With November here I know that many companies, including my own, are looking at their 2013 costs and revenue, and determining 2014 forecasts and budgets. This process is tedious, complex, and very important. Many aspects of your business have to be considered—your position in the market, possible threats based on competition and the economy, opportunities for growth and potential new work, etc.
All of this got me thinking about how this process of budgeting works in the world of construction. While most businesses only go through major budget exercises once a year, the nature of our construction industry requires that budgeting be part of every job and that projections are constantly updated and compared to these budgets. This process, which can be tedious, complex, and very important, is also an on-going task in construction management, not a once a year exercise.
Every job starts with an estimate, which ultimately turns into a budget, but the numbers and the work don’t stop there. Throughout a job’s duration, the actual work done, costs incurred, and revenue recognized must constantly be measured, recorded, and compared to the original budget.
>Doing this right means careful and consistent data gathering. It also means charging your jobs for all the costs they actually incur. Labor and materials are obvious direct costs, but are you including other incidental costs? For example if you install electric wiring, are you including the cost of these incidental items used in those installations? The cost of hundreds of fasteners and connectors adds up, and with profit margins in single digits it is necessary to have a process of allocating these incidental costs to the jobs.
Tracking all the direct and not-so direct costs means having information tools and processes in place at both the office and the jobsite. But tracking is just the beginning. Turning labor, material, and other job cost data into usable information means having data processing tools that roll these costs up into meaningful budget comparisons and that help you create accurate projections.
>The first requirement of construction software needed to perform this processing is that it be designed to support job cost accounting. This at least ensures that costs will be properly attributed to the jobs where they have been incurred.
Next, in order to give both construction accounting and project management groups the information they need, the construction software should combine both financial and operational data. Together, information on job cost and job progress can provide a real picture of the health of a project.
Then, to turn this information into action that can improve job profitability, the latest construction software offerings include project management software that let you create multiple “what-if” scenarios to compare and determine ways to achieve improved job performance . Identifying where problems may arise is the first step, but determining how to handle these problems can make or break a job, or even a company. So when considering construction software, be sure it provides you the ability to track, identify, and react to the problems that arise when actual costs drift away from budgets and projections. This will help keep you from drifting into negative cash flow and unprofitable jobs.