Financial management of construction projects: cost management best practices for the construction industry
Financial management of a worksite is at the heart of the success of a construction project. Along with meeting deadlines, it is one of the key challenges for construction companies when managing a project. How can this vital activity be managed in order to keep costs under control? We will take a closer look.
1. Understanding construction financial management
Before identifying good practices for successful financial management of building works, let’s review the main elements of this activity.
What is meant by construction financial management? See more details
Financial management forms an integral component of construction management. Financial management of building works refers more specifically to managing the economic activity of a construction business. Its objective is to ensure the profitability of operations and, therefore, the financial health and durability of the business.
Financial management can be divided into two pillars of equal importance: budget forecasting, covering the financial planning of the project, and financial monitoring, which must be undertaken with regards to the progress of the works. These responsibilities lie with the company in charge of undertaking the works, the main contractor.
What jobs does financial management include?
Budget preparation, cost forecasting, invoice monitoring, tracking actual costs, coefficient calculation, price revisions… there are many varied jobs linked to financial management. Several professions are key to this financial management activity: foreman, site manager, team leader, works manager… and of course, the entire financial department of the business, including the Finance Director (FD) and financial controller.
2. The challenges of financial management of construction projects
Good budget management by construction financial managers impacts the entire business. Let’s review some of the main challenges.
Works planning and financial monitoring of sites: protect your profit margin
There is a simple principle at the root of financial management: provide the client with a competitive total price and then keep to this quoted price, while ensuring an adequate profit margin.
In the construction sector, this forecast margin is generally quite narrow. Yet without a projected plan and careful monitoring, the project costs can rise dramatically, jeopardizing the actual margin.
It is therefore extremely important for the main contractor (meaning the entity designated by the contracting authority to undertake the project) to closely monitor the cost of the works throughout the course of the entire process.
Pricing studies, a strategic component of construction finance
A precise, detailed and up-to-date estimate of budget costs is indispensable for correct pricing studies. Before starting a project, it is vital to estimate the forecast costs accurately.
Once the costing has been done, the company can then add its profit margin, and thus achieve a reasonable sale price which enables it to ensure profitability.
Carrying out price studies is a strategic activity, in a world where costs (of materials and labor etc.) are extremely volatile. While a price adjustment is sometimes possible, it is not always well received by the client!
Good cash flow management is an advantage when it comes to the unexpected
Another challenge in the financial management domain of construction businesses is having the capacity to deal with unforeseen financial issues and make appropriate financial decisions according to the situation. Payment delays, unexpected expenses, penalties for missing deadlines… Accounting practices such as good cash flow management enables companies to manage these costs while awaiting future income.
3. Financial management tools for the construction industry
Financial management in the construction industry is a complex domain, requiring a high degree of accuracy and attention to detail. To achieve this, having good tools is vital.
From managing budget forecasts to monitoring costs during the course of a project, there are many tools available for construction businesses. To ensure better management and a more streamlined approach, it is important, however, to choose customized tools that are both effective and easy to use.
Tools that are designed for the construction sector will enable you to plan, monitor and control the costs of your projects more effectively and efficiently and make sound financial decisions.
Excel spreadsheets, for managing small projects
Although software tools are easier to use than spreadsheets, the advantage of Excel is that it is already available with no additional costs if you have the Office suite.
Of course, planning and monitoring budgets in an Excel spreadsheet requires careful use and attention to detail. But for a very small business, Excel can turn out to be a suitable tool that many managers are already familiar with.
But do be careful if you manage projects of more significant size or greater in number: numerous inputting can quickly become time-consuming as well as a source of errors. Ultimately, an Excel spreadsheet is a limited tool if you want to have a good overview of your operations or if you are seeking a collaborative tool.
SMEs and large companies therefore tend to use other tools that are more suitable for their business activity.
Software for construction management
For more complex projects, a software tool designed for construction management will enable businesses to ensure their financial management is robust, effective and efficient by providing a number of advantages.
The collaborative aspect of the software will enable simplification of the collaboration between the various stakeholders involved financial management, from the planning stage through to monitoring the progress of a project. These digital tools are often available in SaaS mode (Service as a Software), which enable access from any location.
It is important here to choose tools that will communicate with each other, through integrations, which will enable all stakeholders to work on a single source of reliable data.
Time savings and error reduction are other significant advantages. By reducing repetitive tasks with low added value, such as multiple inputting of data, management software frees up teams’ time to then work on their core jobs.
Lastly, by centralizing the information, management software tools provide better visibility of the available information. This has a notable impact on strategic and financial decision-making and responsiveness to unforeseen cost overruns, which leads to better informed financial monitoring.
Mobile apps, badge readers and other time tracking tools
Communication is not always easy between sites and offices. However, efficient and effective financial management requires having continual access to an overview of the costs incurred in the field.
This is the role of time tracking tools: mobile app, manual clock-in machines, RFID terminals or virtual trackers… They enable accurate up-to-date estimates of the labor costs of construction projects.
By facilitating regular tracking, they enable responsive cost management: plans can be adapted without delay and budget overruns avoided.
Consider choosing a specialized site time tracking app which will be widely adopted by teams and can be used with all types of time trackers.
4 steps to ensure efficient and effective construction financial management
Financial management of a construction project is a complex job that requires meticulous planning and flawless cost control. To successfully manage this activity, it is vital to adhere to certain good practices.
In this paragraph, we will review 4 key steps to ensure efficient and effective construction financial management.
1. Robust financial planning, at the heart of business profitability
The financial planning of a construction project is a crucial step to ensure successful financial management of the work. It enables the financial forecast of the project to be established and the expected costs and expenses to be anticipated.
To ensure effective financial planning of a project, it is essential to take into account all the aspects of the works, from design to completion. It is equally important to regularly update the financial plan as the work progresses over the course of the project.
Well thought out financial planning means finance-related surprises can be avoided and project profitability can be optimized. It also allows cash flow needs to be anticipated, which will enable optimal cash flow capability for the company.
Furthermore, financial planning of projects is closely linked to monitoring the cost of works:
- Planning is a prerequisite for accurate monitoring. A business must be able to identify any differences between the forecast budget and actual costs immediately. This cannot be achieved without accurate and detailed forecasting.
- Finally, accurate budget monitoring enables the budget forecasts of future projects to be refined, and even the planning of site teams to be adapted with a direct impact on the calculation of related labor costs.
2. Cost monitoring, an essential step for good budget management
Managing costs and margins is a key factor for successful financial management of a construction project. It means tracking the actual costs of the works which leads to optimized project profitability. To manage costs and margins effectively, it is vital to take all project costs into account, including indirect costs.
To successfully manage costs and margins, it is also critical to regularly analyze the differences between the expected and actual costs of a project. This analysis allows businesses to take any necessary measures to limit budget overruns and optimize project profitability.
Responsive cost monitoring will enable a company to rapidly adapt team planning in order to avoid delays and budget overruns. Financial management is therefore closely linked to tracking work time and planning field teams.
3. Up-to-date pricing studies, the key to remaining competitive
Accurately monitoring the various components of a project’s costs means being able to keep up to date with the actual budgets required for these different components. Construction is not the same as it was 10 years ago. Materials and techniques are constantly evolving, as are legislation and the importance of energy efficiency.
Pricing studies must therefore also be constantly updated on the basis of data that is as accurate and recent as possible. Once the final price has been fixed on the basis of budgetary expenditure, it is generally very difficult to adjust it upwards. Despite everything, the proposed price must remain competitive: it is therefore vital to have a clear overview of expected expenditure!
While public contracts allow for costs to be updated, according to coefficients calculated from a specific index, this is not the case for private contracts. If there is no revision clause stipulated in the initial contract, it will be difficult, if not impossible, to get an increase to the total price accepted, even if it is entirely justifiable.
Whether for public or private contracts, accurate cost monitoring will enable a business to identify if a price adjustment is necessary and, if so, to justify it.
4. Managing payment and invoicing timescales: avoid payment delays and improve your cash flow
Managing payment and invoicing timescales is an essential element for managing the financial side of projects successfully. It means companies can guarantee optimal cash flow for the business and avoid payment delays which can be detrimental to the profitability of the company.
Payment arrangements must be clearly stated in contracts between main contractors and contracting authorities. It is then vital to establish clear procedures for invoicing and monitoring payments and to define the measures to be taken in the event of late payment.
Effective management of payment and invoicing timescales enables companies to improve the business’s cash flow and guarantee successful management of project finances.
Good cash flow management is even more important in a volatile socio-economic climate, as we are experiencing today.
Improving construction financial management
Good financial management is a key factor in the success of a construction project. From planning costs to monitoring expenditure, it is vital to have suitable tools and establish clear processes.
Fiscal discipline is critical, because ultimately, good financial management is a guarantee of the viability of your company. Choose your financial management tools carefully, establish clear processes and protect your profit margin and reputation!
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