financial management. Construction professionals must recognize the pivotal role that strategic accounting plays in driving profitability and sustaining growth.  

Accurate Cost Estimation

Accurate cost estimation lies at the center of financial viability in construction projects. By accurately forecasting expenses, including material costs, labor, equipment, and overhead, construction professionals can mitigate the risk of budget overruns and ensure projects remain financially sustainable. Integrating historical data and industry benchmarks into cost estimation processes enables construction firms to predict potential challenges and allocate resources judiciously, thereby enhancing project profitability.

One way to aid in accurate cost estimation is through preparation of a contract schedule. A Company’s contract schedule provides better understanding of Company operations and financial performance for each job allowing for more effective management. The contract schedule is a critical tool for risk management, planning, and communication, making it indispensable for the smooth execution of construction projects.

Cash Flow Management

Effective cash flow management is essential for construction companies to maintain liquidity and meet financial obligations promptly. By implementing cash flow forecasting models, management can estimate and predict future revenues and identify potential cash bottlenecks, allowing for proactive measures to mitigate risks. Moreover, establishing stringent invoicing and payment protocols can accelerate receivables turnover, enhancing cash flow and bolstering financial resilience.     

The included cash management resource, published by RSM US, is tailored for construction contractors providing relevant insights and best practices to better assist you.

Construction Cash Guide

Strategic Financial Planning

Strategic financial planning is imperative for construction firms to achieve long-term sustainability and capitalize on growth opportunities. By developing comprehensive financial forecasts and investment strategies, construction professionals can align financial objectives with broader business goals, enabling informed decision-making and resource allocation. Furthermore, fostering a culture of financial literacy and empowerment among project stakeholders cultivates a collective understanding of financial performance metrics and fosters a collaborative approach towards achieving organizational success.

Identifying and evaluating Key Performance Indicators (KPIs) is crucial, as it provides a clear measure of performance against strategic goals and objectives. Regular assessment of KPIs allows for real-time insights into operational efficiency, financial health, and project progress. It enables managers to make informed decisions, identify areas for improvement, and allocate resources effectively.

In an increasingly competitive construction landscape, the importance of strategic accounting is undeniable. By championing a proactive, holistic approach to accounting, firms can navigate challenges with confidence and position themselves for success in an ever-evolving marketplace.

Kirsten Sokom

Kirsten Sokom

Principal
Audit services for construction, manufacturing, and distribution companies; engagement quality control and best practices.

Key Differences between Alabama Department of Transportation and Alabama General Contractors Licenses

In the construction industry, navigating the bureaucratic processes of prequalification applications and license renewals is crucial for contractors to legally undertake projects. In Alabama, two key processes that contractors must be familiar with are the Alabama Department of Transportation (ALDOT) Prequalification Application and the Alabama General Contractors License Renewal. Here’s an exploration of the differences between the two:

The ALDOT Prequalification Application

A process that contractors must complete to be eligible to bid on state transportation projects. This involves submitting a Confidential Financial Statement and Equipment and Experience Questionnaire. The application assesses the contractor’s financial stability, equipment availability, and relevant experience. It’s a prerequisite for contractors aiming to work on transportation-related construction projects and is specific to the Alabama Department of Transportation.

The Confidential Financial Statement and Equipment and Experience Questionnaire must be submitted no more than 16 months after the date of the financial statements previously submitted (April 30th for calendar year-end entities). This deadline is firm, with no available provision for extension. A contractor will not be issued a bid proposal if the Company’s prequalification application has not been submitted.

The Alabama General Contractors (AGC) License Renewal

A broader requirement that applies to all contractors working in commercial and industrial construction within the state. This annual renewal process ensures that contractors maintain their eligibility to operate legally. It involves updating the licensing board with current financial information, proof of liability insurance, and evidence of continuing education where applicable. The renewal process is not project-specific but is a general requirement for all contractors to continue their practice in Alabama.

License renewals with the AGC operate on a unique schedule. Renewal due dates are based on the first letter of the company’s name published on the AGC website. License renewals may be extended up to 90 days upon written request.

License Requirements Comparison

Both licenses require the financial statements must be prepared by a certified public accountant under generally accepted accounting principles in the United States (US GAAP). ALDOT requires financial statements be audited or reviewed by a certified public accountant. The AGC will accept compiled, reviewed, or audited financial statements or ALDOT Prequalification Application in lieu of its own. Thereby consideration should be given to the time needed to perform these engagements to avoid disruption to operations.      

Both also consider different criteria in determining an entity’s eligibility:

  • ALDOT regulations state applications with negative net worth will be rejected.
  • AGC regulations specify a minimum net worth and working capital requirement of $10,000. If either of the requirements are not met the AGC license renewal application will be rejected. 

Additionally, bid limits are determined using different criteria:

  • ALDOT bid limits are determined by considering working capital, total assets, and net worth. Determination of an entity’s bid limit may be subject to additional adjustments upon evaluation of the Prequalification Application.
  • Bid limits are calculated by the AGC using the lesser of the Company’s net worth and working capital based upon the table below. Additional considerations to increase net worth or working capital one step are also available.
Bid Limit
Minimum Net Worth or Working Capital
Contracts Up To
A
$10,000
$100,000
B
$17,500
$250,000
C
$37,500
$500,000
D
$75,000
$1,000,000
E
$200,000
$3,000,000
U
> $300,000
Unlimited

Other financials elements can impact these limits. Given the unique nature of these criteria we advise discussing these options with your certified public accountant.

Understanding these differences is essential for contractors to ensure compliance with state regulations and to secure and maintain the ability to bid on and execute construction projects in Alabama. Failure to comply with application regulations can result in the inability to secure new contracts or the suspension of ongoing operations. It’s imperative for businesses to stay informed and proactive in managing their license renewals.

Kirsten Sokom, CPA

Kirsten Sokom, CPA

Principal
Audit services for construction, manufacturing, and distribution companies; engagement quality control and best practices.