Finance & Lending

 

07 19 2016

07 19 2016

Accurately forecasting annual budgets in the construction industry

Due to the cyclical “feast-and-famine” nature of the construction industry, making accurate budget forecasts is crucial to guaranteeing long-term success for firms of all sizes. Without a well-calculated and reasonable prediction of expected revenues and overhead rates, builder-owners and managers at construction firms may find their enterprises with a cash shortfall, leaving the company unable to pay workers, purchase new materials or even keep the lights on.

But what does accurately forecasting annual budgets in the construction industry involve? Consider the following tips for making informed decisions and more precise financial predictions:

 

Review forecasts regularly

Most construction companies routinely draft an annual budget forecast that includes overhead rates, likely expenses and receipts. Unfortunately, once the forecast has been established, these predictions often end up stuffed in the bottom of a drawer and ignored. Without regularly revisiting the forecast, it’s tough to determine whether the construction firm is on track and it’s nearly impossible to make meaningful updates or revisions to the original prediction.

Failing to periodically review forecasts leaves construction firms vulnerable to under- or overstating rates on future proposals, ultimately impacting a project’s profitability or affecting the company’s competitiveness. Underbidding leaves a business at risk of potentially losing money on a particular job, while overbidding might cause the firm to lose out on the award.

 

Include direct and indirect costs

It’s imperative that both the direct and indirect costs associated with operating a construction firm are included in the annual budget forecast. While indirect costs can be difficult to determine and even trickier to calculate, their impact on a budget is very real.

For instance, according to CLA, a professional services firm, direct labor costs include payroll taxes, union benefits, workers’ compensation, general liability insurance and other related employee benefits. However, indirect labor costs include office administration, payroll supervising, safety programs and equipment and maintenance charges. While not directly associated with an individual employee the same way a health insurance fee might be, these indirect costs add to the overall overhead expenses necessary to employee workers.

 

Lean on historical budget comparisons

“Past is prologue” and “History repeats itself” are common, cliche phrases for a reason: They’re based in truth. This is especially true in constructing budget forecasts. By sifting through the company’s and industry’s historical data, those tasked with creating an budget forecast can see how past trends are likely to

For example, if past budgets show that the company has either consistently fallen short or exceeded the allotted fiscal constraints, managers can use this data to either pull back on a more aggressive mentality or be more liberal in their resourcing. As noted by BKD, a national CPA and advisory firm, construction firms can use this historical data to quantify sensitive assumptions about the budget forecast, including, among others:

  • Incremental volumes
  • Proposed reimbursement changes
  • Charge inflation
  • Payor mix
  • Staffing levels
  • Expense inflation

It can be tempting to take last year’s budget and simply plug in a factor for inflation to draft a forecast. However, this sort of incremental budgeting fails to account for other influences, whether internal company changes or external macro-economic shifts. Taking the time to build a new budget from the ground up every year avoids the mistake of assuming these changes won’t impact the overall budget.

 

Consider alternative financing

Accurately forecasting annual budgets allows builder-owners and managers the opportunity to gain insight on how capital in- and outflows will affect the construction company throughout the year. When times are good and new orders are increasing, an executive can be more optimistic in their estimates.

On the other hand, however, an accurate forecast should also provide advanced warning of potential shortfalls, budget gaps or other financial problems that will need to be addressed. Instead of waiting until a firm’s resources are dried up, advanced, accurate forecasting methods will ultimately shine a light on the potential for having to scale back operations, trim overhead costs or find another way to stretch a dollar.

While every owner or manager wants to remain optimistic about their business’s prospects, an accurate budget forecast can be the canary in the coal mine that alerts the appropriate person of impending trouble. With this information at hand, construction executives can then determine when is the best time to consider alternative financing options.

Traditional banks require construction firm executives fill out extensive paperwork and navigate a labyrinth of red tape before approving a small business loan. Once this is all completed, it can still take weeks or months before the application is approved – if it’s even approved at all. This can be disastrous for a construction firm that’s short on cash.

Thankfully, alternative financing sources provide construction firms with the crucial capital they need, when they need it most. With an easy, no-obligation online application and funding possible within 24 hours, construction firms can find the funding necessary to pay workers or vendors and ensure the lights stay on.

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