Alex Hall, head of solutions engineering at Access Construction, discusses the difficulties faced by the sector when predicting project costs – and how construction-specific technology can be used to achieve accurate forecasts.
The 2024 collapse of ISG is an all-too-grim reminder that cashflow can be a killer in construction. Alongside the jobs lost within ISG, both suppliers and subcontractors to ISG are failing or floundering due to the tight-knit nature of the industry.
Cost forecasting sounds like a straightforward process, but construction is not a straightforward sector, and unexpected costs can lead to project and even business failures. Construction is unpredictable, and anything from a patch of bad weather to a poorly-communicated delivery delay can lead to huge consequences and strain on a project’s cashflow.
While completely accurate forecasting is not possible in construction, and cost forecasting will always be a guess, better forecasting is possible if the sector moves away from the dream of foresight and focuses on hard data, especially building on historical data.
Construction forecasting currently focuses on aggregating lots of small predictions in the form of CVRs (cost value reconciliations), project programmes and site reports. The logic is that by averaging out a large number of small predictions, a business can foresee the trajectory of a project.
However, this isn’t true forecasting. A more accurate forecast comes from statistical analysis of up-to-date data, which can then be compared against historical trends. Data collected around previous projects can be used as accurate benchmarks when costing and forecasting a new project, adjusting for changes in inflation, labour and material costs.
Using financial management software built for the industry helps leaders in construction apply this methodology by saving historical data on the cloud and generating cashflow forecasts based on previous data.
The ‘race to the bottom’
A combination of low productivity and low technology investment has led to the construction sector being trapped in a ‘race to the bottom’ when it comes to forecasting costs around project bids.
As an industry, business cost decisions are being made based solely on reporting from the people delivering the work themselves, and a lack of innovation means accurate data isn’t being captured and correlated for accurate cost forecasts. Project costs can easily get out of hand when there isn’t a second pair of eyes coming from the view of true statistical analysis.
Other industries, such as manufacturing, deal with risk through thorough statistical analysis and forecasting and have seen long-term success as a result. Construction’s heads-down, short-term approach can lead to the out-of-control cashflow and bad debt which leads to insolvency.
Construction has unique problems that make predicting cashflow extremely difficult. For example, long delays between completion of work and payment, and design changes and rework that lead to a murky picture of what income can actually be expected. These issues multiply the further you go down the supply chain. A change in groundworks, for example, will result in a delay to all remaining packages on a project.
How technology transforms construction forecasting
When construction companies shop for technological solutions, it is usually to solve a specific problem, without applying a long-term vision of managing risk and controlling cashflow into consideration. Construction businesses need to confidently invest in the innovation that is desperately needed to help with both forecasting and cashflow.
Enterprise resource planning technology like Access Coins can transform the way businesses track, forecast and measure cost impacts by providing a single source of truth for data, streamlining communication and collaboration, and helping leaders manage and even predict risks coming down the line.
Investing in technology built for forecasting will stabilise construction cashflow and help the industry truly grasp costs in volatile times.
Watch our webinar on Mastering Cost Control in Volatile Times in association with Access Coins on-demand here.
