Budget forecasting is a strategic and integral task within project management and control. At a high level, forecasting can be used to answer key questions like, “When will this project be complete, and how much will it cost?” This type of information is critical because without a well-calculated estimate of costs, a business may find itself without the cash necessary to complete a project or to pay workers.
Forecasting is also important for determining anticipated revenue because companies will want to know how much they stand to make before taking on a project. Additionally, an accurate forecast will provide insight into future cash flow, which is especially important in an industry where the funding for a new project may likely come from the revenue of a previous one.
Creating a budget and financial forecast is no easy feat when there are always a number of variables that may impact a project—for example, weather conditions, change orders, or even a global pandemic causing shutdowns like we experienced this year.
So, what can you do to improve your budget forecasting? Consider these four tips:
1. Review Regularly & Update Accordingly
Anyone in the construction business will likely agree with the saying “the best laid plans often go awry” because no matter how carefully a project is planned, things can change and challenges may arise. It’s important to keep a pulse on a project’s status by revisiting forecasts regularly to determine whether or not the project is on-track.
It’s also important to keep track of the initial forecasts and use them as a baseline for comparison, otherwise you won’t be able to effectively gauge project success and make the necessary updates to mitigate future losses.
When you create a budget forecast, it’s wise to set dates and calendar reminders to review the forecast and adjust the resource and budget allocations as necessary. Not only will this help gauge current status, it will help you create more precise future forecasts and reduce the likelihood of under- or overstating rates for future projects.
2. Factor in Direct & Indirect Costs
When you’re creating your budget forecast, it’s imperative to include both direct and indirect costs. Investopedia defines direct costs as “costs related to producing a good or service. A direct cost includes raw materials, labor, and expense or distribution costs associated with producing a product. The cost can easily be traced to a product, department, or project”, whereas indirect costs “are expenses unrelated to producing a good or service. An indirect cost cannot be easily traced to a product, department, activity, or project.”
Three common types of indirect costs are overhead costs (e.g., office equipment and supplies, insurance, salaries), equipment costs (e.g., depreciation, repairs and maintenance) and labor burdens (e.g., FICA taxes, Workers Compensation). Indirect costs can be difficult to calculate, but they need to be accounted for in a budget otherwise your forecasts will be inaccurate.
3. Use Hindsight of Historical Data
As the saying goes, “hindsight is 20/20.” Use your company’s historical data to your advantage and to feed the precision of foresight. Reviewing historical data will help you identify previous pitfalls and to predict trends that are likely to happen again, all of which will help you plan better for the future to create more accurate budgets and forecasts.
4.Utilize an All-in-One Software Solution
With so many factors and moving parts dependent on one another, it can be easy for project details to slip through the cracks. Adding to this, many construction companies are using multiple disjointed systems for their project management and accounting needs. Not only does this create bottlenecks in processes and waste valuable time, a disconnect between accounting and job costing means the data is unreliable and can’t be used to accurately gauge success or view up-to-date financial information.
One of the easiest and most successful ways to improve your forecasting is to utilize an all-in-one cloud-based solution that allows you to access the information you need, wherever and whenever you need it. Premier Construction Software offers the most powerful construction software solution on the market to ensure you can effectively monitor and manage two of the most important functions—job costing and accounting.
Our software brings the key business data together into a single platform, with seamless integration between all modules, and a single source of truth for reporting. Up-to-date financial reports are ready to go at any time, and can be tailored to your requirements. Premier also offers the ability to lock-in forecasts to ensure project managers are held accountable for their monthly forecasting.
The power and usefulness of a forecast hinges on its accuracy—forecasting in and of itself isn’t enough to guide critical business decisions. Investing the time and resources required to improve your forecasting will contribute to more exact budgets which, in turn, will optimize cash flow and boost revenue.
To learn more about Premier Construction Software’s forecasting capabilities, click here to schedule a personalized product tour.
Kathryn Dressler is a content strategist with more than 10 years of experience across the spectrum of marketing services, including blogging, social media, public relations, copywriting and editorial services.