Improving Cost Estimation in Construction: Outsourced Accounting
In the highly competitive world of construction, accurate cost estimation and maintaining profitability are crucial for success for companies in the industry. For every project that you bid on, cost estimation is usually one of the first steps that is undertaken and is usually done throughout the project (hopefully this is the case for you).
Effective cost estimation ensures that projects are financially viable, minimizes the risk of unexpected expenses and enables construction firms to stay competitive in a demanding market.
Outsourced accounting has emerged as a valuable solution for construction companies seeking to improve cost estimation and enhance profitability. By partnering with external accounting professionals, construction firms can leverage specialized expertise to streamline their financial processes, monitor ongoing expenses and ensure adherence to project budgets.
How do you improve cost estimation with outsourced accounting?
Let’s get started!
The Role of Cost Estimation in Construction
Why is it important to do cost estimation, especially in the construction industry? You already know this answer.
Accurate and reliable cost estimation plays a vital role in project planning, budgeting and decision making and provides crucial insights in resource allocation, helps to manage financial risks and enables effect project management. In other words, you want to ensure that your projects are financially sustainable!
The Challenges of Cost Estimation in Construction
The emphasis is on accurate and reliable cost estimation, however, it’s never easy simply because it hasn’t happened yet. Several challenges influence the accuracy and reliability of projections and overcoming these is crucial for construction companies to improve their estimation processes and achieve more precise cost projections.
Here are five common challenges in cost estimation, along with some mitigation strategies:
1️⃣ Project Complexity
The complexity of a construction project which can include design intricacies, unique specifications and technical challenges can make cost estimation more difficult.
To mitigate this, you can break down the project into manageable components, collaborate closely with architects and engineers and leverage specialized expertise to analyze and estimate costs accurately.
2️⃣ Fluctuating Market Prices
Material costs can vary significantly due to market conditions, availability and demand, especially in longer-term projects. We’ve experienced this in the last couple of years with lumber and steel prices, for example.
To mitigate this, stay updated with any market trends, establish strong relationships with suppliers and even consider adding in price escalation clauses in your contracts with your customers.
3️⃣ Uncertain Labour Productivity
Estimating labour costs accurately can be challenging due to variations in productivity rates and availability of skilled labour. This involves both the cost (including Payroll Burdens) and time required to complete an activity.
To mitigate this, conduct detailed labour analysis on the outstanding scope of work, consider local labour market conditions and consult with industry experts to assess productivity rates for different tasks.
4️⃣ Incomplete Project Information
Insufficient project information and incomplete specifications hinders accurate cost estimation and gives rise to an unknown. How do you estimate a cost for something that is not yet determined? You can’t.
To mitigate this, review through the project documentation and specifications provided and if there is a gap or you come across questions, engage in effective communication with clients and project stakeholders to gather the necessary information. This may go through a formal process like submitting RFIs, something over email or even through collaborative meetings.
5️⃣ Unforeseen Changes and Risks
Construction projects are always susceptible to changes, risks and unforeseen circumstances that can potentially impact costs. This can include weather delays, scheduling delays, waiting on someone else to finish their work before you can start or even unforeseen site conditions.
To mitigate this, implement a robust change management process, conduct thorough risk assessments during the bid, before the start of the project and throughout as well as maintaining contingency allowances to account for these uncertainties.
How Outsourced Accounting Improves Cost Estimation
Outsourced accounting services offers valuable support in improving cost estimation for construction companies. By leveraging specialized expertise (especially those who knows your industry) and advanced tools, they contribute to more accurate and reliable cost estimation.
Here are five key reasons how they can enhance cost estimation:
Industry-Specific Knowledge
Outsourced accounting professionals possess industry-specific knowledge and experience, enabling them to understand the nuances of construction projects. Their expertise in construction accounting allows for a more comprehensive analysis of project requirements, cost drivers, job costing and financial implications.
Access to Advanced Tools and Technologies
They have access to advanced accounting software and tools that streamlines the cost estimation process which incorporates real-time data, historical trends, market insights and project forecasts. This enhances the accuracy and reliability of cost projections.
Collaborative Approach
Outsourced accounting teams work closely with the project team to gather project information, validate cost estimates, review job costing and review project performance. Working collaboratively facilitates more accurate cost estimation and ensures a comprehensive understanding of the project.
Cost Control and Management
Throughout the project lifecycle, outsourced accountants closely monitor the project expenses, verify that the costs are going to the correct cost codes based on the budget, identifies any cost-saving opportunities and provides ongoing financial analysis. This allows the construction company to optimize resources, reduce cost and enhance profitability.
Risk Mitigation
Their expertise in risk assessment and contingency planning helps construction companies account for potential cost overruns, market fluctuations and unforeseen changes or circumstances. In cost estimation, it’s important to account for all the necessary costs required to complete the project which is done on a periodic basis and assesses the assumptions made in prior forecasts.
Your Turn
If you’re in the construction industry, whether you are working on small scale residential projects, large commercial developments or anything in between, you most likely have challenges with cost estimation but you’ve tried those mitigation strategies I suggested above. How do you improve cost estimation effectively? There is one optimal solution for you and that is Outsourced Accounting Services!
This blog focused on how Outsourced Accounting Services can improve cost estimation in the construction industry.
This is a strategic solution for your accounting needs because you can gain access to Industry-Specific Knowledge, Access to Advanced Tools and Technologies, Collaborative Approach, Cost Control and Management, Risk Mitigation and it’s a Cost-Effective Solution.
How else can Outsourced Accounting Services help you?
Partner with us and let us handle your accounting burden while you focus on what you do best!
Unlock your business’s full potential by outsourcing your accounting needs to us. With our firsthand experience in accounting management roles within small to medium sized businesses in the construction industry, we bring the experience and insight necessary to drive your financial success.
Contact us today to explore how our outsourced accounting services is the optimal solution for you!
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At JTL CPA, we are Ontario’s virtual accounting firm. Our goal is to automate your accounting and bookkeeping processes in a way that increases financial visibility. Pair that with our value-added approach and tailored advisory solutions gives you the ability to make sound decisions from good data. Check out our website here: https://www.jtlaccounting.com.
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