Managing Financial Control through the Project Lifecycle
May 9, 2018
How do some construction companies manage financial control throughout the project life cycle when others struggle to understand profitability once the dust settles?
To believe this article is worth reading, you first need to agree on two fundamental truths in construction management:
- A contract construction company’s measure of profitability is entirely driven from profitable projects.
- That the project is the hub of financial interest and company financials are not a good measure of project success.
I’ve had the good fortune of working with hundreds of construction companies over the past 25 years. Many of these companies are now years on, still running very successful companies. So how do some contractors manage to ride the ebb and flows of the economy while others die a horrific death when things dry up? Experience has shown me that companies with a clear visibility of job cost reporting have a much greater chance of sustained profitability. So what is job cost reporting and how do you achieve it?
First – anyone responsible for delivering projects should have skills to assess the size and risk of an awarded project. From a cross section of typical projects your company delivers, rate the value / risk of your project. (Length of project, contract structure and estimated value) all play into that assessment.
Second – each project classification should have a different approach to how it is managed and reported on.
Let’s think about it – you’re not going to be tracking purchase orders (committed cost) against a project that will be completed in two weeks. You might raise purchase orders but the project will typically be completed before the supplier invoice is received. Your job cost reporting will be a post-mortem not an earned value report. So large projects are managed and reported on differently than short duration projects. Typically short projects are no longer that 6-8 weeks or one invoice.
Third – because a project will have multiple moving parts (monthly claim, current budget, cost to date, up-to-date variations, construction schedule) all of which need to work in unison to determine your company’s project earned value (WIP).
These three elements – Project Assessment, Project Classification, and Project WIP are cornerstones of project profitability. Without those three elements and the reporting visibility to gauge project success contractors will struggle to scale their business and set targeted weekly objectives. To test my theory you need only to ask yourself. "Can I get my hands on weekly job cost reports showing profit position for all active projects in my business?" If the answer is no - you have critical work to do
Closing – the construction industry is a dynamic industry. After all, that’s why most of us have gravitated to it. We like to build things and make things work. But all too often that passion is not placed supported by accurate financial numbers. It you would like to future-proof your business and build a model for successful projects, accurate estimates and effective job cost reporting will always be the ingredients for project success!
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