If you're involved with construction for a Residential Estate then these “best practices” for using your Project Accounting Software will help your client with their dealings with their financiers as well as simplifying your project manager's work.
However before you look at your software, it's best to have a clear idea of the processes involved when undertaking a broad-acre conversion to a residential housing estate.
The Big Picture
To start with you know that the financier backing your developer client is not going to take on the all of the Risk involved with constructing the total number of homes that can fit on the broad-acreage. They will aim to minimise their risk by staging the development.
So the the broad-acreage will be conceptually divided into several Development Stages. The first stage release will commence with the construction of a display village consisting of one of each house type. This enables their sales team to walk prospective clients through a completed home and to estimate the cost of changes to the basic design on a client by client basis.
After sufficient sales are made in Stage 1 the developer will release another Stage downstream and in the process build a new display village and sell off the first display homes you constructed.
This provides a positive cash flow for the developer as they progress through building the remaining stages and in doing so lessens the risk for the financier.
Now we understand the big picture, we have to determine how best to manage this Contract using our project accounting software.
One Project or Many Projects?
You may think it a good idea to set up each home as a project but there are disadvantages to this simplistic approach – particularly in terms of reporting.
It would be best if the whole Estate was defined as a single Project and then as you undertake construction you define each house, being the Scope of Works, as a Stage within that project in your project accounting software. The use here of the term “Stage” should not be confused with the “Staged releases” of land within the estate.
Better Client Reporting
One benefit of this approach is that it makes it easier to produce the reporting that your client the developer needs to provide to their Financiers to convince them that their risks are being managed properly. This is because you can produce “big picture” plus” drilled down” reporting as required.
The Stages approach also helps your project managers focus on the construction as they can see all the information about an individual house and follow it right through the system. In effect you have a “sub-cost report” for just a single house.
When a new house is required to be constructed, then you would add a new Stage and then allocate your tradespeople to work on it. The scheduling process will easily identify the extra details.
If we examine the Subcontractor Payment Claims process then each tradesman has an original contract for work on other stages (homes) so if they win another stage (home) then it will just be another amendment to their contract. You can then pay the subcontractor by stage and in the process make tracking and controlling the processes easier.
Depending upon how you contract with the developer you may in fact be establishing two projects - not one - for the entire estate. This would be the case if you decided to use a Complementary Project approach.
This approach enables you to manage the construction project on an “open book” basis, with the developer taking the risk and some portion of the work charged at agreed rates. You would take a small risk for the preliminary items but have an agreed rate of recovery for selected services such as project management on an hourly basis.
To do this in your construction accounting software you would establish one project as open book with the client, where the budgets equal the agreed target prices of the client. In this project, the income is equal to the expenses so there is no profit. But you link this project with a second project which invoices the first project for the value of contracted services at the agreed rates.
The next point to consider is how to pay subcontractors and suppliers in the first project so that it doesn't effect your cash-flow.
Ideally the client should setup a trust account and you pay contractors out of this account based upon a client approved payment list. However some developers may insist upon greater control of the “purse strings”. In this case you could still control all the subcontractor claims paperwork within your construction accounting software and at the end of each Pay-run send the direct deposits data file to your client so the developer can pay off this file using their own bank.
So the developer controls the “purse strings” but your project managers manage the job without you assuming the financial risk.
The practices should enable you to make better use of your project accounting software when your constructing for a Residential Estate Developer.