Construction accountants understand the critical role of forecasting and work-in-progress (WIP) management in achieving financial success. Forecasting sharpens cash flow, improves cost analysis, and ensures accurate financials while also driving predictability, job monitoring, and cost control.
WIP tracks project costs and revenues in real time, capturing labor, materials, and overhead as work progresses. By aligning revenue recognition with project progress, WIP enhances clarity, reduces risks, and strengthens financial performance.
Cost Forecasting
Construction cost forecasting analyzes data to predict project costs. Forecasting empowers your team to make informed decisions on maximizing cash flow and reducing risk.
Key steps involve monitoring market changes, material delays, labor shortages, and any other project delays that may occur. Forecasting evaluates past and current project data to clear uncertainties, define objectives, and make accurate predictions.
There are several best practices when it comes to forecasting.
Cost Forecasting Best Practices
Using Real-Time Data
Up-to-date project data is essential to achieve an accurate forecast. This includes, but is not limited to, maintaining your actual costs of labor, materials, subcontracts, and equipment; keeping up to date on any estimate change orders; and even ensuring accuracy of the balances on your outstanding subcontracts and purchase orders.
Ensure all project data is up to date so that you have a strong foundation for every forecast.
Never Stop Reforecasting
Reforecasting is key to achieving accurate forecasts that capture all of the ongoing changes that can occur in the construction industry as they relate to your projects.
It also ensures that more informed project cost control decisions can be made through adaption to those unexpected changes that happen throughout the project’s life cycle.
Automation
Automating processes provides real-time visibility into the health of any job. By reducing back and forth communication and double-entry risk, it will also free up your time for more analyses and decision-making tasks.
Working with software that provides this automation to your workflow is essential to manage issues before they impact final job performance.
Project Scope & Duration
Breaking your project down into detailed deliverables (which are often made up of many layers) that have defined costs will aid in not only establishing a desired budget and project margin, but also impact the projects duration.
Once you have a breakdown of the detailed deliverables for your project, you can use historical data to see the timeframe you and your teams took to complete those specific tasks.
Cost Forecasting Options
There is cost forecasting software available to get you out of using stagnant spreadsheets that have no data connections. There are options available that connect to data that has been extracted from your ERP, include a job cost projections module, and allow project managers (PMs) to create cost forecasts.
Forecast to Complete & Forecast at Complete
The most effective solutions should allow you to forecast to complete or forecast at complete.
Forecast to complete calculates the remaining costs required to finish a job, adding to expenses already incurred. Forecast at complete estimates the total cost of the project upon completion.
Advanced software may also offer options for forecasting by buy out or cost complete methods.
Buy Out
Buy out applies when forecasting at the cost code level. It is a forecast entry method where the software calculates the forecast at complete to match job-to-date commitments, such as subcontracts or purchase orders, for the cost code.
This assumes that the signed subcontract or purchase order will cover the total cost needed to complete the task, making the anticipated final cost equal to the commitment’s total value (see Exhibit 1).
Cost Complete
Cost complete applies to forecasting at the cost code level. It is a forecast method where the software sets the forecast at complete to match the actual cost to date for the cost code.
This assumes no additional costs will be incurred beyond what has already been spent to date (see Exhibit 2).
Different Levels of Forecasting
Job Level Forecasting
Job level forecasting offers the least detailed perspective, focusing solely on, “What will it cost in total to complete this project?” Ideal for small- to mid-sized projects or new PMs, it supports a phased approach to the forecasting workflow.
Job Cost Type
Job cost type forecasting provides a mid-level detail, primarily for mid-sized projects. This level breaks down costs further, asking questions like, “What will the total labor or equipment cost be by the end of the project?” as in Exhibit 3.