Why is An Accurate Estimate Important in Construction Accounting?
Updated: Jun 26
Why is An Accurate Estimate Important?
Take a moment to look at the tallest building in your city. Think about what’s going on inside it. You could imagine employers interviewing new trainees or maintenance staff up on the ladder fixing light bulbs. Now, flashback before the building was built, it was just an empty space. In order to build that tall, monumental building, contractors had to factor in materials and labor and develop a construction estimate to predict how much it would have cost to construct it. Then, they had the estimate and started building, thinking about how the building’s owner paid. Of course, they can NOT pay in full like the way we paid our painter for painting 3 walls in the house. Instead, they used the progress invoicing which allows them to split the estimated total amount into multiple smaller payments.
Why need to have an accurate estimate?
- Construction projects are different from product manufacture or retailing in assembly lines: each building is unique, even for groups of buildings that look similar to each other. So, the estimate should be prepared individually
- Projects are set timelines and budgets to complete. An accurate estimate forces a business project to stay on schedule and on track. Any slight miscalculation could magnify a massive setback for a project.
- A well-prepared estimate also helps decision-making. The information on the estimate could be used by the owner to consider making an investment as well as cost-cutting for savings. The assumed numbers are then built into commitments, contracts, budgets, procurement, and accounting accruals. If the information in the estimate is not correct, it could lead to some further changes or compensation.
- The estimate is used to prepare Progress Invoicing, which affects the whole billing progress. An inaccurate estimate could lead to an incorrect payment amount.
In conclusion, the Estimate is the document that records all charges a contractor would like to receive from the customer. From that point, whenever they complete a stage of the project, they generate a Progress Invoicing for payment. In other words, Estimate is the foundation of Progress Invoicing.
If you need any advice or services on any aspects of construction bookkeeping, accounting, or tax, our construction accounting specialists are ready to help. Get in touch with us for a free quote.
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