Accountants Missing Construction’s Nuanced Cash Management Needs

The construction industry is facing multiple headwinds, from late supplier payments to a talent shortage. According to Euler Hermes, the construction sector, which is worth $10 trillion worldwide, is expected to enjoy 3.5 percent growth this year.

But according to Bent Flyvbjerg from Saïd Business School at Oxford University, the vast majority – more than 90 percent – of construction projects are late or over-budget, he told The Economist last month.

There are several reasons for this, analysts say, but regardless, there is a clear need for tight cash management in the construction sector.

“Competition is fierce and profit margins are thinner than for any industry except retail,” the publication stated, adding that industry fragmentation and a lack of investment are also troubling trends for the space.

Another trend, the news publication noted, is that construction firms aren’t adopting the technologies and expertise they need to remain viable, competitive and fiscally healthy.

One certified professional accountant, Evan Hutcheson, has launched his own company, Foundation to Cloud, to address some of the largest accounting and cash management problems faced by construction firms and contractors.

“Construction accounting is a little more complex,” he recently told PYMNTS. “Because of that complexity, taxes are more complex – it’s a snowball effect. If you don’t start off correctly from the foundation, it gets all of out of whack. The way taxes are done in the construction industry is different than in other industries.”

Indeed, the construction industry has dizzying tax rules that don’t apply to other verticals. According to Vincenzo Botta, CPA, CGMA at Rucci, Bardaro & Falzone PC, construction companies often make four major tax mistakes.

In an article appearing on ForConstructionPros.com, Botta listed “choosing the cash versus accrual method of accounting, converting from accrual basis to cash basis, understanding the limitations on vehicle depreciation expense and properly tracking your work in process” as the top four culprits. These are complex, industry-specific terms, and if construction companies and their accountants aren’t aware of these particular nuances, Hutcheson said they’ll eventually run into problems.

“Taxes are usually filed incorrectly,” he said. “Some of these accountants [who] file taxes for construction companies don’t realize that they’re recognizing more taxable income before it should be recognized. Or the actual cash flows and job costs per project need to be handled a little differently [than other industries],” he explained. “You have estimates, bidding [and] change orders that all influence the actual books.”

Aside from tax compliance, Hutcheson also said that overall cash management and corporate accounting for this industry can be a headache.

Luckily, the industry has garnered some attention from the financial services and FinTech world. In addition to Hutcheson’s new company – which sees Hutcheson himself diving into his clients’ books and working with existing cloud- and desktop-based solutions like QuickBooks to sort out the numbers – firms like Lowe’s and Viewpoint are rolling out their own services, too.

Last month, Lowe’s introduced new prepaid cards for construction companies to provide their own employees with a B2B corporate spend solution, the result of a collaboration with Fidelity National Information Services. Viewpoint, meanwhile, launched its cloud-based enterprise management solution in June, enabling construction companies to handle accounting, payroll, project management and other tasks from a single portal.

With more service providers aiming to help the construction space gain a stronger hold on cash flow and remain compliant with tax rules, some analysts believe that FinTech’s focus on the sector could continue.

According to Daryn Lecy, VP of operations in the Equipment Finance Division at Stearns Bank NA, the outlook for the space is actually a positive one.

“This increased overall funding volume and contagious optimism surrounding the construction industry presents some real excitement throughout 2017 for us at Stearns Bank,” the executive reflected in response to recent analysis from the Equipment Leasing and Finance Association. “In addition, future infrastructure spending, paired with a possibility of less regulation, presents more reasons for industry enthusiasm throughout the year ahead.”