Financial control in construction
Why should there be a separate budget for each object
To whom to entrust control of finance
Why is it necessary to introduce a payment calendar and a payment day in the company?
Why the project budget should be tied to the construction schedule
Incorrect calculation of the cost of the object before the start of the project leads to sad consequences: according to the results of construction, the cost of residential or commercial real estate rises significantly, and it turns out that a company that has already sold objects at reduced prices suffers losses and cannot finish work. And if there are several of them, the situation will become critical for both the developer and the buyer. Strict financial control in construction will help to avoid this.
4 principles of financial control in construction
Principle 1. Separate budget for each object
The main postulate of a successful construction project managed by one legal entity is maintaining a separate budget for each construction project. In the general budget, expenses are displayed in total, and this is fraught with an incorrect estimate of expenses for objects and the opacity of the construction process. The cost should include only the costs of a particular property.
This is exactly the scheme we are implementing in the construction of the Triumph Park residential complex in St. Petersburg, where a separate bank account has been established for each construction project. This helps to clearly track expenses and prevent their redistribution from another object, that is, mixing budgets.
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How to take into account common costs for all objects. Before starting construction, it is necessary to adopt the so-called budget number zero, which will include the estimated construction, marketing and general business expenses (office rental, salary, cost of office equipment, construction insurance, transportation). The total capital costs must be accounted for in each building in proportion to the area or footage of the land (network, water, electricity, roads, lighting, security). Ideally, the budget number zero should be identical to the final budget. The more detailed and professionally prepared the budget, the less the final figures will differ from it. However, in practice, especially in Russia, the initial and final budgets almost never coincide.
How to control deviations from the budget. In order to minimize the risks arising from multi-site construction, it is important to have professional design, coordinated budget work, control over the selection of contractors, as well as constant (monthly or even weekly) control over the excess of items from the current budget over budget number zero. For example, in our company we discuss a variety of budget deviations every two weeks. The finance department preliminarily e-mails questions about the deviations that have arisen, and the construction department at the meeting tells in detail why they happened. Based on the results of the meeting, a decision is made to accept deviations or a method of reducing them, if they are recognized as unacceptable.
Principle 2. The control and accounting service subordinate to the financial director
The work of the estimated department and the budgeting department is monitored by the financial director through the control and accounting service, which can work, including outsourcing. There are pros and cons to this solution.
The advantages are obvious: people who calculate the estimates do not physically know those who carry out the construction and prepare these estimates, respectively, the information comes in more objective, which makes all processes independent of each other. However, there is a drawback. Counterparties may receive urgent orders to check a large amount of information from other companies, and therefore the period for checking estimates may differ from the expected one. Unlike your own estimated department, an outsourcing company cannot set its own priorities.
Financial control in construction: 4 basic principles
Principle 3. Own payment calendar and day for each object
You must enter the company’s payment calendar and payment days for each object. For example, if you are building four houses at the same time, then payments for the first and third houses can be made only on Tuesday, and for the second and fourth houses only on Thursday, and vice versa. The specifics of the construction business is such that everything should always be done urgently. To avoid errors, there should be a payment register, which is approved by the financial director, so that the costs are not fragmented. It also provides psychological comfort to accounting and financial services.
Principle 4. The project budget should be tied to the construction schedule.
The most difficult thing in multi-unit construction is that the budget of the next house is laid down already at the stage of construction of the previous object, so it is necessary to predict the final costs as accurately as possible so that it does not turn out that the money that should be invested has already been spent.