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Ed Williams / Gemko Information Group LLC – Direct 716-270-8110 / Cell 716-343-1081 Page 1
Importance of Forecasting Const...
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Are you forecasting your construction project costs

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Are you forecasting your construction project costs

  1. 1. Ed Williams / Gemko Information Group LLC – Direct 716-270-8110 / Cell 716-343-1081 Page 1 Importance of Forecasting Construction Project Costs Are You Forecasting Your Project Costs? Today’s construction projects are typically bid with less and less profit margin to stay competitive and win the job. Hopefully there will be necessary change orders along the way to provide an increase in revenue with much better margins. Now more than ever before it is important to track and manage each jobs forecasted cost to complete. Many in the industry know this forecasting as “Estimated Cost to Complete”. This information can be critical to the success of your project regardless of a job’s size, types or number of job tasks. Knowing what your true costs are and the estimated cost forecasted at completion is your crystal ball to look in to the future at what expected costs and profitability will be attained on each project by the each month and as well as by the end of each project. For a job’s “Estimated Cost to Complete” to be accurate requires team work and communication between the main office, field office and project managers. The actual costs incurred to date must be current through the period of time being analyzed. This means that all subcontract work has been approved and entered against the job costs; That all direct labor related to the job is posted weekly with payroll burden; All other job costs such as materials, owned or rented equipment that are utilized on the project are costed . Even indirect labor or other indirect costs may be allocated to job for even more accurate cost of projects and more realistic gross profit margins. Project managers may estimate cost to complete on small projects as a whole whereas larger projects may have many sub-jobs or levels of job tasks and even task managers responsible for specific job task across multiple projects. % of Completion Method is a common method for determining “Estimated Cost to Complete”. This can be based on a single analysis and estimate of an entire job by “Job % Complete” (Simplistic), or, Percentage of Job Task (More Detailed and More Accurate) in which the value of Actual Cost on an “As of Date” by Job Task is divided by “Estimated Percentage of Completion” resulting in Estimated Cost at Completion. Estimated Cost at Completion Less Actual Cost on “As of Date” = Estimated Cost to Complete. Units of Completion Method can be applied to job tasks that the completion can be measured in a specific unit. It may be a street lighting task in which 200 Street Lights are being installed by a subcontractor that can be measured by how many of the Street Lights are installed. If 50 are installed then the result would be 25% Complete on that job task and baring no other changes presented the unit cost should have remained the same. The same calculation as above is applied to determine Cost at Completion. Hours To Finish Method can be applied to labor intensive tasks where using the Actual Hours Incurred on the “As of Date” divided by “Actual Hours + Hours To Finish” = Percentage of Completion. Then Actual Costs on “As of Date” divided by Percentage of Completion will result in “Estimated Cost to Complete” and “Estimated Cost at Completion” More than one of these methods may be used on the same project depending on the type of job task. With the overall estimated cost to complete a gross profit can be determined for month end as well as for the end of the project. Years ago, this type of job analysis was tedious and time consuming. Today there are many software applications available to help assist with accurate costing and automated calculation of forecasted cost to complete and forecasted gross margins. Knowing forecasted costs of each project is invaluable for making good business decisions sooner and driving the costs savings to your bottom line. By Ed Williams, Construction Software Consultant, Gemko Information Group LLC