The Best Way to Solve Expense Management in Construction
The construction industry is over $1.5 trillion dollars. Miscellaneous construction expenses can account for 5% of a total project’s value on an average-sized project in most sectors of the industry.
The majority of these miscellaneous expenses will be made with a construction credit card and will need some type of cost tracking system to handle that cost appropriately. That’s over $75 billion dollars of expenses that contractors have to deal with each year in the US. It’s 10 times that globally.
Expense Management for Construction isn’t Easy
Many construction companies are using old methods of expense management like keeping up with paper receipts and large spreadsheets to code purchases. These are not viable options for cost tracking in construction. They waste time and slow down month-end financial reporting, along with offering no control over the spend on the front end. These are retroactive solutions.
Construction companies have to efficiently control spend in real time and proactively manage expenses. They deserve more elegant solutions provided in other industries to make their lives easier. Construction companies need their own, industry-specific controllable purchasing cards and spend management solutions.
Cost tracking is painful for all industries, but especially in construction. Let’s look at why managing expenses is particularly difficult for construction companies:
1. Large volume of purchasing
This is probably an understatement. There is a massive amount of purchases made all day, every day making it very difficult to implement controls and track. As mentioned above, over $75 billion dollars every year is the total expenses in the construction industry. This equates to over $200 million worth of construction project expenses that must be controlled and tracked every single day in the construction industry.
This point alone is enough to justify expense management in construction being a seriously hard problem to tackle. But, there’s more.
2. Most construction professionals are not accountants
The individuals making all of these purchases are usually highly-skilled field supervisors, craft foreman, engineers, and project managers. All of whom are extremely good at building amazing projects, doing it safely, and getting the job done on time and under budget. However, not too surprisingly, expense management is often the last thing on their minds.
This is why these construction professionals need a streamlined and simple, but powerful expense management tool for all of their construction project expenses along with a controllable card that syncs with a spend management solution to provide an all-in-one, cost-saving platform.
3. Cost codes or types
Construction has possibly the highest level of cost categorization (projects, budgets, overhead, cost codes, gl accounts, equipment numbers, etc…) of any industry. All of your expenses need to be categorized into cost codes or cost types and separated to different projects and overhead categories.
Cost vs. budget is a way of life for construction professionals, so all of this cost from these expenses in construction need to be realized on projects as they happen, not at the end of the month or the next month, or even later than that which is usually the norm.
Finding the Right Construction Corporate Card Solution
Whatever solution for corporate cards that a construction company decides to use, it must have a robust, efficient, and user friendly system for categorizing all of these expenses. If it’s too complicated, construction professionals simply won’t use it.
Your solution must integrate with construction-specific accounting software and construction ERP platforms. The reason for this is so that all of these categories mentioned above like projects, cost codes, account codes, and the rest can be pulled straight from whatever ERP system that that construction company is currently using. This also helps your company close out the month with financial reports by sending the coded expenses to the ERP or accounting software without manually entering data.
For these three reasons, expense management in construction is one of the toughest problems for a construction company (or any company in a related industry with “boots on ground”) to solve.
How to Be Proactive about Construction Expense Management
The way to solve expense management in construction is to be proactive. Proactive expense management means setting up card controls, limits and permissions, construction budgets, cost codes for construction project purchases, and other categories like fuel purchasing for a construction project.
Do this before the purchases are made so each transaction is ‘expensed’ at the point of purchase instead of at the end of the month like most construction companies are doing now.
Provide Controllable Cards
To properly manage expenses, a construction company needs to have a controllable card (some refer to it as either a construction corporate card, purchasing card or p-card, or business credit card for construction) that empowers their employees to purchase what is needed to get the job done, while still giving the financial managers ultimate control over expenses on the front end. However, this is only one side of the solution.
Controllable cards in construction can do many things that help control and manage expenses, such as:
1. Allow different limits for different categories
For example, a construction company may have some field supervisors that need a certain amount to spend each month on fuel, but the managers at that construction company don’t want that field supervisor to be able to spend that amount on everything else. So, the field supervisor would then have another, lower limit for other purchasing categories like restaurants and grocery stores.
That same field supervisor might need another limit for building supply categories like those at Home Depot and Lowes. This sounds complicated but all construction financial managers will tell you that it is absolutely necessary. These same construction finance managers will also tell you that 99% of card offerings on the market today do not offer the level of granular control that is needed to effectively manage expenses in construction.
2. Request funds for specific purchases
If a cardholder is set up similar to how I mentioned above with different limits for different categories, what happens when something happens out on the job and a large purchase needs to be made? What if the nature of this purchase is urgent, and it’s holding up the whole job or a whole crew of workers?
Lots of money is on the line in this case and a card with low limits that doesn’t allow the cardholder to quickly make the purchase and get the crew back to work could be detrimental to the project. Several of these ‘emergency purchases’ (which actually happen all day, every day in construction) could result in a serious loss to the bottom line for a construction company.
The solution is a controllable card where the cardholder can easily request funds in a mobile application without being held up by a cumbersome process. Similar to a simple purchase order process, but with the convenience of a card.
3. One solution to suit all
Card consolidation is a huge part of solving expense management for construction companies. The card must be an all-in-one purchasing card, fuel card, building supply (Home Depot, Lowes, etc) card, and whatever other type of card is in a construction professional’s wallet, as well as offering an incentive.
Ideally, the card is totally controllable and has something that incentivises use for fuel like a fuel rewards program.
Onboard an Easy-to-Use Expense Management Platform
Construction companies also need an easy-to-use construction cost management software solution that is uniquely built for this industry. A new common term to use is ‘spend management.’ Either way you phrase it, the common problem is known collectively as expense management in construction, and the only way to truly solve this problem without wasting too much time or money is with controllable cards and proactive expense management (or proactive spend management).
The platform or application that powers real time card controls and cost tracking is the other aspect of the solution. This is a seamless tool that controls spending and helps a construction company run more efficiently. This platform should at least perform the following few tasks:
1. Ease of request/approval process
This feature should allow your worker to not only request the funds for approval, but also code the purchases to simplify account management. This is a huge feature and while most say they do it, they don’t scratch the surface on solving the real problem for construction managers and cardholders and more importantly, solving it in an easy, simple-to-use fashion.
2. Real time ledger updates
See cost as it happens in the correct project, cost code, and other categories needed by construction companies. This goes back to our cost vs. budget mentioned above when talking about the problem with expense management in construction. The only way to know all of a project’s cost is to see the miscellaneous card expenses as well, and almost none of the expense management solutions allow you to do this.
3. Accurate record management
With an effective construction budget tracking system, you can import transactions with correct company information like project name and number, budget name, description, cost code, equipment number (and many more) into the construction ERP or accounting software that the construction company uses. This is a vital step in the process as this is where the majority of time is spent by construction controllers, accounting managers, and CFOs.
Entering data manually or expensing each transaction can take multiple days of accounting work each billing cycle that can be avoided. These key time saving tips for accounting might help.
Exporting the pertinent company information from an ERP system or accounting software is also a big value add for any spend management platform in construction. That way cost codes, project information, and all other data is accessible in the expense management software and doesn’t have to be manually input by a construction finance professional which is obviously another way to save a lot of time.
Current Options for Expense Management
This may sound odd, but most generic, industry-agnostic expense management software systems on the market today do way too much. So much so that they are confusing to learn and clunky to use on a daily basis. The best construction cost tracking solution needs to be very simple for construction companies and contractors to learn and use day in and day out. It will also need to be user-friendly for all levels of the company, from the CFO all the way down to the craft foreman, if necessary (because, remember, with an effective controllable card, more employees can be empowered to purchase, but only when appropriate).
Now that you have a better idea of how construction companies can save time and money with an expense management solution, challenge your business to attack the problem head-on using the knowledge here as a powerful mechanism to save time and drive profitability for your company. If you need help or have any questions, please don’t hesitate to reach out. We’ve been there and know what you’re going through.