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Industry Insight Tips & Advice Trends & Technology Ultimate Guide

Why Forecasting Project Costs Is Important For Your Construction Business

From day one on a construction project, the number one question everyone has is whether the project will meet the expected budget. You can wait to answer this question at the end of the project when you can’t do anything about it, or you can assess where the project stands as you progress through the work, allowing you to act proactively if an overage is found. In order to assess the project costs before completion, however, you must forecast or predict the potential costs to complete the work.

A forecast to complete the project is a well-educated guess of how much you have left to spend to finish the work. It’s based on the current costs, the percentage of the project that’s complete, and what’s remaining to be finished. The better you are at tracking your costs, the easier it will be to predict how much is left to spend.

Before we get into how to forecast final costs on a construction project, let’s look at why it’s important to know how much the remaining work will cost you.

The importance of forecasting final costs

One of the primary benefits of forecasting costs is that you get an early warning if a project is losing money. Since many contractors rely on their profits to fund future work, losses on today’s job can quickly lead to real problems when it comes time to start the next one. Without adequate profits to fund the work, contractors have to rely on alternative financings, like bank loans or credit cards, that ultimately cost them more in the long run, further reducing profits. It’s a never-ending cycle of higher costs.

Predicting final costs also allows companies to identify their future cash flow needs and address any issues before they become real problems. If contractors know that they won’t have enough money coming in to finance their payroll or other necessary business expenses, they have time to move money from investments or seek lower-rate financing options.

Sometimes forecasting final costs can help contractors identify change orders that have been missed or haven’t been processed yet. If a change hasn’t been made to the project budget but extra materials have been paid for or work has been completed, it may show up as a cost overage. The contractor can then follow up with the owner or architect to determine the status of the required change.

Finally, forecasting allows companies to learn valuable lessons about the accuracy, or inaccuracy, of their estimates. If a contractor is always going over budget on labor costs, they will see that sooner and be able to adjust future budgets accordingly. This will make their estimates more competitive and lead to more work.

How to forecast final costs

One of the most important things you can do to help forecast final costs is to monitor costs as you go. If you’re relying on data from a single point in time to predict costs, it can be difficult to make the appropriate assumptions and gather enough data to accurately predict future costs. By tracking costs as you go, with an accounting system that supports job costing, you’ll be able to monitor the project’s progress and see cost patterns that may not be visible with a static report.

To forecast final costs, you’ll be looking at three data points: the amount remaining in committed costs, amount remaining in your budget, and historical costs. Based on these three data points you should be able to predict, with a reasonable degree of accuracy, the final costs for a specific scope of work. Let’s look at an example to help illustrate how these data points help predict future costs.

Let’s say we are forecasting costs for the concrete scope of work on a project. The contract with the concrete subcontractor was originally for $100,000, and they have billed $80,000 so far, leaving $20,000 to bill. This is the amount remaining in committed costs. Based on our original budget, we know that we still need to purchase some rebar that wasn’t part of the concrete contract for $5,000. We also know, based on reviewing past projects and the amount of work left to be finished, that we have about $30,000 in work remaining to be completed. So, how do we predict what our future costs will be?

Remaining committed costs:                       $20,000

Remaining in the budget:                                     $5,000

Historical data:                                                  $30,000

The answer will be somewhere between $25,000 and $30,000, depending on whether we are looking at it for cash flow reasons or to assess what our profit margin is for this particular project. Either way, we are using the three data points to inform our prediction and will continue to improve the accuracy of each prediction as we analyze the data on more projects.

What to do when you’re over budget

The second most important question, after “Are we on budget?” is what to do when you’re over budget. The answer depends on why you’re over budget.

  • If there has been a change in the project scope that affects the budgeted costs but hasn’t been reflected in a change order yet, that could cause an overage.
  • If there was an unforeseen condition, such as bad soil, that caused additional costs, this may cause an overage.
  • Or, if the general contractor or a subcontractor made an error in their work, that could also cause a budget overage.

Depending on the cause, the contractor will need to either ask for a change order or make an internal budget transfer. The internal budget transfer will move excess monies from one line item of the budget to another to help cure the overage. It’s important to note the reason for the transfer for future lessons learned.

How Premier helps you predict future costs

Premier has made forecasting future costs in your projects easier with its forecasting module. Using this module, project managers can account for unexpected costs and request internal budget transfers to cover overages.

To see how Premier can help keep your projects on track, request a demo.

Author Biography:

Dawn Killough is a construction writer with over 20 years of experience with construction payments, from the perspectives of subcontractors and general contractors. Dawn has held roles such as a staff accountant, green building advisor, project assistant, and contract administrator.  Her work for general contractors, design firms, and subcontractors has even led to the publication of blogs on several construction tech websites and her book, Green Building Design 101.

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Industry Insight Tips & Advice Ultimate Guide

Why Embrace the Future of Automation in Construction

For construction companies, time is money. Both in the field and the office, time wasted is money lost. Using out-of-date processes and multiple software programs can quickly eat into slim profit margins. Construction companies must rely on technology to make their processes faster and avoid errors. If they don’t, they will continue to spend money and time fixing problems and repeating work.

Construction’s future?

Although no one has a crystal ball to tell exactly what the future holds, here’s where we think construction is headed:

Automation

Smart contracts will make the payment process faster. Technology will assess how much of the work has been completed, and payments will automatically be distributed to those contractors who have completed the work.

The software will analyze compliance documents, and automatically notify all pertinent parties when insurance or licenses have expired. Contractors will be able to submit compliance documents directly through a portal, where the software will analyze them and gather the required information.

All the documents that pertain to a specific project will be organized and searchable in one location. All team members will have access to these documents, and paper files will be a thing of the past.

Accounts payable invoices will be scanned by software, and the information will be automatically entered into the accounting system. The software will provide analysis and let operators know when contracts are overbilled or change orders are not updated.

Payments to subcontractors and suppliers will be processed automatically by the system, without the need for checks or other paper documents. Payments will be tied directly to the completion of the work.

Artificial intelligence (AI)

Project software will be infused with artificial intelligence that allows the software to provide predictive analysis based on past project data. As contractors process projects through the software, they will learn what activities cause the most delay or create the most risk and remind users when these possibilities occur.

Using the Internet of Things (IoT) and wearable technology, the software will be able to analyze the completion of work in the field. It will then compare that information to the project schedule to determine if there are any delays. Parties will be notified when the schedule slips, allowing the team to proactively respond.

Machine learning

Machine learning, a subset of AI, will assist estimators in project bid analysis, allowing them to select projects they will be the most successful on. AI will also identify the most common bidding errors and correct them before they bid goes out.

Photos will be taken of each worker as they arrive on-site and will be analyzed to determine if the proper personal protective equipment (PPE) is being worn. If there are missing items, the system will notify the worker and their supervisor, allowing them to correct the problem.

Problems with the status quo

Currently, construction teams work with a hybrid of software and paper documents. While some contractors strive to go paperless, many still rely on paper documents for certain activities, like material takeoff. This dual approach leaves contractors open to the following problems:

Lost time

The process of entering and analyzing information by hand takes more time than an automated system. Systems are available that capture data automatically directly from documents and provide analysis, saving contractors time.

Lost information

Paper documents are often lost or misplaced when they are filed incorrectly, or not filed at all. Even teams that rely on software often use multiple systems for different purposes (estimating, project management, accounting). This confuses users who don’t know where to look for the information they need. This takes extra time to determine the correct system and find the data they need. If documents are lost or misplaced, more time is lost in searching for them or re-creating the documents.

Errors are more likely

An experiment in 2009 showed that data entry workers made up to 10.23 errors when entering data from thirty spreadsheets. Data entry errors can cost companies millions of dollars. Workers can spend more time searching for errors and correcting them than in the initial data entry.

Hidden costs of mistakes

Besides lost time finding and correcting mistakes, it has been shown that incorrect data can cost companies up to 30% or more of their revenue. A 2018 Goldman Sachs report stated that the direct and indirect costs of manual paper invoice processing are $2.7 trillion for businesses around the world. The hidden costs of manual data entry can be enough to make or break your business.

Benefits of new technology

Embracing automation and other technological improvements can save companies real money.

  • Work is performed faster.
  • When there is only one integrated source of information, less time is wasted searching.
  • Accuracy is improved with automatic data capture.
  • Time and costs are saved by limiting time wasted on rework, searching through data, and fixing errors.

In a nutshell?

If your construction company is wasting time on manual processes and paper documents, it’s time to embrace automation. Premier Construction Software can help you reduce errors, speed up data entry, and waste less time looking for information. We bring the power of automation, artificial intelligence, and machine learning to construction accounting and project management. For more information on how our software can save you time and money, contact us today.