Closing out a construction project is the last step in wrapping everything up. To get across the finish line, you must ensure everything is completed in accordance with all contractual obligations–including the financial closeout.
If you’re managing a construction project, nailing the financial closeout means fewer headaches, smoother transitions, and a happy client. But what exactly does this entail, and how can you ensure it’s done seamlessly? Read on to learn more about achieving a seamless financial closeout in construction projects.
What is a Financial Closeout in Business?
Financial closeout marks the point where all financial obligations are met and that there are no outstanding costs to be aware of. This includes settling any outstanding invoices, ensuring all payments are made, reconciling accounts, and completing the necessary documentation to confirm that the project has been financially completed. It’s a bit like a final checklist to make sure all parties are happy.
Once this is all agreed, the project can officially be deemed complete!
Why is Successful Project Closeout so Important in Construction?
When a project isn’t closed out successfully, it leads to a range of complications–financial disputes between clients and companies, delays in future work, or even damage to the company’s reputation.
In construction, if your reputation is in question it’s inevitable that another company will attempt to swoop in and take your clients.
Successful closeouts leave no loose ends, allowing the client to take full possession and use of the completed project while avoiding potential legal and financial issues down the road. It also satisfies all contractual, compliance, and safety standards.
Some solutions can help you take the paperwork out of the financial closeout process and automate processes for you. At Handle, we make sure companies have exchanged lien waivers aligned with payments, and lien rights are protected until project completion. Solutions like OneStream can also allow you to focus more on the customer.
Key Components of Financial Closeout in Construction
Let’s take a look at some of the key components of financial closeout on a construction project.
- Final invoicing – Ensuring all subcontractors and vendors have been paid and all invoices have been received.
- Cost reconciliation – Performing a final accounting of the project and checking it’s all within budget or agreed-upon adjustments.
- Retainage release – Releasing any retained funds to contractors after successful project completion.
- Change order settlement – A change order that is not dealt with then and there can easily turn into a claim and can slow your project closeout. This ensures all change orders have been processed and financially accounted for.
- Contract compliance – Making sure that all financial and legal obligations under the contract have been met and all parties are satisfied.
- Documentation – Finalizing all necessary paperwork such as balance sheets, warranties, and compliance certificates.
What Happens if a Closeout Goes Badly?
It’s what every business wants to avoid, but sometimes the closeout process isn’t as smooth as one would hope. So, what can happen if it doesn’t go well?
A poorly executed closeout can lead to multiple issues. These include the likes of financial losses and even legal disputes. Such issues can put a strain on relationships with clients and subcontractors. On top of this, the company could also be hit with penalties for non-compliance with contract terms or regulations.
For instance, if you fail to resolve change orders it can lead to disputes. This, in turn, can hold up payments and create frustration and rising tensions for all parties involved. In severe cases, legal action might be taken, causing financial and reputational damage.
Six Steps to Achieve a Seamless Financial Closeout on a Construction Project
Here are six steps all businesses should follow to achieve financial closeout on a construction project:
Plan the closeout
As simple as it sounds, planning the closeout process at the beginning is a surefire way to ensure you’re on the right track throughout the project. Establish a clear process for how you will do the invoicing, tracking payments and reconciling costs as you go on. This will prevent last-minute scrambling and ensure that everything is in place as the project nears completion.
If contractors wait until near the end of the project before thinking about the closeout, they may feel overwhelmed with the scale of the task ahead of them. That’s why it’s best to start the financial planning and analysis as soon as the project begins.
Maintain Regular Communication with Stakeholders
It’s important to maintain contact with stakeholders throughout the financial closeout process. Stakeholders to keep updated include your contractors, vendors, the client, subcontractors, and everyone with interest in the project’s completion.
Regular updates on payments, outstanding invoices, and any financial issues will help prevent surprises during the closeout.
Complete Change Orders Promptly
As we’ve discussed, change orders need to be dealt with promptly to stop the risk of any difficulties during the closeout process. Change orders are inevitable in construction, but delaying their resolution can cause significant headaches at the final stages of the project. It’s critical to address them as soon as they arise.
Ensure All Documentation Is Ready
There will be a plethora of documents involved in the construction project process. Ensure all documentation required is gathered and accounted for, as this makes the financial closeout much smoother in the end. Organize these documents well in advance so that when the time comes, they’re ready to be submitted without delay.
Perform a Final Audit
Before you officially declare the project financially closed, you should conduct a final audit. This involves reviewing all costs, payments, and outstanding obligations to ensure that nothing is left unresolved. It’s an extra layer of protection to confirm that everything aligns with the project’s financial plan.
Address Retainage Efficiently
Lastly, it’s important to release retainage promptly once all obligations are fulfilled. Delaying retainage can lead to disagreements and potentially impact relationships with subcontractors. Make sure that all criteria for release are clear and communicated early on to avoid any misunderstandings.
Follow a Project Closeout Checklist
By following a project closeout checklist, you can establish a seamless financial closeout every time. Planning ahead and preparing for every step in the financial closeout process, can allow you to keep on top of the project and manage expectations when it comes to an end.
Following these steps will help ensure that your project is not only delivered on time and on budget but that it is financially closed with no big surprises! In doing so, you’re not just completing a project – you’re building trust within the industry and maintaining a solid financial reputation among peers and future prospects.