The role of a financial professional in construction is different than in any other industry. Managing the financial inputs, throughputs, and outputs in construction are complicated by the unpredictable nature of the source data.
Construction financial professionals (CFPs) can often be the last ones to find out about upcoming projects, their costs, and cash flow requirements as well as the impact on the company’s overall financial performance. This lack of insight into the pipeline and backlog forces CFPs to rely on linear projections and predictions, which presents a challenge to projects and budgeting. However, these challenges can be overcome by CFPs getting involved in project operations early and often to gain visibility to the pipeline and backlog information as well as to provide valuable input to project financial planning.
This article explores pipeline (e.g., business development, potential jobs) and backlog (i.e., awarded work that has not yet started) by providing a point of view and recommendations for CFPs to help them transfer linear projections into more accurate nonlinear, historical performance-based projections and budgeting.
The term preplanning is unique to the construction industry due to the lack of advanced planning. CFPs along with their project managers (PMs), who operate with more data, primarily rely on financial reports, which are after-the-fact in the best case. As far as the ability to course correct based on the actual work performed, timely decisions are impossible through the rearview mirror of financial reports.
In the field, preplanning refers to any planning that happens before the job starts. In other words, planning the work and resources early is often a challenge due to the lack of, or changing, information.
This challenge continues from the field to the business, where many construction company owners are tradespeople themselves, having once been in field planning. When building on their success with minimal information, it becomes a challenge to depend on data for decision-making and business planning — relying on CFPs and good accounting systems becomes critical.
However, information about the pipeline and backlog doesn’t always live in accounting; at best, it is kept in a spreadsheet, but there are often a lot of informal agreements with customers that aren’t incorporated into that spreadsheet. So accounting will only know about the upcoming work if a PM or estimator gives them input, which does not always happen.
To connect the front-end of the work and capital flow in a construction business, CFPs must be able to see the input, throughput, and output of the work inside of the company as well as out in the field.
One way of managing the flow of information in many industries is through digitalization, commonization, and interconnection (DCI™) of the data sources and their inputs. The process starts with pipeline, backlog, and project tracking (including procurement) and is finalized with accounting and financial reporting, including data quality analysis of gaps among any of the sources.
Pipeline & Backlog
Through our work in the construction industry, we have come across various understandings of the pipeline and backlog.
There are three general mindsets when it comes to measuring, tracking, and managing this first step in the flow of information:
1. Ignorance is bliss.
- We don’t have a pipeline; we bid one job at a time.
- I’m more worried about running current work than tracking backlog.
- It’s too tough to keep up with it, and my business is doing fine.
2. Sailing in smooth waters.
- We have a consistent client/work base, and I’m not worried about getting future work.
- I’m not looking to grow or expand outside of our current base; if we just keep doing what we’re doing, we’ll be okay.
- I have simple tracking on my computer of the jobs I know are coming up.
3. Expansionary and risk-taking.
- We’re trying to grow (geographically, market/niches, volume, etc.), and I need to align our strategy with a view of what work is available.
- We’ve grown, and I can’t keep all the bids, customers, and work we’ve committed to in my head or in our current systems anymore.
All three mindsets can benefit from the digitalization of the pipeline and backlog for interconnectivity.
By providing a point of view for CFPs, this can help transfer their linear projections into a more accurate nonlinear and historical performance-based projection and budgeting; segregated data about performance provides insight into typical performance of certain groupings of projects (e.g., by customer, location, type of work).
Life & Work Are Not Linear
When data for daily schedules, weekly and monthly job progress, and overall construction put in place is visible and trended, it can show that construction is not “linear.” Yet, accounting systems or other tools forecast the backlog as though it is equally divided in time.
For example, if your estimating department just won a 10-month, $10 million job, the assumption is that $1 million worth of work will be performed per month. For macro planning on that job or a few others, this might be good enough; however, once you start stacking these linear scenarios on top of each other to aggregate company resource planning, the differences become significant.
What once looked like a need for 35 workers in three months could be 70, and what may look like work ramping down in six months could be just the opposite.
As shown in Exhibit 1, industry data shows that construction goes through very consistent cycles, and the same holds true for your projects. Companies may have a slightly different nonlinear profile depending on the type of work, approach to the four phases of construction (planning, procurement, installation, and closure),1 etc.
Exhibit 2 shows a comparison of a linear manpower plan for a project with the nonlinear projection. Note that in a linear labor allocation backlog model, the labor is applied straight through the duration of a project; however, the nonlinear allocation of labor projection considers labor loading according to labor usage intensity, where it would use more labor when the project ramps up.
The nonlinear projection is based on industry-wide data collected by MCA, Inc. over 20 years based on true project progress (percent complete of work), independent of their duration and size. Planning and forecasting manpower and other resources on your projects should consider this nonlinear model.
For example, companies should look at the difference of weekly and monthly hours needed for their company when a linear model vs. a nonlinear model is used. It was found that, in some weeks, the difference represented 2,000 hours of work (roughly 50 people).
MCA, Inc.’s approach of DCI™ uses historical and aggregate data from estimating, field, and accounting databases to develop these nonlinear models for the industry, company, and specific project conditions.
For example, when studying one company’s job progression and performance on over $100 million in projects that occurred over a period of five years, the model of comparing and projecting manpower planning for linear vs. nonlinear was the most common option.