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Cost containment is the single most important component of running a successful, holistic construction firm. Unfortunately, cost creep is a prevalent issue across construction projects, with research suggesting that a mere 31 percent of projects come within 10 percent of their estimated budget. This isn't an issue contained to small-scale projects run by liquidity and talent-sapped firms. Large asset projects regularly take 20 percent longer to finish than scheduled and go 80 percent over budget — while 98 percentof megaprojects go 30 percent over budget. In other words, nearly every firm, of every size, struggles to contain costs.
Between productivity frictions, contractual misunderstandings, and insufficient talent, to safety concerns and material woes, there are plenty of pain points along the project journey that can immediately impact costs and profitability. But here's a simple truth: most cost overrun comes from poor planning.
The Link Between Cost Management and Planning
In our experience helping countless construction firms tackle their financial woes with robust predictive analytics, we've learned something: construction firms are great at calculating and planning for up-front costs (e.g., materials, safety equipment, etc.) and long-term pipeline financials (e.g., bids in the pipeline, potential cash flow, etc.). But most are poor at planning against mid-term costs. These are things like labor, cash flow, and overall cost-to-completion. This is the layer of cost management that typically trips contractors up.
Not only do these mid-term factors have a significant stake in individual projects, but they help you navigate your long-term vision by showing you where to point capital resources during influxes, troughs, and flat periods. Cost management is, above all else, planning. You can cut costs, improve labor, and increase productivity until your company is in tip-top shape. But if you lack a sufficient mid-term plan backed by analytics and concrete data, you're playing a guessing game. Really, it's easy to consider the short-term costs. And it's even easier to project out long-term financials based on margins of error. Successfully navigating the mid-term is challenging. How do you account for everything that happens between the project start date and end date in terms of cash flow and cost?
The Value of Mid-term Planning
The three biggest costs associated with the mid-term of projects are:
- Labor
- Risk
- Cash flow
These are areas where construction firms seriously struggle. Labor is often projected upfront, but in today's talent-strapped ecosystem, labor fluctuates throughout the project lifecycle — especially for multi-year projects. Unfortunately, most construction firms lack the analytical backend to project labor costs out over the entirety of their projects, which leaves them vulnerable to mid-project fluctuations.
Risk is another variable component of construction projects that can quickly change. You can't afford to react to risk once it's entered your project ecosystem. Understanding risk variables and predicting risk is the key to keeping costs flatlined during projects. But risk is tricky to project. You need to combine both past data with incoming data streams to analyze risk factors across your entire construction infrastructure. This requires a hefty amount of tech and forward-thinking.
Finally, cash flow is an imperative mid-term objective. Not only do you need to manage broad cash flow and push money into savings umbrellas and new projects in the pipeline, but you need to predict cash flow against variations in labor and risk for each project. Again, this involves predictive analytic solutions and plenty of data streams.
Reinventing Construction Financials With Briq
It would be nearly impossible to succinctly discuss every variable that comes with cost management in construction. There are simply too many. While we brushed aside the subject of short-term and long-term planning, they're still equally important — but generally better captured. Mid-term is where most companies struggle. Unfortunately, vaguely understanding project costs and requirements is no longer an option. Across construction and manufacturing, G&A expenses are rising faster than revenue growth (15.4 percent vs. 6.0 percent), and McKinsey estimates that there is over $57 trillion in infrastructure projects up for grabs over the next five years. Firms that can successfully contain costs while simultaneously driving productivity and making smart bid decisions stand to reap the benefits — which will offset the downward fluctuations in construction revenue.
At Briq, we developed our rich financial automation platform to tackle nearly every layer of construction cost management. Briq is purpose-built for the construction industry, and our end-to-end capabilities can help you understand the nuances of your project costs. Don't rely on long-term projects or short-term cash when approaching your projects. Understand the full value chain of each project in the context of labor, cash flow, cost-to-completion, and risk. This process starts with analytics, but it ends with purpose-driven strategies and plenty of mid-project decision-making.
