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 prediction of expected revenues and overhead costs, you may find yourself with a shortage of cash. Without cash flow to cover expenses, you won’t be able to pay workers, purchase new materials or even keep the lights on. Learning how to create a budget forecast is an important skill for owners and managers in the construction industry. So, what does accurate forecasting of annual budgets in the construction industry involve? Consider the following tips to ensure accurate construction project forecasting:
Review Forecasts Regularly
Most construction companies routinely draft an annual budget forecast that includes overhead rates, projected 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. It’s nearly impossible to make meaningful updates or revisions to the original prediction if you’re not aware of the original predictions or anticipated needs.
When deciding how to create a budget forecast for the next year, set dates in your calendar ahead of time dedicated to reviewing the forecast. Failing to periodically review forecasts leaves construction firms vulnerable to under- or overstating rates on future proposals. This ultimately impacts a project’s profitability or affects your competitiveness. Underbidding leaves a business at risk of potentially losing money on a particular job, while overbidding might cause the firm to lose out to a competitor.
Include Direct and Indirect Costs
It’s imperative that both the direct and indirect costs associated with operating your firm are included in construction project forecasting. While indirect costs can be difficult to determine and even trickier to calculate, their impact on a budget is very real.
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. These costs take into account the actual cost of each employee.
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. Forgetting to incorporate these costs in your forecast could leave you short on cash when it’s time to pay employees.
Lean on Historial Budget Comparisons
As cliché as it seems, it’s common for history to repeat itself when looking at the budget for your construction company. By sifting through historical data of your company and the construction industry as a whole, you can start to predict trends that are likely to happen again. This can help you with your construction project forecasting for years to come.
For example, if past budgets show that the company has either consistently fallen short or exceeded the allotted budget constraints, managers can either be encouraged to slow down spending or be more liberal in their resourcing.
Construction firms can use historical data to quantify important assumptions about the upcoming budget, including:
- 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.
Internal company changes or external macro-economic shifts can easily change the budget needs of your company. 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
Accurate construction project forecasting helps you determine an accurate annual budget. Having an accurate budget allows you to predict how the inflows and outflows of cash will affect your company throughout the year. Knowing this information well in advance gives you time to plan for financing when you expect to need it most.
An accurate forecast should provide advanced warning of potential shortfalls, budget gaps or other financial problems that will need to be addressed. Instead of waiting until your resources are dried up, these forecasting methods will ultimately help you determine if you need to cut back operations, readjust spending or look for ways to raise capital.
Alternative lenders 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.