Forecasting – How to improve your profitability

There is only one time in the project life cycle when you can ever be sure if you have made money or not; the rest of the time, you are forecasting.

The project forecast is an estimated position on your costs during the project life cycle and should be done every month on all projects under construction.

The initial forecasting process is the project budget, and this will often be used to determine the projected revenue. The difference between your costs and your revenue will be the Markup & Margin, and this is also the baseline against which all other forecasts will compare.

During construction, you are typically faced with a range of challenges, e.g. the way something was designed is not as simple as building it, unexpected site challenges (overruns) and occasional wins that reduce your costs (under runs). 

The client may change their minds during the building phase, and changes could occur (variations).

These have the impact of increasing or decreasing your costs and increasing or decreasing your revenues and not always proportionally.

Forecasting regularly allows you to review progress on the project. Review the estimated project costs that have occurred so far and plan for and understand the costs that are still to happen. Review that against all of the project revenues and monitor for margin creep.    

The more granular you can go with your forecast, the more accurate the results will be. The estimates should also compare to the prior period forecast to see what movements occur between periods.

Several methods will allow you to calculate your forecast, including the known Actual Costs, Procurement value (Purchase Orders/Subcontracts), Billed revenue, and Total Contract revenue. More complex formula’s will incorporate features such as Worse Case Scenario planning, Built % Complete, Estimate % Complete and price variance calculations.

While forecasting is possible on a spreadsheet, advanced systems such as Sage Intact have inbuilt tools that can review all of the data and automatically model out predicted results at a very granular level on the project.

The benefit of regular forecasting is that it will allow you to identify issues early when you can have an opportunity to have an impact. You may not be able to reduce the costs you’ve already incurred; however, you can look at opportunities to save costs in other parts of the project or find ways to increase the revenue, such as increasing the markup on a variation.

Avoid the need to have the next project pay for the mistakes of the last.  

Forecasting reason analysis also plays an essential exercise in Project Lessons learnt by looking at trends and causes during the project. It may help more accurate estimating in other current and future projects.  

Key trends to identify should look at

• Project managers
• Build Period
• Construction Type
• Location
• Suppliers

By taking the time to forecast regularly, you will naturally find that project margins are maintained as you are working closely with your team to ensure that each project generates revenues that allow the business to grow.  

If you would like to discuss your forecasting practices with the construction industry experts, give the team at Thrive a call today on 1300 868 474 or info@thrivetech.com.au.