Every business must optimise its financial processes to succeed in the long term. Proper financial oversight is absolutely critical in the field of construction management, however. An experienced construction manager knows this to be true, as they’ve experienced firsthand the monetary factors that can bring projects to a halt.
For example, construction management is complicated because payments typically only come at specific intervals or when project milestones are completed. As a result, contracting firms may have to front significant amounts of money, and construction managers must closely monitor spending to keep things going. Unexpected weather conditions and labour shortages routinely disrupt projects. On top of all that, the seasonal nature of construction work can seriously impact cash flow.
Navigating these challenges is the trick to successful construction management. Ultimately, it all comes down to following best practices for budgeting, spending, and accounting. The five financial management tips below can help ensure money problems don’t derail your construction projects.
Tip 1: Create Detailed Budgets and Forecasts
It may seem like the best construction managers have a crystal ball that helps their projects from financially collapsing. In reality, they’ve actually perfected the art of financial forecasting. A good forecast enables you to adjust resources when unexpected events occur. Forecasts also give you a better view of cash flow, so you can manage resources until the next payment from your client arrives.
However, great forecasts start with detailed budgets. A comprehensive budget gives construction managers a roadmap for each aspect of a project. Some of the line items to capture in your budget include:
- Material costs
- Labour expenses
- Equipment rentals
- Permits and other regulatory fees
- Insurance and other overhead
- Administrative expenses
- Safety gear and security costs
- Client payments and other revenue
Creating a detailed budget gives your project a solid foundation right from the planning stage. Forecasting isn’t magic; it’s simply the act of updating your budget with the latest information. If market conditions have led to an increase in material costs, or you need to add extra workers to meet a project milestone, update your forecast to see how it affects your project. Mastering budgeting and forecasting helps you better manage spending and mitigate risk.
Tip 2: Use Your Budget for Cost Tracking
When a construction project isn’t as profitable as expected, it’s often due to high costs. Sometimes in the course of a project, costs rise unexpectedly, but it’s just as likely that unmonitored spending can eat into revenue and profits. You can implement cost tracking to stay on top of project expenses and ensure they remain within expected limits.
At a basic level, cost tracking simply compares your construction project’s budgeted expenses to actual spending. Cost tracking can get more complicated than that, as specialised software exists for detailed analysis of expenditures and cost-to-budget ratios. But even without fancy software, you can monitor costs to ensure a construction project stays within budgeted limits, preventing overspending that hurts profitability.
Tip 3: Identify Cost-Saving Opportunities
Comparing your actual spending to budgeted amounts sometimes reveals good news — sometimes expenses are less than expected. Despite diligent budgeting and forecasting, you may have overestimated the amount you need to spend on some line items. Or, you might have found some way to do more with less while still delivering on the project’s goals.
Capitalize on these cost-saving opportunities by lowering expenses for the affected line items in your forecast. Every bit you can save is like extra revenue, positively impacting the bottom line. Also, the unfortunate truth is that some things will likely cost more than expected, but cost savings can counterbalance these expenses.
Tip 4: Manage Cash Flow Efficiently
Cash flow — the movement of money in and out of a business — can be difficult to master in any industry, but it’s particularly challenging in construction management. Unlike retail companies that typically generate revenue every day, contractors are bound to the periodic payment terms stated in their contracts. This can mean payments once a month, once a quarter, or with even less frequency.
Construction managers must meticulously manage cash flow to cover project expenses. Look at your forecasts and cost-tracking data to make informed decisions that help cash flow. For example, if you can safely wait to purchase specific materials until after you’ve received your next payment, that can help build cash reserves.
Tip 5: Prepare for Unexpected Financial Challenges
Despite your best planning, unexpected financial challenges are part of the construction industry. Weather can cause unforeseen (and costly) delays. Government bureaucracies might slow down the permit process. World events may hinder the global supply chain, denying your project necessary materials.
Whatever the challenges, construction managers always have to be prepared. Comprehensive budgeting and precise cash flow forecasting can help, but you also need contingency plans. Whether it’s negotiating favourable payment terms with suppliers, building relationships with subcontractors, or allowing some leeway for the unexpected in your contracts, ensure there’s always a “plan B” to keep projects financially stable.
Construction Management is Financial Management
In some ways, construction management is a high-risk endeavour. You’re in charge of an extensive and complex project with many possible ways to fail. However, solid financial management skills can ensure success for even the most challenging construction jobs. Good construction management is the same thing as good financial management. Looking at both as one and the same will put you on the path to success every time.
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