Construction Project Forecasting: A Practical Look at Financials

August 31, 2020 Andy Lambert

A financial forecasting chart shows financial figures and an arrow trending upward

Making accurate financial forecasts is a challenge we face as an industry. KPMG reported that only 31% of all projects come within 10% of the budget. The bigger the project, the worse the financial uncertainty. McKinsey reported in 2016 that 80% of large projects go over budget, with productivity actually in decline since the 1990s and larger projects taking roughly 20% longer to finish than scheduled. Meanwhile, 98% of megaprojects, which are only increasing, get delayed or go over budget, and these spending spikes associated with these massive projects are only expected to continue. 

So, what’s going on? When construction projects are underway, there are a lot of moving parts, especially with large projects that employ many subcontractors whose work needs to be deftly orchestrated. Accomplishing this is only bound to get harder with lasting effects of COVID-19 in construction that will redefine our design processes; how we communicate with vendors, trades, and customers alike; as well as the digital tools we’ll need to adopt to thrive amid a quickly adapting landscape.   

But while you can’t predict the future, using effective construction forecasting methods can help to ensure uptime is maximized, project plans are honored, schedules are preserved, and your projects are tracking to completion. 

The Purpose and Importance of a Construction Forecast in Project Management  

Aside from scheduling work and overseeing subcontractors to assure quality, a large part of the job of a construction project manager consists of working with clients to understand their needs and ensuring budgets don’t get out of control.  It doesn’t help that construction costs are on the rise, represented by a 10% increase in materials cost in 2019 alone—or exacerbated by tariffs on steel and aluminum that 40% of contractors expect to impact their business considerably over the next three years. 

Cost Forecasting Methods 

There are plenty of cost forecasting methods in construction that don't make you seem to clients like that maladjusted weatherperson who says all clear when a storm’s coming.  

Communicate Early and Often 

It may seem needless to say, but keeping an open dialogue going can go a long way in making sure everyone is on the same page and miscommunication is averted.  

Construction workers discuss building plans together

The management of project financials and cost monitoring in construction are extremely important to builders, and communication is truly at the heart of staying true to proposals and balancing budgets when you consider that over half of rework is caused by poor project data and miscommunication. Further, 70% of total rework experienced in construction and engineering products are a result of design blunders. Quantified, that’s $31.3 billion in rework… an expensive price to pay for simply not talking openly or working together. 

Remember, there are a lot of people involved in construction projects: 

  • Your clients  

  • Architect, engineers 

  • Vendors  

  • Subcontractors  

  • Inventory and asset managers  

 
Having a sit-down with the team, all the important stakeholders, early on can help create a truthful proposal and also aid in cost management by avoiding overruns. Some early communication could include: 

  • Conducting an open discovery session with your client to determine needs 

  • Develop a clear project scope of work, including a realistic cost estimate based on materials and labor involved. The SOW can help to create your project Cost Breakdown Structure    

  • Develop a project Work Breakdown Structure to break work into smaller, more manageable tasks. This will help ensure work schedules are maintained: Materials arrive when they’re supposed to, work proceeds, and budgets don’t get ballooned due to discrepancies  

  • Identifying KPIs that will enable accurate cost forecasts 

  • Formulate a risk mitigation plan 

  • Conduct a cost forecast that considers optimistic, pessimistic, and most likely scenarios. Make sure to include padding for possible change orders that could lead to overruns if not accounted for. Better safe than sorry! 

Balancing the Project Budget 

Basic budgetary considerations will include: 

  • Permits to address zoning, surveying, land disturbances, electrical, mechanical, plumbing, environmental, department of transportation, etc. 

  • Insurance Costs, both general liability or more comprehensive policies  

  • Design Budget: From blueprint to drafting and review, and architect and engineer fees 

  • Contractor Budget 

  • Material Costs 

An illustration features construction tradespeople on desk with construction materials, calculator, and building plans

When it comes to balancing budgets, the commonly used cost forecasting methods in construction consist of step-by-step lists, Excel spreadsheets, readymade templates, or there is software available that can provide a more robust feature set such as trend analysis and predictive cost data. Where machines can take you so far, it’s also worth considering hiring a human cost estimator to be your tour guide. These specially trained professionals can leverage the full potential of cost-estimating software programs while applying their own expertise—an understanding of architectural drawings, engineering (and associated costs), construction materials, engineering, etc.—to optimize the end result.  

Empower Project Teams through Collaboration and Knowledge Transfer 

Communication between teams should not stop after the kickoff. It’s important to make sure everyone that needs to be is abreast on what’s going on—from the back office to the field—whether that’s about material shipments being delayed, change orders throwing off the final build, city ordinances, or anything in between. 

MCAA reported that over half of productivity problems are the result of issues with construction logistics. What’s worse, 60% of general contractors see problems with coordination and communication between project team members and issues with the quality of contract documents as the key contributors to decreased labor productivity. 

So, how do you start to bridge the gap? 

Gather Real-Time Data 

Real-time collaboration is not just for separated college students racing to get a group project done from two different coasts.  

Photo shows construction woman with laptop computer illuminated by data overlay

There are a number of ways contractors can use technology-aided construction data to improve their processes in real time:  

  • Building Information Modeling (BIM) helps architects and engineers collaboratively build rich environments and make tweaks to address the project’s needs, or project managers ensure code compliances and that the project is still within scope 

  • Virtual reality (VR) and augmented reality (AR) can be adapted to be utilized as a real-time quality assurance tool, inviting customers to experience projects virtually, and make tweaks that the construction crew can immediately execute on 

  • Cloud-based inventory management software offering anything from tool diagnostics and utilization data to improved scheduling that inhibits costly inventory-related downtime   

Synchronize Your Systems 

Knowledge is power! Integrated construction software platforms allow you to empower your teams, from finance to field management, with programs they prefer and excel at using while seamlessly transferring data between software platforms securely, and knowledge between teams. The end result is an enterprise construction management ecosystem that keeps your entire organization in lockstep moving forward and executing on plans without the bottlenecks or the miscommunication, or misinterpretation, that stall progress. 

Automate  

Quit scrambling to find important documentation that’s gotten lost in the shuffle of a busy construction enterprise. You’re better than that!  Moving away from spreadsheets, or worse pen and paper, to construction forecasting software that lets you automate routine tasks like invoicing, tax payments, and recordkeeping will save you time in the short-term and reduce risk in the long-term. 

Construction Project Forecasting: Tying It All Together 

At first blush, forecasting project costs would seem as tumultuous as the weather. But really, there are some great cost forecasting methods that are at your disposal: 

  • Communicate early and often to ensure client needs are met and the SOW doesn’t go out the window 

  • Balance the budget by covering all your bases up front and consider adopting a construction project forecasting software program, or better, hiring a professional cost estimator who can fill in the blanks for you 

  • Empower the team through collaboration and open communication 

  • Gather real-time sharable data  

  • Synchronize your software systems through integrations  

  • Automate routine tasks  

Hopefully, there’s plenty of sunshine in the forecast for 2021! 

About the Author

Andy Lambert

Andy Lambert has 15+ years' leadership experience in construction technology. As group program manager for the One-Key team, he is responsible for leading the development of new features and partnerships within our platform.

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