Financial oversight means managing and overseeing a construction company’s financial resources. Oversight should be done by key stakeholders like business owners, finance managers, or accountants.
Project managers should also be involved because they are responsible for the day-to-day management of the project.
Financial oversight is important because it helps a company control its finances, ensuring a balance between cash inflows and outflows.
If outflows exceed inflows, the project will stall due to a lack of adequate financing. Other benefits of financial oversight include the following.
Benefits of Financial Oversight
Financial oversight ensures that the policies set up by the company are followed. Financial policies can vary depending on the circumstance. An example of such a policy is the payment policy.
A construction company can have a payment policy that dictates payment terms. The policy will also include the authorization procedure and the people required to authorize funds.
Another benefit of financial oversight is ensuring financial sustainability. Financial sustainability can be achieved when the financial position of a project is tracked in real-time. This way, the finance manager can devise remedial measures if there’s a sudden increase in construction costs.
To accurately track resource allocation, project managers can use a platform such as https://www.alicetechnologies.com/analytics-and-reporting.
It has an easy-to-use dashboard that easily tracks resource allocation and identifies project constraints, helping users consolidate schedules.
Financial oversight also makes it easy to identify threats before they affect a construction project. For example, finance teams can use tracking platforms to identify resources that have been overutilized.
A good example is when two hundred bags of cement are used daily instead of the recommended one hundred and eighty bags of cement.
Lastly, financial oversight is essential because it lets senior management know the company’s cash flow position.
6 Tips for Maintaining Financial Oversight in Construction
1. Use a modern project reporting platform
Overseeing a small construction project with less than twenty workers is not quite as difficult as managing a mega-construction project with hundreds of workers. Cases such as this will require a modern financial oversight reporting platform.
Modern platforms help finance officers oversee financial thresholds in real-time. This is better than the use of Excel, since the spreadsheets can’t track data in real-time.
Another advantage of using modern reporting platforms is the ability to consolidate schedules and review project constraints. In addition, the platform makes it possible to export data into a 4D Flipbook or P6.
2. Track actuals vs. planned budget in real time
One of the biggest challenges of financial oversight is ensuring that it’s not affected by cost overruns. Cost overruns can be caused by several factors, such as design errors and erroneous project estimates. Design errors can cause an entire section to be demolished, increasing the overall cost of construction.
Another reason why cost overruns occur is when there is a change order. A change order is a document that requires a contractor to change the initial scope of work. The cost will surpass the planned budget if the construction company has no change order policies.
When actuals are tracked in real-time, mitigation measures can be recommended early, before the project is affected.
3. Track and manage subcontractor costs
For effective financial oversight, financial managers need to track subcontractor costs. Subcontractors are third-party companies contracted to help implement a construction project. Oversight must begin with the type of contract signed. For example, a company can decide to pay subcontractors by the hour or on a job basis.
In the construction industry, contractors should pay subcontractors on a job basis. If they are paid per hour, there is the possibility that they might work slower to increase their price. Subcontractors must have a contract with clear payment terms based on project milestones. Subcontractors should also deal with their employees.
This way, the company will not pay for insurance or be liable in case of a work-related accident.
4. Track additional expenses daily
To ensure the construction project is in good health, track costs daily. This is important, especially when the project is expected to last several years. If a project will last for five years, the contractor needs to factor in the costs of inflation, labor, and cost of materials.
If these expenses are tracked daily, it becomes easy to identify budget shortfalls before they affect the entire project.
5. Track cash flow
Financial oversight cannot be complete without tracking cash flow. Cash flow is vital to a construction business because it enables the company to pay for labor and materials to fund new projects. Positive cash flow indicates that the construction company is doing well. However, a negative cash flow is an indication that there is something wrong with the business.
If not rectified on time, the company will experience a cash crunch that will cause the construction project to stall.
6. Streamline the payment process
Finance managers should streamline the payment process by digitizing and setting up structures that allow key stakeholders to approve or reject the payment. Payment to subcontractors and suppliers should be automated.
Automating payments makes it easy for financial oversight to be implemented. In addition, it avoids abuse by subcontractors because every job done needs to be verified.
Financial Oversight is Important
In conclusion, every construction company needs a financial oversight policy and a financial oversight officer.
The officer will ensure that construction works are done within budget and that safeguards are put in place to prevent suppliers and subcontractors from taking advantage of the company.
When developing a financial oversight policy, there must be institutionalized controls.
These controls are essential because they prevent one person from abusing the procedure.
In addition, setting up such a policy is not a one-day affair. The policies need to be tested and refined on a need-be basis.