As every property developer knows, development projects have never been a favoured investment among funders – especially mainstream banks.
Investors tend to see property developments as high-risk options, as the asset they’re being asked to lend against doesn’t yet exist. And in the post-recession climate, and the unpredictable times we find ourselves in, they seem more reluctant than ever to finance them.
In this context, the slightest cause for concern can be enough to discourage funders from taking on property risk. Developers must therefore guard against giving them any excuse to say no.
In my experience, less-than-adequate project accounting can be one such excuse.
Robust project accounting allows a development’s stakeholders to monitor the financial health of the work in progress. Without the transparency it brings, any problems with a scheme could go unnoticed until they cause serious financial damage to the project.
That’s why investors will often insist on seeing evidence of good project accounting before deciding whether to fund a development.
Effective project accounting drives several important benefits for property developments.
Firstly, it joins the dots between operations and financial control. It connects the quantity surveyors and project managers on the frontline, with the accountants who report on the development’s financial performance.
It also accurately forecasts and monitors cash-flow and profitability over the course of the development. This provides stakeholders with crucial, up-to-date intelligence on the scheme’s financial situation, and helps prevent any unexpected shortfalls from occurring.
Finally, by ensuring smooth financial performance, sound project accounting keeps funding flowing into the development. And it puts developers in a better light when looking to fund future projects.
So how can developers go about ensuring their project accounting is up to the mark? I believe a robust process depends on three vital elements:
Let’s look at each of these aspects in turn.
Project accounting can only be as effective as the forecasts it is based on.
The first step is therefore to create a reliable financial forecast for the development, based on a well set-out project appraisal, accurate costings and, importantly, the right level of detail.
Too little forecast data restricts transparency, and risks introducing inaccuracies. Yet too much will be incomprehensible to stakeholders, also harming transparency. And it will take too long to compile.
With the forecast in place, actual financial performance data needs to be reconciled against it each month. The aim should be to expose any differences, understand their impact, and identify their cause.
As with the forecast, monthly reports must be presented in a way that can be easily understood and interpreted by a wide range of stakeholders. These include site managers, the board, investors, and so on.
The monthly reports should be discussed by the senior management team. It’s their job to act decisively to address any major variations from the forecast as the project progresses.
Between reports, any unforeseen changes must immediately be reported to stakeholders, along with their implications for the project’s financial situation. Such changes might include construction delays, cost increases, disputes or significant currency movements.
The key to keeping project accounting on track is to lay down – and keep to – strict deadlines for three key milestones:
1. data to be provided by site surveyors and project managers
2. invoices to be received and input into the accounts
3. monthly management reports to be compiled and distributed to stakeholders
Project accounting for property developments is a complex exercise. Getting it right will require input from financial experts with deep experience in the technicalities of the property and construction sectors.
Skilled project accountants will produce clear and accurate management reports that can inform strategic decisions, and of course, satisfy lenders’ demands for transparency. They will also know how to make sense of the numbers, and discern what they mean for a project – and for the business behind it.
Please get in touch if you’d like to discuss project accounting for your property developments.