This is the second article in a series of articles walking the small business contractor step by step in implementing cost accounting in construction. This article focuses on designing and developing a document flow system for use in cost accounting. The next step after creating a document flow system is learning how to sort and process the documents that come into the office. Finally, the last set of articles in this series helps the accountant/bookkeeper choose the best accounting software to match the business operations and illustrates the different types of reports you’ll need for information and how to interpret the reports.
Document Flow System
A document flow system in construction provides many benefits. If well designed and implemented it reduces office stress, minimizes labor resource consumption, and makes it easy for the owner to retrieve needed documents. The whole system is redundant and you should use an electronic format. The final paper document is stored in the project box or folder depending on how many documents you process per project.
To make this work well, you should have already designed your cost accounting program based on Implement Cost Accounting in Construction – File Structure. Now you are ready to process documents as they come into the office. The following is a step by step process with some description on how to create a great document flow system:
Step 1 – Create a Master Paper File
This is an easy step, if your projects will be vast and complicated and stretch out over many months or even more than a year, get on file storage box for the project. Put folders in the box in the following format:
1. Contract folder – this is the master contract and change orders as signed, include in this folder the project estimate and the subcontractor bids you receive.
2. Insurance/Warranties – put your insurance items in this folder for this project, the bond, the risk premium policy, and any other insurance/warranty items.
3. One folder for each phase of construction as identified in the phases of construction article.
4. Draw Schedule/Draws Folder – this folder contains the original draw schedule and any draw documentation as process throughout the project.
5. Permits/Licenses – copies of the permit, project licenses etc. related to this project. Include inspection reports and copies of the inspection approvals as they are generated.
6. Invoices – place the invoices and copies of the payments received in this folder.
Some of the projects are not intensive and you can get by with one of those collapsible types of folders. Use your discretion in determining which physical storage device to use.
Step 2 – Assign a Project Number and a Class
Each project should be assigned a number that will be used throughout the entire project. In addition, make sure the number is assigned the appropriate class of work. See the prior article in this series to understand this concept. My suggestion is to use the year as the first two digits, then the month as the next two digits and then the day of the month. This allows for chronological listing of the projects and it makes it easy to retrieve data in the future. My suggestion is to use the contract date of that project. For purposes of bills you receive, they are labeled as follows:
13ZZZZ – 0Z The first 6 digits are the year, month, and day of the contract. The extension digits identify the phase of the project.
Step 3 – Give Notification to all Parties Involved
It is important that all parties involved understand the project numbering system. Many vendors or subcontractors only want the physical address, but inform them that this numbering system is similar to an accounts payable approval number or purchase order number. It allows the front office to properly track the bill to the correct project, scan in the bill to the correct project and vendor file, and finally put the paper document in the correct project folder.
As vendors bid or bill you for a particular project, ask them to submit their bills based on the project number and the phase they generally bill under. As an example, the plumber will bill under the project identification number and phase 5 or 05 on his bill.
Even your employees that work in the field should have a project identification card handed to them weekly. One side of the card has the project identification number and corresponding address while the other has a list of the phase codes and a brief description of the phase code. This way, the field workers will properly code their time to the correct project and the best phase for their labor. Project managers should carry a few cards with them in case an employee loses their card.
Even let the customer know the project number. Anytime they call in with a change order, by knowing their project number it will make it easier for the staff to understand which project they are inquiring about.
Step 4 – Set up Electronic File Structure
An electronic file structure is designed to cut down on physical paper, make for easy access to information about the project, and provide proper documentation resources for future reference. You build the file structure around the project. The structure should be an exact image of folders and subfolders as described in Step 1.
In addition to the project electronic files, create vendor electronic files. These electronic folders should be date related, e.g. the following is a file structure for a subcontractor and the custom materials supplier:
Custom Materials Company
Summary – Document Flow System
A document flow system begins in the front office. It is designed around the project via a numbering system identifying the project and the corresponding phase of work. By creating a paper and electronic filing system, all documents related to the project and contracts can be sorted and recorded. The primary purposes of a document flow system is to reduce stress, minimize labor costs in the front office, and make it easy for management to retrieve documents in the future. The next in this series of articles describes how the physical documents are processed for cost accounting. Act on Knowledge.