Knowing your numbers is critical in the construction industry. Understanding how much a previous job truly cost is part of accurately estimating and landing new, profitable projects. But, just as vital is knowing how a current project is running and where it will end up, allowing for adjustments and planning. For this type of nimbleness, construction contractors need to understand forecasting.
What is forecasting? How does it help? And how can a firm perform forecasting properly? Keep reading to learn more about this important tactic (and feature) in this ultimate guide to forecasting in construction.
Forecasting is the process of analyzing and interpreting the current trajectory of a construction project. This process takes into account the budget, actual costs, upcoming or projected costs, current and expected change orders, and other values that will determine the final cost of the project at completion.
Among others, the forecasting process yields two important data points: the estimate at completion (EAC) and the estimate to completion (ETC).
Estimate at Completion (EAC)
The estimate at completion for any project details how much the project will cost the contractor or developer when the project wraps. This estimate includes all of the values involved in the project, including actual costs, projected costs, expected change orders, and other fees.
This is a report that should be run and reviewed on a monthly basis to ensure there are no surprises or significant changes to waylay the project’s success.
Estimate to Completion (ETC)
The estimate to completion is a forecasting data point that explains how much money is expected to be left over from the project’s budget at completion. This value is essentially the difference between the budget and the EAC.
While subtracting the EAC from the budget may appear to be a simple equation, that’s not the case. If the EAC isn’t as precise as possible and accounts for all of the commitments moving forward through the project (actual and proposed), the ETC may be useless. At this point, the contractor is opening themselves up to expensive overruns and shrunken profit margins, and they might not even know these expenses are coming.
Why is Forecasting Important?
The ways that accurate forecasting is important are many, but let’s use an analogy. Consider you have a flight to make and you’ve budgeted enough time to get to the airport. And although you know the way, you set your GPS to track your progress. The GPS details what time you’ll arrive at your current pace and route, allowing you to determine how much time you’ll have left once you arrive. If a traffic jam or detour is in the future, the GPS adjusts the route and gives you the newest data, helping you to ensure you remain on time.
Forecasting is essentially the same as using a GPS with the exception that you get to choose the route when a roadblock occurs. Still, accurate forecasting can explain how much that detail may cost, and where the budget will land.
Other Benefits of Forecasting
Beyond being able to remain nimble and informed as described above, there are other significant benefits to accurate forecasting.
Forecasting Creates Accountability
Firms should be running and reviewing forecasting reports on a monthly basis. Upon review and comparison to past months, major changes that have taken place in the budget or proposed changes moving forward will be apparent. Senior staff can then ask project managers why these changes occurred or why they may be necessary.
While this might seem like punishment, it’s anything but. Understanding how a project management team thinks allows the firm to implement training or protocols that may enrich their management team moving forward, helping keep future projects on budget. On the other hand, it also gives management the ability to recognize their staff for their foresight, allowing them to place employees in roles that best play to their strengths.
Forecasting Allows for Contingency Conservation
Every project has contingencies built into the budget for unforeseeable or unavoidable events. Generally speaking, those contingencies are around 10 percent of the total estimated cost. And while this is money meant for “emergencies,” managing the project allows the contractor to conserve their contingency budget.
Early and Frequent Communication
One of the most beneficial aspects of forecasting for contractors is the ability to clearly communicate early and often. With accurate forecasting reports, contractors are often able to see issues with the budget—or timeline, to some degree—well before the problem comes to fruition rather than that problem springing up at the last second when the contractors’ backs are against the wall.
With this understanding of the budget and its projected health, contractors are able to discuss issues with the customer. This may give the customer enough time to make a change and adjust the budget or scope accordingly, keeping the project on track and allowing for a timely delivery.
Better Budgeting and Estimating
Very few successful construction firms handle one job at a time. They’re typically running multiple projects, all at different stages. Some are wrapping up, some are in process, and some may only be in the estimating or proposal stage. While the traditional use for forecasting is to keep the current project on track by staying ahead, it can also help with other projects in the pipeline.
The proper use of forecasting keeps contractors and developers up to date on the latest data on a monthly basis. If they’re reviewing how their current projects are doing, they’ll be able to plan and estimate other similar projects more accurately and efficiently. In use with job costing reports, being aware of trends in forecasting will ensure the contractor is able to provide the best estimate possible for their business and allow for better, more accurate budgeting for their customers.
Let’s be honest: the reason that most contractors that don’t forecast choose not to use this tool is that it’s hard. There is a lot of data entry, updating, reviewing, and corroboration that has to occur to forecast properly. And, should one data point be a bit out of line, the report’s credibility becomes suspect, meaning it’s not as helpful as a tool as one might think.
Just think of all the items that a forecasting report might require:
- Actual costs of each line item
- Data from the correct fiscal period
- Which invoices apply to each cost item (and invoices that have multiple cost items)
- Actual, pending, and outstanding commitment amounts
- Unforeseen or unaccounted items
Luckily, construction management software can help ease this incredibly complex burden.
Premier Construction Software automates the forecasting process. The system automatically populates most of the critical data that accurate forecasting requires, meaning users don’t need to transfer budget items, double-check accuracy, or even collect all of the data required. The system will automatically pluck items from individual reports and integrate them into the forecasting report.
Premier will automatically enter, track, or calculate values such as:
- Original budget
- Change orders (both actual and proposed)
- Commitments (actual, proposed, projected, outstanding, and uncommitted actuals)
- The budget utilized and project budgets
Along with those values, Premier allows users to update or input data that might not currently exist within the system. Items like anticipated costs for which the system does not account are easy to add, with customizable categories for simple organization. Also, any actions that need to occur such as budget transfers or internal change orders (workflows implemented for accountability when transferring budget items) are incredibly simple to add and track.
Premier users also have the benefit of customizing third-party access. Users can allow customers, lenders, bonding partners, or subcontractors to access the system for up-to-date forecasting information.
Forecasting Automation is a Powerful Tool That Every Firm Needs
The automation and customization make Premier Construction Software’s forecasting feature incredibly powerful. Users can make more informed decisions that keep projects on track and on budget by using the latest information available. This type of informed, nimble decision-making will lead to better profitability, growth, and happier customers—the goals of any construction firm.
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.