Key Takeaways
Effective expense management starts with reliable financial information and an understanding of how costs arise across the business.
Track expenses accurately. Separate business overheads from direct Project costs and review actual expenditure against budgets.
Investigate the causes of overspending. Supplier prices, labour productivity, purchasing decisions and inefficient operations can all reduce profit margins.
Make cost reduction part of financial management. Review expenses, Project profitability and cash flow together before deciding where to cut spending.
How can businesses monitor expenses and reduce spending?
Businesses can monitor expenses by recording transactions accurately, categorising expenditure and comparing actual costs against budgets and previous reporting periods. Accounting software, management reports and cash flow forecasts help identify increases in operating expenses and areas where spending can be reduced.
Construction businesses also need Project-level cost reporting. Labour, materials, subcontractors and equipment should be monitored against Project budgets and forecast costs to complete, so management can investigate overruns while work is underway.
Why business expense monitoring is important
A construction business can be busy, generating substantial revenue and still earning very little profit.
The problem may be obvious in the financial reports. Gross margins are falling, wages have increased or overheads are consuming a larger share of revenue. In other cases, management needs to investigate individual Projects before the causes become clear.
A Contractor might have allowed 1,200 labour hours for a Project but used 1,450. The additional hours could result from incomplete drawings, rework, access restrictions or poor coordination with other trades. An accounting report will show the labour expense. A Project cost report, supported by information from the delivery Team, can help explain why the budget was exceeded.
Expense monitoring is also important for cash flow. A business may have earned revenue that has not yet been collected while supplier payments, wages and equipment costs are already due.
Owners need reliable information about both profitability and the timing of payments.
1. Record and categorise business expenses properly
Accurate expense records are the starting point for controlling spending. Transactions need to be recorded against meaningful categories, with enough detail for management to investigate unusual costs.
Accounting software such as Xero, MYOB or QuickBooks can help businesses capture invoices, reconcile bank transactions and prepare financial reports. The usefulness of those reports depends on how the accounts are set up and whether transactions are allocated correctly.
For construction businesses, expenses commonly fall into two groups.
Direct Project costs include labour, materials, subcontractors, equipment hire and other expenditure attributable to particular Projects.
Business overheads include office rent, general administration, insurance, accounting fees, software subscriptions and costs associated with running the wider business.
These categories need further detail where the business requires it. For example, recording all equipment expenditure under one account makes it difficult to distinguish fuel, maintenance, hire charges and finance costs.
Project cost codes can provide another level of information. Materials purchased for a particular Project should be allocated to that Project where appropriate, allowing management to compare expenditure with the original estimate and current budget.
2. Review financial reports and cash flow
A bank balance tells an owner how much cash is available at a particular time. It provides little explanation of whether the business is profitable or what payments will become due over the next few weeks.
Financial reporting should bring together the profit and loss statement, balance sheet, cash flow forecast and supporting management information.
The profit and loss statement identifies revenue and expenses over a reporting period. Comparing the figures with the budget and previous periods can reveal increases in wages, insurance, administration or other operating costs.
A cash flow forecast deals with timing. Construction businesses need to account for progress claims, debtor payments, supplier terms, payroll, tax obligations, loan repayments and retention amounts.
For example, a Contractor may expect a substantial progress payment at the end of the month but have wages and subcontractor invoices falling due beforehand. The Project may be profitable while the business faces a short-term cash shortage.
This is where expense management and working capital management need to be considered together.
Blaze Business & Legal provides Construction Financial Management services to help owners improve financial reporting and understand business performance.
3. Compare actual spending with the budget
A budget provides a basis for investigating expenditure.
Construction businesses can use an annual operating budget for overheads, supported by monthly forecasts that reflect changes in workload, staffing and other commitments. Individual Projects need their own cost budgets.
Suppose a Contractor budgets $18,000 for monthly vehicle expenses but consistently spends $23,000. Management needs to establish where the additional $5,000 is going.
Fuel prices may have increased. Vehicles could be travelling between distant Projects more frequently than expected, or the business may be paying for equipment and vehicles that are rarely used.
Each explanation leads to a different commercial decision.
Budget reviews should also consider whether increased expenditure was planned. Hiring another Project Manager will increase wages, but the additional cost may be justified by the workload and improved delivery capacity.
The review needs to consider what the business receives for its spending.
4. Monitor Project costs before margins disappear
Project profitability deserves particular attention because a Contractor can lose substantial amounts on individual Projects without seeing the full effect until months later.
Tender estimates establish the starting budget. Once the contract is awarded, the Project Team needs to monitor committed expenditure, actual costs and the forecast cost to complete.
A useful Project cost report includes:
Original budget and approved budget adjustments
Labour hours and labour costs
Materials and subcontractor commitments
Plant and equipment expenditure
Variations and their commercial status
Actual costs incurred to date
Estimated costs to complete
Forecast final revenue and Project margin
The forecast cost to complete is particularly important. A Project may appear to be performing well because several supplier invoices have not yet arrived or significant work remains unfinished.
Commercial Managers and Project Managers need to consider the remaining scope, expected productivity and outstanding commitments when forecasting the final result.
A monthly Project review can expose a problem early enough to change procurement arrangements, improve scheduling or investigate contractual entitlements.
5. Find unnecessary overheads and recurring expenses
Recurring expenditure can continue for years without anyone checking whether the business still needs the service.
Software licences are a common example. A construction business may subscribe to estimating, Project Management, document control, scheduling and reporting systems, with overlapping functions across several products.
Review the actual users, licence numbers, contract terms and costs before renewing subscriptions.
The same approach applies to telecommunications, office equipment, insurance, vehicle leases, professional memberships and external service providers.
Expense reports should identify recurring payments clearly enough for management to question increases. An annual review of supplier contracts can then address services that have become more expensive or no longer suit the business.
Insurance and other essential expenditure require more careful treatment. Reducing cover or changing providers without understanding the business’s contractual and operational requirements can create a much larger financial exposure than the premium saving.
6. Negotiate supplier prices and improve purchasing
Material costs, equipment hire and subcontractor rates can have a substantial effect on construction Project margins.
Purchasing decisions should take account of the total cost of supply. A cheaper material price provides little benefit if late delivery leaves a site crew waiting or the product fails to meet the Project specification.
Contractors can compare supplier rates, delivery charges, credit terms and lead times across Projects. Where the business purchases substantial quantities of the same materials, negotiated rates or consolidated purchasing arrangements may be commercially worthwhile.
Bulk purchasing needs care.
Ordering materials early can protect against a price increase or supply shortage, but it also ties up cash. Storage, handling, damage, theft and changes to the required specification can erode the saving.
Purchasing procedures should also identify who can approve expenditure and the budget against which an order is being placed.
Without those controls, several employees may order similar materials independently, or Project expenditure may exceed the approved budget before management becomes aware of the commitments.
7. Reduce labour costs caused by poor productivity
Labour cost overruns often arise from problems with planning and Project delivery.
A supervisor may have enough workers on site, but productivity can fall when materials are missing, drawings remain unresolved or another trade has not completed the preceding work.
These problems increase labour hours without increasing the amount of completed work.
Comparing actual hours with estimated hours provides a starting point. Management then needs information from supervisors and Project Teams to understand the reasons for the difference.
Better work sequencing, reliable material deliveries, clear instructions and early resolution of design issues can reduce avoidable downtime.
Construction businesses should also review overtime, labour hire and subcontractor arrangements. Repeated overtime may indicate insufficient planning or a resource shortage that needs a longer-term solution.
Labour reductions require particular care where the business is already struggling to meet contractual deadlines. Removing experienced staff may increase rework, delay Projects and create further costs.
8. Automate administration where it saves money
Administrative work can become expensive as a construction business grows.
Invoices may pass through several employees before approval. Timesheets might be entered into one system and then transferred manually into accounting software. Project Managers may spend hours preparing reports from information already held elsewhere.
Automation can reduce this work when the underlying process is sound.
Digital purchase orders, electronic timesheets, invoice approval workflows and integrated accounting systems can improve accuracy and reduce repetitive tasks.
Before purchasing another software product, management should check what existing systems can do and whether they can exchange information reliably.
Implementation costs also need to be included in the calculation. Training, data migration, ongoing subscriptions and staff time can exceed the expected saving where a system is poorly suited to the business.
Technology should be assessed against the practical requirements of the people using it and the expected financial benefit.
For further discussion of competing Project delivery priorities, see Time, Cost and Quality.
9. Decide which functions to outsource
Outsourcing can be useful when a business needs particular expertise without employing someone full-time.
Bookkeeping, payroll, IT support and selected administrative functions are possible examples. The decision depends on workload, the cost of internal delivery and the quality of the available external service.
A business considering outsourced bookkeeping should examine the hours currently spent processing transactions, reconciling accounts and preparing reports. It should also establish who will remain responsible for reviewing financial information and approving payments.
The cost comparison needs to include the time employees spend supervising the provider and correcting errors.
Construction businesses should retain adequate internal oversight of purchasing, financial commitments and Project performance, even where external providers prepare the underlying reports.
Where the business is already experiencing financial difficulties, cutting administrative expenditure may provide limited relief if Projects continue to lose money. The underlying causes need to be investigated.
Further guidance is available in What to Do When Your Business Is Losing Money.
10. Manage equipment, maintenance and energy costs
Plant, vehicles and equipment can generate substantial ongoing expenditure through finance payments, fuel, servicing, repairs, insurance and storage.
Construction businesses should examine how frequently equipment is used and whether ownership remains commercially worthwhile.
A machine that sits idle between Projects may be more expensive to own than to hire when required. Equipment used continuously across several Projects may justify a different arrangement.
Maintenance records can also reveal where repair expenditure is increasing. Planned servicing helps reduce breakdowns and unexpected downtime, particularly for equipment that is essential to Project delivery.
Energy expenditure should be reviewed where workshops, offices, warehouses or operating equipment consume substantial electricity or fuel.
Savings depend on the business’s actual usage and the cost of making changes.
11. Introduce spending approvals and accountability
As a construction business grows, more employees make purchasing decisions on its behalf.
Clear delegations help management control those commitments.
A purchasing process can require employees to identify the relevant Project, cost code, supplier, agreed price and authorised approver before placing an order.
Approval limits should reflect the employee’s responsibilities and the financial exposure involved.
Invoices can then be checked against purchase orders, delivery records and agreed rates. The process also helps identify duplicate invoices, incorrect charges and purchases outside the approved scope.
Project Managers need enough authority to keep work moving, supported by reporting that allows senior management to identify unusual expenditure.
Staff should understand the budgets they manage and the circumstances in which additional approval is required.
12. Use a cost reduction plan to implement changes
Once management understands where expenses are increasing, the next task is to decide which changes are commercially worthwhile.
A cost reduction plan can identify the expense, proposed action, expected saving, responsible person and implementation date.
For example, an expense review might identify $2,000 a month in unused software subscriptions, excessive vehicle costs and repeated material wastage on one Project.
Cancelling unused subscriptions may be straightforward once the contract terms are checked. Vehicle costs could require changes to allocation and utilisation. Material wastage may need an investigation into estimating, ordering or site practices.
The plan should reflect those differences.
Employees can contribute useful information about delays, duplicated work and unnecessary purchases. Supervisors and Project Teams are particularly well placed to explain expenditure that cannot be understood from accounting reports alone.
Management should check the actual financial result after each change. A projected saving has little value if the cost simply moves to another expense category.
13. Review expenses and business performance every month
Expense monitoring works best as part of a regular management process.
A monthly review should consider operating expenditure, budget variances, gross profit margins, overhead recovery and cash flow. For construction businesses, the discussion also needs current Project forecasts and information about outstanding claims and supplier commitments.
Where the reports show a significant change, the relevant manager should explain the cause and the proposed response.
Consider a Contractor whose revenue has increased by 20% while net profit has fallen. Additional Project revenue may have brought higher labour costs, equipment hire, financing expenses or management overheads. Project-level reporting can help identify whether the business is pricing work adequately and delivering it within budget.
The findings may require changes beyond individual expense categories.
Rachelle Hare – In my experience
Construction businesses can lose sight of profitability when Project Teams concentrate on delivery and owners concentrate on keeping work coming in. I look at how tender pricing, contractual obligations, procurement and Project management decisions affect the financial results. Understanding where costs arise gives owners a better basis for deciding what to change.
When cost cutting will not solve the problem
Persistent financial pressure can indicate a broader problem with the business model, Project selection, pricing or operations.
A Contractor may have already reduced overheads but continue to accept Projects with inadequate margins. Another business may be carrying a management structure that suited a larger workload, or using financial reports that do not identify Project losses until the work is finished.
The response may involve reviewing tendering practices, improving financial management, restructuring the business or changing how Projects are managed.
Blaze Business & Legal helps construction business owners work through these issues through Business Advisory and Construction Business Improvement.
The firm combines commercial, financial, operational and legal advice to identify what is holding the business back and implement improvements. More information is available about Blaze Business & Legal.
FAQs About Monitoring Business Expenses
1. What is the best way to monitor business expenses?
Accounting software provides the transaction records needed for expense monitoring. Businesses should use those records to prepare regular profit and loss reports, compare spending against budgets and investigate unusual increases. Construction Contractors also need Project cost reports and forecasts of the cost to complete.
2. How often should a business review its expenses?
A monthly management review is suitable for assessing overall financial performance. Cash flow, purchasing commitments and significant Project costs may need weekly monitoring, particularly when the business has limited available cash or several active Projects.
3. What business expenses should be reduced first?
Unnecessary recurring expenses, duplicated services, excessive purchasing costs and avoidable waste are useful starting points. The business should establish the likely saving and consider the operational consequences before making changes.
4. How can construction businesses reduce operating costs?
Contractors can investigate labour productivity, purchasing practices, equipment utilisation, Project planning and administration costs. Better Project cost reporting can identify overruns early enough for management to respond.
5. What is the difference between expense management and cash flow management?
Expense management concerns the costs incurred in running the business and delivering work. Cash flow management deals with when money enters and leaves the business. A profitable construction Project can still create cash shortages where payments arrive after wages, supplier invoices and other commitments fall due.
6. Can reducing business expenses improve profitability?
Lower expenditure can improve profitability where revenue and other costs remain unchanged. The financial benefit depends on whether the reduction affects the business’s ability to deliver work, maintain quality or generate revenue.
7. When should a business seek Business Advisory assistance?
Business Advisory can help when owners cannot explain falling margins, rising overheads, recurring cash shortages or differences between expected and actual Project profits. An adviser can review the financial information, investigate the causes and help management implement commercially workable changes.
Get help reducing business expenses and improving profitability
Uncontrolled expenses can indicate problems with financial reporting, Project performance, pricing or the way the business operates.
Blaze Business & Legal works with construction business owners to identify the causes of poor profitability and cash flow, prioritise improvements and implement changes across financial management, commercial operations and Project delivery.
Contact Blaze Business & Legal to discuss the business’s financial and operational challenges.
