Forecasting – The Single Most Misunderstood Word

Mention the word “forecasting” to many construction company owners and then watch their eyes start to glaze-over. Talk about forecasting for more than ten minutes and then you can observe the bobbing of the head —don’t mistake that head bob with a “yes nod”—it’s the one associated with dozing. So, why is forecasting such a boring subject for most construction company owners? The powerful benefits of forecasting are simply misunderstood by most.

Why Bother to Forecast

Running your construction company without an operating annual forecast, which is broken down into monthly goals, is akin to building a construction project without a plan in mind—just winging it from one day to the next. Now, hardly anyone will dispute the fact that building a construction project in that manner is inefficient and costly. The same can be said about running your construction company without an annual forecast.

Lack of forecasting is a poor business practice, which is costing you money by not maximizing the company’s potential. This lack of planning usually permeates throughout the company’s culture, resulting in a reactionary culture as opposed to the much more efficient and profitable, proactive culture. A reactionary culture often results in a workday being consumed by “putting out fires”. A more efficient and profitable method is to have a proactive culture which through anticipation and foresight prevents the fires from starting in the first place. Forecasting is a forward thinking process which helps to create a more profitable proactive culture.

How to Improve Your Profits with Forecasting

Maybe this analogy will help to understand the power of forecasting. When a project is bid, an estimate is generated (hopefully broken into phases and based on true costs). This cost estimate becomes the benchmark from which to measure the construction operation’s performance. Their goal is to complete the job with less costs than what was bid while still meeting the quality requirements.

A forecast serves the same purpose. The forecast is the benchmark from which to measure the collective efforts of the team. It creates goals. Developing a forecast is a method of establishing goals for your sales/estimating and construction operations. Imagine your sales/estimating team working towards meeting monthly goals of landing new work. Imagine your construction operations team having monthly goals of how much work to complete.

Once you can forecast how much work you can complete during the course of the year, you are in a better position to establish an overhead budget required to support the successful completion of the forecasted work volume. Once the overhead budget is established, you can now determine how much profit you can make during the year if the goals are met.

Components of Forecasting

1. Sales Total
   • a. Backlog Forecast
   • b. New Contract Awards Forecast
   • c. New Sales Created From the New Contracts
2. Costs of Completing Work
   • a. Direct Costs
   • b. Indirect Costs
3. Gross Margin (Sales – Direct Costs – Indirect Costs)
4. Operating Overhead Budgets
   • a. Departmental Budgets
   • b. General & Administrative Budgets
5. Net Profits Before TaxesThe forecast becomes the benchmark from which to measure the performance of the key components of your company — getting and performing the work. The forecast is the backbone of our Just Rewards system of business management. It will also become the backbone of your company culture…making that change from the costly reactionary environment to a more profitable proactive company culture.

Imagine your team of employees striving to beat the forecast. Imagine your employees wanting the company to make as much money as possible, and striving to make that happen! Isn’t that type of company culture you want? Our Just Rewards system of business management will create this type of environment in your company. If you feel like you are sometimes the only one who really cares about the profitability of your company, we can help you change that unprofitable environment. If you truly want to make more money, and are not using a system comparable to our Just Rewards method of performance management, the time to change your company’s culture is now. Let us help you develop a more profitable, forward-thinking, proactive company culture.