This year we are going from top to bottom in our review of construction's “best-in-class” management practices. We began at the traditional top of business organizations, the Board of Directors (Advisors). Because the construction industry is largely made up of "closely held" corporations, the board of director's functions (control and advise) are absent from most contracting firms. This, we pointed out in our series on "advisory boards", is a costly omission for the industry. Instituting the advisory function in closely held construction concerns is essential.
The CFO
In our continued search for "best-in-class" management practice, today we shift down the corporate pyramid from "the board" at the top to the CFO, (skipping over the CEO for the moment).
The Chief Financial Officer (and his or her accounting function) is the "executive orphan" of the construction industry's management team. Years ago as the construction industry evolved beyond the green eyeshade, fat roll-of-cash style of financial management, the accounting department, and its head the CFO emerged reluctantly onto the scene. And when I say "reluctantly", I mean it because they are too often not welcomed “at the table.”
They Are Not Bean Counters
Thirty years of research into construction industry business management practices have taught me that too often contractors neither fully understand the function, nor value the contribution, of their CFO. Many have told me they are "Bean counters" and don’t know anything about construction. Some claim they're just there to count the beans and as a result, are rarely admitted to the decision-making executive management level of contracting firms. This is not "best-in-class" management practice and leaves many of the most effective management tools critical to a construction firm’s success lying unused on the floor around the office.
The Accounting Function
Anyone familiar with my work over the years has heard me divide the management of construction firms into three major functions - Getting the work, Doing the work, Accounting for the work - an oversimplification that nonetheless gets to the heart of the matter. Accounting for the work is an essential management function that goes far beyond the "after-the-fact-bean-counting" many contractors relegate it to.
Today we begin a series of blogs on the” best-in-class” management utilization of the CFO and the accounting function. My research confirms that the misuse of the CFO is one of the main causes of contractor failure. The CFO and the inappropriately referred to "bean counters" are actually highly skilled management professionals that bring a wealth of critically needed specialized knowledge to the management function of a construction enterprise.
Critical Contributions to Management
FIRST - The CFO applies statistical discipline to both corporate and job PLANNING. Only when the corporate long-range plan, as well as each individual job plan, is subjected to financial analysis can they be evaluated accurately.
SECOND - ESTIMATING is in fact an accounting function. Project managers and estimators can predict the step-by-step buildout of a job, but the CFO and their team can accurately reduce the estimate to dollars and cents.
THIRD - The experts in accounting can accurately quantify a BID and guard against high or low bidding errors. If this were their only function, they would be worth their weight in gold.
FOURTH - ONGOING OPERATIONAL CONTROL provided by real-time cost accounting and work-in-progress accounting is the only effective defense against unexpected financial disasters. Once a job is underway, construction CEOs have no choice but to press on to the finish - hoping to make a profit. Accurate progress accounting (cost and financial), enabling them to make adjustments every step of the way, is the only defensive tool they have. Only the CFO knows how to swing this hammer.
FIFTH - Banks and Sureties rely on the REPORTING function of the accounting department to decide whether they will provide the financing necessary to fuel a going concern. Again, a professional CFO can keep you in business. If the financial community loses faith in your REPORTING capability, you will not be in business long.
SIXTH - A skilled CFO and their accounting department will monitor and maintain your company's CAPITAL POSITION. Capital is the foundation of your firm's ability to continue into the future. Without constant monitoring in the volatile construction industry your company is in peril…whether you know it or not.
A New Understanding and Respect
For the next few weeks, we will take a deeper dive into each of the six essential functions of a construction industry CFO and their accounting department. We will provide links to our body of work on each function for anyone who wishes to enhance their understanding of, and respect for, their CFO's critical contribution. Let’s leave the term "bean counters" behind.
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