3 Profit Pitfalls in Project Accounting

Disclosure: The following content was written and sponsored by NexTec.

When we talk with construction CFOs about profit pitfalls that could lead to major profitability drains, it's clear that the key lies in accurate project-by-project accounting. It’s essential to maintaining control of your overall budget and resources, generating timely and accurate billing and establishing each project’s profitability. 

But while project-based industries, like construction, rely on project accounting for accurate estimating, time and resource management, billing and more, many construction businesses aren’t using project accounting software to help manage their projects. 

Consider these statistics: 

  • 34% of projects have no baseline (Wellington)
  • 27% of all IT projects go over budget (HBR)
  • Businesses see “capturing time/costs against projects” as their biggest challenge in project management (Capterra)
  • 60% of small and medium businesses (SMBs) use manual methods for project management, non-project management software or nothing at all to manage projects (Software Advice)
  • 52% of projects experience scope creep (Project Management Institute)

Below, we look at three common pitfalls that can affect every project and how, with the right project accounting tools, you can turn those pitfalls into opportunities. 

Profit Pitfalls and How to Turn them into Opportunities  

From our guide Project Accounting: 6 Opportunities and Potential Pitfalls on the Road to Profitability, here are three common project accounting pitfalls that construction companies face and how each pitfall can be turned into an opportunity.   

Pitfall #1 - Scope Creep 

Change occurs in almost all projects. New requirements, such as requests for additional functionality, modifications to contract terms or anything outside the original Statement of Work, will affect the project timeline and budget.  

While some changes are impossible to avoid – including material shortages or building code requirements – others occur as the customer begins to anticipate future needs and requests a change in project scope or direction.

This is scope creep and, if left uncontrolled, can lead to serious profit loss. 

The best way to mitigate scope creep is to thoroughly discuss the project with the client and understand their vision of what they expect the project to accomplish. This allows you to build each request into the project plan.  

It’s also critical to establish a formal change request procedure before a project starts. This ensures that the project team has the time and information needed to assess each change request for any impacts it might have on the design of the project, the availability of personnel and the necessary equipment needed to make the change, and the cost and project milestones. 

Opportunity lies in tracking and controlling scope creep in a systemized way, so that you can compare one project to another, see where you can improve your processes, save money or identity opportunities to improve projects across the board.  

Tracking and controlling scope creep can be extremely difficult without project accounting software built for the construction industry, like Acumatica Cloud ERP – Construction Edition. It helps control project scope by automatically tracking and documenting every step of the change request process. Users can create a change order within the system and attach electronic copies of all documentation, including the request being made, the revised project plan and any reports showing the impacts the change will have on the revenue budget, cost budget and resource commitments. This helps ensure that every project budget is always accurate and up to date. 

Pitfall #2 - Accurate Estimates 

Before accepting or rejecting a new project, make sure that you spend time establishing a project baseline - a clearly defined starting point for your project plan to measure and assess performance over time. A project baseline is vital in understanding whether a project will be profitable or not.  

However, according to Wellingtone, over one in three (34%) of projects have no baseline. Without an accurate estimate, it’s impossible to know whether you’re potentially signing on to a project that may cost your business money, instead of making money.  

Take the opportunity to spend time upfront and prepare accurate estimates that include detailed information. It will pay off big in the long run.  

There are many factors to consider in your estimate. For example, cash flow is affected when revenue is collected – upon project completion or as various phases of the project are completed. Waiting until the project ends to collect revenue could eat into the company’s cash reserves. Other factors to consider include materials, labor, rented/purchased equipment, workers (contract, hourly or salaried) and overhead.  

An often-overlooked cost is time spent on project meetings and reading emails, which can add a significant cost burden to the project. Don’t forget to consider the monthly costs that keep the company running, such as office rent, telephone expenses, electricity, salaries and supplies. Each project must be able to contribute to the day-to-day operations of the company. 

Having an accurate estimate in place will help ensure you sidestep unprofitable projects and capitalize on the profitable ones.  

If this sounds overwhelming, the good news is that with project accounting software, available in Acumatica – Construction Edition, you can create accurate project estimates, revise estimates, track revisions and compare actual costs against estimated ones.

Acumatica also allows you to: 

  • Create project estimates as quotes, assess the profitability of the project based on the estimate, and then create a new project based on the estimate when the quote is accepted
  • Allocate overhead and shared expenses to individual projects (including billable or nonbillable items)
  • Include inventory items, nonstock items, labor, services, and more in project budgets and compare actual project costs with original and revised budgets by period with real-time reports

Keep better track of costs by accounting for work in progress 

Enter and modify project budget forecasts and compare these forecasts with the actual project costs and incomes for each financial period 

 Pitfall #3 - Revenue Recognition 

Construction companies with complex, multi-element sales scenarios may experience revenue recognition challenges required by ASC 606 and IFRS 15. Companies must make sure their contracts identify separate performance obligations and declare their revenue appropriately to remain compliant. This becomes difficult in recurring revenue situations or when dealing with long-term contracts. 

The new revenue recognition standard encourages construction businesses to keep more detailed records when tracking their contracts, which inevitably helps improve planning and performance. It also offers greater flexibility to recognize revenue based on a company’s unique situation. 

Acumatica – Construction Edition has advanced revenue recognition capabilities built right in. This makes compliance with ASC 606 and IFRS 15 easy. The system also allows you to implement contracts and items with multiple revenue components, automatically creating a deferred revenue schedule when inventory and services appear on invoice documents. 

To see all six project pitfalls and opportunities, download our guide, Project Accounting: 6 Opportunities and Potential Pitfalls on the Road to Profitability.  


Trusting the Right Partner 

Ready to learn more about project accounting software? You’ve come to the right place. NexTec has been in the consulting business for more than 26 years and our consultants have deep industry experience in construction.  

As a gold-certified Acumatica partner, NexTec has one of the largest teams in North America and has been implementing Acumatica for customers since 2015. To learn more, visit us online at https://www.nextecgroup.com/industry-software/construction-erp-software/ or schedule a personalized demo by emailing info@nextecgroup.com

About the Author

Chris Milan

Chris Milan is the VP of Sales at NexTec Group and has worked in the construction industry for over 20 years. His deep industry knowledge and expertise in technology has allowed him to successfully deliver dozens of software solutions to general contractors, home builders, land developers and subcontractors.

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