In the competitive realm of project-focused companies, the universal goal is clear: to ensure project profitability. However, in the complex dance of various industries, project margins are not created equal. Unfortunately, the construction industry is at the bottom of the profitability scale, where a 4% margin is considered a commendable achievement. With low profit margins, inherent unpredictability and intense competition both domestically and internationally, the difference between a successful project and a loss-making company becomes tenuous, putting the entire business at risk. Recent years have only increased these challenges, with economic changes, labor shortages and supply chain disruptions adding to the complexities facing construction and engineering organizations.
The pressing reality is that the construction industry’s susceptibility to risk is increasing. In response, effective project financial control is being transformed from a desirable luxury to an absolute necessity. So the critical question becomes: How well do construction and engineering firms currently manage the financial control of projects?
Broadly speaking, the answer is discouragingly, badly. The complexity of effective project financial control extends beyond the capabilities of a simple accounting system. To truly excel, it must seamlessly integrate four key areas: financial accounting, cost and revenue transactions, project and contract management, and project cost control.
Although all established companies have an accounting system, managing the financial control of the project actually requires a more complex approach. A sound accounting system, while crucial, is insufficient on its own. The four key areas are interdependent, and require seamless interaction to deliver a fully integrated project financial control solution. A stand-alone accounting system does not manage the critical elements that influence the current and future status of a project, such as risks, cash flow, contract changes, and forecasts to ensure that project margins are keep on track
The challenging landscape in which many companies attempt to manage project financial control resembles a patchwork of disconnected systems and numerous Excel spreadsheets. This disjointed approach leads to slow and inefficient information processing, prone to inaccuracies and manipulations, presenting management with a distorted version of reality.
The four pillars of effective project financial control, as identified below, provide a more comprehensive and controlled approach to ensuring profitability:
- Financial accounting: A world-class accounting system serves as the foundation, supporting project accounting and seamlessly integrating with the costing, revenue transactions, and cost control areas of the project.
- Cost and revenue transactions: Integration is key to an effective financial accounting solution. It should be fully integrated with all cost and revenue transactions, eliminating the need for manual entries and accruals, thereby improving efficiency and accuracy.
- Project and contract management: Often supported by standalone Excel sheets, this critical area requires a more robust solution. It should include sales and subcontract management, contract and project change management, risk and opportunity management, estimating, pre-contract support, project progress tracking and integration with sub-plans.
- Project cost control: Broken down into project budgets, cost tracking, periodic reviews and forecasts, and cash plans, this area is considered the most critical. An effective solution must be fully integrated, using information from the other three areas for accurate forecasting.
Companies looking to implement the best financial project control recognize the need for an integrated solution that is part of a digital enterprise resource planning (ERP) platform. The benefits of such a flexible and future-proof solution are far-reaching, including improved efficiency and profitability, reduced business and project risk, and more informed and timely decision-making.
For example, the IFS Cloud ERP solution for construction and engineering is specifically designed to integrate tight cost control and governance of complex construction projects, ensuring best practices for all business, management and reporting processes.
As IFS continues to lead the way in offering integrated project financial control, our clients are positioned to reap these benefits and navigate the challenges of project-centric industries with greater resilience, control and, ultimately, business success.
