Navigating the world of construction financial management is a complex task, particularly for CFOs and other financial leaders who face the daily challenge of unpredictable project landscapes and the critical need for precise revenue forecasting. This is compounded by data challenges such as variability in estimates like cost-to-complete.

The importance of accurate financial forecasting and a clear understanding of your company’s financial health 
cannot be overstated.

This article addresses forecasting project revenue by identifying the unique barriers within the construction industry and providing actionable solutions for construction financial professionals (CFPs) to tackle data subjectivity. It also covers innovative approaches, the latest technology, and proven best practices.

Subjectivity of Project Data

At the heart of this challenge is the subjectivity of project data. From guesswork and assumptions to the inherently unpredictable nature of construction work, getting forecasting right is both an art and a science.

With only 31% of all construction projects coming within 10% of budget,¹ there is a constant struggle for accuracy in an industry of slim margins and huge risks. Hence, this enhances the impact accurate forecasting can make on the company’s ability to maintain profitability while also managing growth and financial uncertainty.

The right estimation of project revenues is critical since it eases the control of cash flow, allows for the efficient allocation of resources, and plans for a prospective project that is instrumental in obtaining finance, attracting investment, and managing stakeholder expectations.

Why Master the Forecasting Game in Construction?

In the high-stakes world of construction, accurate revenue forecasts are the cornerstone of your company’s strategy and financial wellbeing.

Project Revenue Forecasting: The Heartbeat of Construction Success

Forecasting revenue is more than just monitoring costs — it’s an appraisal of the whole project’s financial journey. This means carefully assessing potential income and project costs as well as when those dollars will hit your books — all while holding in line with accounting standards and contract terms.

It also allows a strategic point of view regarding investment opportunities in the market in general and measuring a project’s contribution to its larger financial objectives. This approach, in keeping with factors such as market trends and economic conditions, underlines the complexity and necessity of adroit forecasting in construction.

Elevating Financial Strategy With Forecasting Insight

Strategic forecasting for CFPs is the compass that guides through uncertainty, not only ensuring the company’s financial health, but also paving the way for strategic growth. This process demands a deeper understanding of both the minute details of each project and the wider market forces at play.

Project revenue forecasting is not just about the financial leader doing their job — it has wide-reaching impacts across the entire organization. Accurate forecasting not only protects a company’s financial position, but also forges a pathway to long-term growth and a competitive edge.

For example, if your organization has 200 projects at once, and if the forecast for just one project is off by 5%, then it might not seem like much. However, if that level of inaccuracy is consistently applied across all 200 of your projects, then the distortions are compounded.

A 5% cost overrun, for example, applied to work-in-hand of $500 million can lead to a $25 million budget gap, reducing your company’s cash flow and hence its ability to make payroll, reinvest in new projects, or secure financing for future growth. By mastering the forecasting game, your projects can be more accurately predicted.

In the tightrope walk of construction finance, where the margin for error is slim, the rewards for forecasting accuracy are significant, to say the least.

The Brains Behind Financial Forecasting

Gregg Steinberg, President of International Profit Associates, raises an important issue: too many construction company leaders, in the grind of daily survival, are shortsighted and lose sight of the big picture, which includes long-range planning and stability.²

In this context, one simple oversight in the world of construction mirrors something bigger: neglecting the strategic side of financial forecasting can endanger not only the immediate outputs of projects, but also the broader market value and potential sale price of the company.

Steinberg’s observations underscore the indispensable role of construction financial professionals in forecasting. They are about more than just the commitment to maintain the company — they are about taking the company’s worth higher in the marketplace.

In effect, CFPs are more than navigators of the uncertain waters of construction projects. Rather, they are architects of the bedrock of financial stability and strategic growth for their companies.

To put it another way: CFPs are the captains of the ship through choppy waters of subjective data, calling on their deep knowledge to sort through numerous factors to find reliable insights and improve processes for collection that are more reliable.

Navigating the Maze of Data Subjectivity

With estimations, projections, and assumptions as the primary tools for forecasting, the risk of inaccuracies is always looming, making the quest for precision an ongoing battle.

The Crucial Role of Project Managers

A key part of this forecasting challenge is project managers (PMs) because they are tasked with providing project cost estimates and forecast data, which can put them under a unique set of pressures that can, unintentionally, affect their projections.

There is also the unfortunate practice of sandbagging — intentionally overestimating project costs with a goal to create an extra safety buffer as insurance to cover themselves in case the actual costs are higher. That said, it is a hard task to manage expectations and, simultaneously, prepare for the unforeseen.

So, while it may offer some temporary relief and act as a safety net in the short run for cost overruns or delays, this strategy poses a big challenge — and headache — for CFPs. Using this method further complicates their work, along with that of their finance teams, who are working hard to achieve perfect financial forecasting and robust cash flow management as possible, driven by data that is as close to objective as possible.

Beyond Sandbagging: Other Forecasting Hurdles

Besides sandbagging, attempts to achieve accurate forecasting are littered with additional obstacles. From the unpredictability of change orders to the ambiguity of open commitments, factors such as these add layers of complexity, turning the task of budgeting and financial planning into a high stakes guessing game that many would prefer to avoid.

For example, unapproved change orders might drastically change the scope and cost of a project — changes to the forecast plans that could not be predicted and ultimately blindside them could lead to unexpected budget overruns.

Roots of the Subjectivity Problem

To understand and tackle the forecasting challenges in construction, it’s important to see the sources and underlying issues contributing to data subjectivity. When viewed in the context of the construction industry — with intrinsic complexities like fluctuating site conditions, shifts in regulations, and the unpredictability of labor and material costs — acquiring timely and accurate data becomes a challenge in itself.

The subjective nature of cost estimating — often influenced by PMs’ approaches of overshooting or undershooting budgets — further muddies the waters, worsening the reliability of the data that is collected. However, with such variability at the foundation of the subjectivity in forecasting, finance teams must move through these estimations to stitch together a coherent financial narrative.

Spreadsheet Dilemma & Human Error

Many turn to spreadsheets as the go-to tool for managing these complex forecasts. While an established tool, it comes with limitations in handling the dynamic needs of construction project management.

For example, accommodating real-time data updates and enabling seamless collaboration become very apparent. Plus, there is often human error in relying on manual input and updating activity, which leads to more subjectivity rather than generating concrete financial 
projections.

Interoperability Challenges & Joining the Dots

A stumbling block in achieving accurate forecasting is the difficulty of integrating all the data required across diverse platforms and systems. Through these interoperability issues, the ease and flow of vital information necessary to construct a proper forecast are affected.

Without an integrated solution, the data from multiple sources, such as project management software and accounting systems, cannot be easily rolled up into one place. This subsequently pushes the reliance on subjectivity to make interpretations that bridge the gaps — often ending up with forecasts constructed over incomplete or misaligned datasets.

Bridging the Technology Gap

A technology gap exists between the specific forecasting requirements of the construction industry and the generic functionalities of the most widely used software solutions in the market. Without industry-specific answers for modeling these complex dynamics of construction projects accurately, CFPs are left with inadequate tools that fail to cut through the fog of subjective data.

Overall, these challenges illustrate the intricate relationship between construction forecasting and the subjective nature of project data.

Cutting Through the Fog: Strategies for Dealing With Subjective Data

These strategies can help guide financial leaders toward more accurate, objective, and reliable forecasting practices that address the core problems that introduce 
subjectivity into the data used for forecasting.

Building on Solid Ground: Reimagining Traditional Methods

Traditional mathematical forecasting methods have their place in project revenue forecasting, as they provide a stable foundation. But there’s a pressing need to innovate these approaches to suit contemporary demands.

1. Simple Arithmetic Methods

Simple arithmetic methods are foundational to forecasting, offering straightforward yet effective techniques to anticipate future financial outcomes by adjusting current figures with growth rates.

The challenge in the construction industry, known for its frequent surprises, is to maintain the adaptability and responsiveness of these forecasts to accommodate unforeseen changes.

2. S-Curves & Earned Value Management

Consider S-curve and earned value management tools as the vital sign monitor of your project, tracking its progress and financial expenditure over time. They excel in providing a current overview of your project’s status. However, it’s crucial to remember that their precision hinges on the quality of data inputted.

In the ever-changing construction landscape, this necessitates a rigorous approach to maintaining your data’s accuracy and timeliness.

The Leap to Modern Software

The transition to modern software solutions represents a significant shift, akin to upgrading from a traditional map to real-time GPS. These advanced tools offer a new level of clarity and precision in forecasting, featuring live data updates, predictive analytics, and scenario modeling capabilities tailored for the construction industry.

For CFPs, this evolution means basing decisions on solid, current information rather than intuition or rough estimates.

Embracing Tech to Tame Subjectivity

The move toward dedicated forecasting software equips you with the latest technology to penetrate the fog of data subjectivity. The following highlights the key features that these modern software options bring:

Real-Time Data Integration

A real-time data integration is your connection to ongoing projects, grounding your forecasts in the most current realities. It emphasizes the importance of up-to-the-minute monitoring, ensuring that decisions reflect the latest developments rather than outdated information.

Automation & Standardization

These two practices reduce manual labor and minimize human errors, thereby streamlining the process, minimizing the work, and enhancing data integrity. Automating data gathering and applying uniform forecasting methods across projects not only saves time, but also boosts the accuracy of your projections.

Enhanced Collaboration Via the Cloud

Cloud-based platforms are like your project’s social network — a digital meeting place where everyone on your team, from the field to the finance office, can stay connected. This network is crucial for aligning efforts, verifying assumptions, and ensuring that all decisions 
are based on a unified understanding.

Fast Predictive Analytics & Scenario Modeling

Equipped with historical data and current trends, fast predictive analytics and scenario modeling tools enable forward-looking insights, presenting various potential futures to help you prepare for any eventuality. This capability is vital in an industry where change is the only constant, enabling proactive planning and strategic foresight.