Rolling 12-Month Forecasts for Specialty Trade Contractors

Construction financial professionals (CFPs) often view the budget process as something that must be done because it gives everyone a bar to measure success against.

However, what if the budgeting process was easier and provided real insight into a business?

For specialty trade contractors, revenue and net income forecasting can be especially challenging. Being one of the last stakeholders on a project and needing work to be executed quickly creates cyclical pressure, which is further compounded when less work is performed than expected. This cycle is very apparent in the annual budgeting process of trying to forecast the next 12 months of work.

This article shares the author’s experience creating a useful tool that took less effort than the typical budgeting process and yielded better results for the company.

The New Journey

After facing the challenge of several year-end cycles where best guesses failed to come close to reality, Tweet/Garot Mechanical’s operations team started doing a final quarter revenue forecast to create a better year-end plan. Projections for tax planning and decisions about capital improvement spending were impossible based on the information created 12 months earlier.

In order to make better decisions for the company, we needed better and more timely information.

We decided to embark on a journey that has had a profound impact on the visibility into our future, revolutionizing how we execute annual budgets. Our new view of the future workload has not only resulted in better year-end tax planning decisions, but also improved bid, capital purchase, and overhead investment decisions.

Final Quarter Forecast

In order to develop this final quarter forecast, each operational department was asked to identify what work they would have in the next three months. We also wanted to review the job schedule for any potential gains or losses that would have a significant impact on the financials.

Getting this information was difficult at first, as is common with most changes. To help engage our team, we started by soliciting their input on historical data, the potential future work list, remaining backlog, etc. By providing this starting point rather than a blank slate created astonishing results. We were able to forecast within a half percent of our net income, which made year-end planning more efficient.

After a few years of this fourth quarter activity, we considered whether we could follow this process throughout the year. It took a few quarters to perfect, but we successfully implemented a 12-month rolling revenue and net income forecast.  

Say Goodbye to the Annual Budget Process

One of the significant advantages of instituting a 12-month rolling forecast process was that we never had to go through the annual budget process again. Instead, when it comes to the annual budget, we pick a 12-month rolling period and use it for the basis. Then we focus on the indirect and overhead costs to support that workload as well as any capital expenses and promotional dollars we are going to commit.

This new process has saved the company significant time on the budgeting process because we only focus on the one component in which decisions do not change as frequently — general and administrative expenses. By building revenue forecasting into our monthly tasks, it takes less time to gather information and is also more useful.

The Buckets of Forecasting

To account for the variability in large project work vs. house contractor work, our forecast had to be separated accordingly, which resulted in three buckets (Exhibit 1).

Secured Work

Secured work includes any signed backlog that the company has. Our project managers (PMs) are asked to forecast the revenue by month so that we can get an accurate picture of what each month’s results will be. This may seem intimidating at first, but it’s just setting it up at the beginning of the job and then tweaking the forecast each month.

This bucket also includes any preventative maintenance contracts from a service perspective, which are even easier to forecast by month since they are driven by seasonal activity requirements that create revenue recognition.

80-90% Work

80-90% work includes any work that has been verbally awarded, where we are the only bidder, or are only participating in a design assist role. This also includes work from sites where we are the house (preferred) contractor and perform daily work there, but we don’t have a signed maintenance agreement.

This category is a good place to include significant potential change orders. If your company experiences a significant increase in contract value via change orders, then you could forecast this as a percent of backlog.

SWAG Revenue

Among other things, SWAG revenue refers to a scientific wildly-aimed guess. This is usually the remainder of the budget, though it’s recommended to check it against your prospect/opportunity list to ensure there is enough work in the pipeline to make it feasible.

In the near term (the next two months), there should be less than 5% SWAG; however, in months 9-12, 50-80% of forecasted revenue is often in SWAG. The bulk of our rolling 12 discussion is usually spent on this area.

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About the Author

Hope Voigt

Hope Voigt, CPA, CCIFP, is COO at Tweet/Garot Mechanical and is responsible for operational performance, developing leaders and teams, and overseeing process development.

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