The ability to accurately forecast is the difference between having a profitable project and losing money—all while minimizing risk.
Contractors know that being able to predict and prepare for variances in costs or schedules is essential to the profitability, cash flow and—in extreme cases—the viability of projects. However, reliable forecasting is a complex and multidimensional process that is difficult, if not impossible, with manual or out-of-date systems.
“One of the main reasons why forecasting is not done well in a lot of companies is because collection of all the necessary information is such a big task,” says Steve Cangiano, Product Manager at CMiC. “The majority of the time that’s spent on the forecast is really about collecting that data and then putting it into a format that others can understand and access.”
Two of the reasons that data collection is not done well are (1) use of multiple software systems to store and manage data, and (2) use of traditional spreadsheets as a supplementary measure. This patchwork approach inhibits free flow of information and results in data redundancies.
Unfortunately, use of two or more systems is all too common at construction firms. “Even if firms are using [automated] systems, they still use Excel to some degree,” observes Chet Kuchyt, Solutions Consultant at CMiC.
Kuchyt’s assertion is backed up by the JBKnowledge 6th Annual Construction Technology Report. The functions within construction firms that are most dependent on software are accounting (85%), estimating (60%) and project management (56%), but those same three workflows are also the ones most dependent on spreadsheets, in a slightly different order: estimating (71%), accounting (59%) and project management (46%).
The spreadsheet method has inherent problems:
- Out-of-Date Data – Forecasting has to be done as close to real time as possible. A Carnegie Mellon University professor stressed this point in a construction-oriented textbook. “For the purpose of project management and control, it is not sufficient to consider only the past record of costs and revenues incurred in a project,” he wrote. “Good managers should focus upon future revenues, future costs and technical problems. For this purpose, traditional financial accounting schemes are not adequate to reflect the dynamic nature of a project.”
- Potential for Inaccuracies – Manual data entry (or re-entry) is error-prone; a single typo can throw off an entire set of data.
- Lack of High-Level Analytics – When much of a company’s data is stored in spreadsheets, extrapolations are problematic. “The forecast should be systemized,” Cangiano says. “It should state, ‘Here’s the data, this is what it’s telling us, this is what we should do moving forward.’”
Scott Jennings, P.E., principal of SJ Construction Consulting, LLC, has over 25 years of experience working with hundreds of contractors across the country. As we already know, “forecasting feeds the lifeline of the financial health of a company,” he says. “If owners and CEOs want to prevent profit fade during construction projects, they must equip project managers with sophisticated software tools that allow the managers to project costs accurately.”
In other words, don’t let your inadequate budget forecasting undermine your projects—instead, learn to get ahead with a unified ERP solution.
With the right software, “they also can know where their active projects stand at any time, in terms of profitability, by forcing the project managers to go into the software and actually update each of the line-item costs on a weekly or biweekly basis,” Jennings adds. “This brings tremendous confidence to the owners and CEOs and will allow them to expand their surety bonding for their backlog of projects.”
Want to learn more? Read part 2 and part 3 of our ‘Forecasting with Confidence’ blog series, or visit our Resources section to view our consolidated library of industry best practices and success stories.