Cash flow forecasting report

Protecting Tight Margins in a COVID-Affected Construction Industry

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COVID-19 has had a massive effect on the construction industry. From closing job sites to stretching materials thin, owners, general contractors, and project managers are seeing the consequences on their projects.

 

 

One of the most notable impacts of COVID was a drastic reduction in cash flow for almost all project participants. When the industry slows, everyone involved in a project tends to grab hold of what cash they have, holding onto it until we’re in the clear. Sometimes, it’s just the result of less available cash, as financing and projects begin to dry up.

 

Let’s take a look at the impact COVID has had on cash flow and what you may be able to do to shore up your bottom line.

COVID Cash Flow: Where’d it go?

The COVID pandemic has had a significant impact on construction projects across the globe. Owners, general contractors, Project Managers, and subcontractors have been scrambling to grab their share of the cash before it seemingly runs out altogether.

 

Jobs are becoming more expensive to complete. With the new rules on social distancing, personal protective equipment, increased regulations, rising material pricing, projects that used to be profitable now seem to be bleeding profits. Between purchasing masks, hand sanitizer, adding new safety regulations and paying for full-time cleaning crews, projects that were underway with profitable margins are now taking on water.  

 

Factor in that social distancing can double the amount of time it takes to complete a task, and it’s easy to see how timelines and schedules are suffering. While unloading a material delivery that used to take two hours with a full staff, it might now take four hours. You’ll have to budget time to unload the same amount of materials with half the manpower. After all, pinch points like entry doors and elevators could bring workers on your crew into close proximity to each other. 

 

Materials shortages are also stifling cash flow. If you’re lucky enough to find the materials you need, the prices are way up. Many plants and lumber yards had to shut down for some time during the height of the pandemic. As a result, materials are low, trucking costs are through the roof, and deliveries are becoming more difficult to schedule. 

 

All of these factors, and many more, are shrinking profit margins. They’re also leaving project managers, general contractors, and project owners wondering what they can do to survive. 

How project managers can handle tighter budgets

Most of the burden of these tighter margins falls on the project managers. They have to recognize the changes in these margins and adjust the project’s course to maintain some semblance of profitability. Holding project managers accountable to their variances and tracking the movement each month is vital to any construction company.

 

If you’re a project manager, all is not lost. There are some techniques you can focus on to ensure you maintain these tighter margins to the best of your ability.

Job forecasts and cash flow projections

To understand which direction the project might head in, you need to maintain detailed cash flow projections. This data is the baseline that helps you determine the health of your company or projects on a monthly basis. You’ll be able to recognize and budget for trends, allowing you to save for leaner times and make the most of your busiest season.

 

Effective cash flow projections need to account for income and operating expenses. They also need to track other incidentals like investments and equipment purchases. Thinking about taking out a loan? Your cash flow projection will take the payment and interest into account and show you how it will affect your monthly bottom line.

 

One thing cash flow projections do very well is point out trends. If you’re maintaining a proper forecast on a monthly basis, you’ll have years of data to look back at. You’ll see which months are the most profitable, which months are the leanest, and what might cause both of those scenarios.

 

For more information on how you can forecast with Premier Construction Software, you can schedule a personalized product demonstration here.

Estimate at Completion

With the right software, you can track your project’s progress with real-time updates on the Estimate at Completion. Your Estimate at Completion, or EAC, is an important tool for maintaining these tight COVID-related margins.

 

As the project moves along, and you’re updating your cash flow projections with actual costs, the EAC changes. For instance, say a one-time event occurs unexpectedly, like a change in materials, subcontracts or suppliers. You can input the change order and it will automatically impact the EAC. 

 

The effects of some other scenarios on the EAC can be a lot harder to track. An on-going change, like purchasing extra PPE for the duration of the project, can be a challenge. This is why it’s important to factor in pending commitments, pending change orders and anticipated costs in your EAC so you have a more accurate picture of where you will finish on the job and won’t be caught with any surprises. With the right software, the EAC should automatically calculate and should be easy to adjust. It should be easy to view the history, and raise budget transfers so you can more accurately determine the long-term effect on the margins and adjust on future jobs.

How owners can hold project managers accountable

For project managers to be effective, owners need to let them manage. But this doesn’t mean that owners shouldn’t hold them accountable throughout a project. Owners need to give PMs the room to make decisions but also maintain the ability to override the decisions when needed.

 

A smart way to allow your PM to operate is to use effective forecasting software. The PM can make adjustments, enter change orders, account properly for anticipated costs, or even transfer budgets through this software. With an all in one software that provides both accounting and job costing, it can auto calculate the EAC. This way you can trust the data providing the owners with a real-time update on the project’s progress and a more accurate picture of where they will finish on the job and account for all the variances. 

 

The owner can choose the information they want the PM to have access to and keep updated as the project progresses. The PM will then have all the data they need to make smart decisions to keep the project on track. They can compare line items on a project that are under budget and transfer those amounts to items that might come in above the targeted amount. This way, the PM can account for line items like sanitation costs or materials that have gone up in price.

 

To ensure that the PM is staying on budget and within these tighter margins, owners can track, approve, or deny these requests. Owners can also lock the previous months, giving them a baseline to judge the PM’s performance against.

Maintaining tight margins during COVID

Protecting what profitability you have left is the key to surviving the changes COVID has had on the construction industry. Some solutions are easy, like shifting budgets, creating change orders, or simply planning for the leaner months. But, you still need to track those items effectively to make smart decisions. You need whatever advantage you can get.

 

By equipping your project with the right software, you can shore up your bottom line against these profit-robbing changes. Be sure to keep an eye on your Estimate at Completion as well as your regular forecasting. These records will give you an up-to-date record of your project and where it’s heading.

 

What’s Next?

 

This new pandemic has influenced the construction industry to adopt technology and refine their business processes to help streamline operations. Traditionally the construction industry are ranked as late technology adopters as it is structured with in-person meetings, hard copy documents,manual signatures and more. In the wake of this pandemic, businesses are becoming more reliant on cloud technology, digitization, virtual meetings, real-time collaboration, and electronic sign-offs pushing the industry to a new world of collaboration and automation.

 

Cloud technology is now essential. Schedule a personalized product demonstration here and learn how Premier Construction Software can help empower your business. 

 

Author Biography:

Tom Scalisi has over 15 years of experience working in the trades. Since moving to full-time freelance writing, he has developed a passion for helping construction companies grow. He enjoys teaching contractors how technology can streamline their businesses and educating them about their rights during payment disputes. 

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