Maestro Technologies - Intelligent management software for the construction industry.

The importance of cost forecasts

In a competitive environment, the ability to estimate forecasts can make a construction company successful or explain why it failed. The scarcity of qualified resources and increased price pressures for certain raw materials make the exercise even more difficult. The expertise required to conduct this exercise is also evident in preparing estimates for a potential project as well as the regular monitoring of existing projects. An organization with a strict procedure governing forecasts can detect potential profitability problems and increase the accuracy of its forecasts.

According to the document Construction Accounting Best Practices Guide on Revenue Recognition, published recently by the Canadian Construction Association (CCA), the estimation of total project costs is essential product information (revenue recognition) for construction companies. In fact, they are usually required to have access to the method for advancing work, which will only be reinforced with the eventual adoption of international accounting standards. The CCA recommends determining the progress of work by comparing actual costs to planned total costs, rather than by relying on invoicing to date or on certificates issued by architects and/or engineers. The approach recommended by the CCA matches the requirements of certain major external users of financial statements, such as banks and bond companies.

Directors of construction companies are therefore recommended to review their cost forecasting procedures in order to evaluate their effectiveness and reduce the risk of errors. Software solutions used for this purpose can make a significant difference. Organizations that use multiple information systems can find themselves with unreliable data and multiple entries for the same information, resulting in a demanding exercise that requires a great deal of time in addition to providing results that are unreliable and untimely. For example, some use a separate system for estimating, use Excel for cost forecasts and invoicing, and use their regular financial system. It then becomes difficult, if not impossible, to make the information match so they can use relevant and up-to-date information to create estimates and forecasts. Estimates may not include the most recent labour or materials costs, and future costs may be determined without knowing the actual costs.

There is no doubt that using an integrated solution for managing all of the above functions makes the procedure much more efficient and reduces the risk of errors while providing directors with the information they want in a timely manner so they can make enlightened decisions. This solution guarantees that estimates can be prepared with the most recent costs and can easily be converted into budgets to monitor actual costs. Invoicing done with the system makes it easy to recompile posted revenues. Having project managers enter forecast data with an integrated tool allows them to see actual costs, committed costs, and the effects of various future cost scenarios (entered in the form of unit costs, quantities or total costs) makes the entire exercise less tedious and encourages their participation in the process. The risk of error is also reduced by being able to compare new forecasts with those produced earlier and with the initial budget. Finally, management can use an operating report to view key information and/or projects whose profitability numbers deviate from the established standards (up-to-date or preview) at any time.

An integrated software solution and a strict process ensure continued improvement in the company’s skills in terms of forecasts. Such improvements are without a doubt an undeniable competitive advantage to differentiate themselves, achieve their profitability objectives and reduce risks.