3 Levels of Forecasting for Construction Businesses
Preparing, reviewing, and updating forecasts is an important part of the strategic planning process for construction companies. While each construction company may go about their forecasting process differently, forecasts typically fall into 3 major categories or levels - business, project, and external forces.
Business Level Forecasts
At the business level, your forecasts help you develop your budgets, establish a vision for the future, and create benchmarks to measure and reward performance. Predictive indicators, such as customer satisfaction, sales pipeline, and accounts receivable turnover, will help you create your forecasts. Common business level forecasts for construction companies include:
- New contract awards
- Direct and indirect costs
- Cash flow
- Gross margin
- Net profits before taxes
It's a good idea to create a contingency plan in case actual results fall below projections. "Plan for the worst but project for the best" as they say.
Project Level Forecasts
Each project must be controlled carefully from beginning to end. Forecasting plays a vital role in identifying potential problem areas—after all, how can you know when a project gets off course unless you first understand the destination? Successful contractors are systematic with their project forecast, typically requiring finance and operations to work together to provide monthly project forecasts. Key project areas to forecast include:
- Net profit
- Cash flow
- Cost to complete
- Equipment resources
Construction forecasts typically rely on accurate and timely input from field management for information such as percent complete and units in place. From these indicators, you can derive a forecast variance and make adjustments. To improve the timeliness of this data, companies are increasingly providing mobile access so field personnel can record project progress from the jobsite.
External Forces Level Forecasts
In addition to making projections regarding internal business performance, it’s important to consider how external factors will impact your organization. For construction businesses, these external driving forces typically fall into five categories:
- Economic—Continued recession or rebound?
- Political—What new regulations are on the horizon? Where are taxes headed? How will government spending affect available work?
- Social—How will an aging population change the type of buildings and services in demand?
- Technological—How will innovations in mobile, cloud, and BIM impact the industry?
- Environmental—In what new directions will the “green” movement pull the industry?
Scenario planning: Prepare for what might happen. Without a crystal ball, the best way for construction executives to understand these forces is to use a method called scenario planning. According to the Journal of Accountancy, scenario planning is focused on answering three questions:
- What could happen?
- What would be the impact on our strategies, plans, and budgets?
- How should we respond?
Review and Update
Make sure to review your forecasts, including the assumptions they are based upon, on a regular basis. Forecasting and planning should not be an annual event, but an on-going process.