The construction industry presents the challenge of a very complex business model, not least because of factors like subcontractors and extended payment terms.
Your individual business will be working across multiple projects, with each of these jobs involving a unique range of timeframes, budgets, business partners and suppliers. The cost, payment and value dynamics will vary across all projects and every element of this scenario is open to impact from changes in local and global conditions.
With this much going on, managing cash and accurately forecasting profitability is therefore a big test.
The amount of information you need to input in order to gain a clear picture of the cash position for your business is enormous:
- Work completed: by project and by subcontractor
- Costs incurred: by project and by subcontractor
- Work invoiced: by project and by subcontractor
- Long-term client retention debtors and associated cash collection
- Invoices paid
- Invoices outstanding
To generate an accurate model for future forecasting, each variable would ideally be provided at unit cost or exact value.
However, with this much data being generated within spreadsheets, the reality is that for simplification averages are applied. This will provide a relatively precise, one-off snapshot of the position of the business, but it is not at all helpful as an agile model which can adapt to changing conditions.
Following the initial forecast, changes in unit values can only be applied at global levels – to the average which has been applied. Even when using the simplified data which has been averaged out, modelling scenarios takes a significant amount of time when altering all of the variables. And of course the margin for error is larger in this situation thanks to the simplifications used with the data – the tool is undeniably blunt.
Initial estimates are made using similar simplifications, creating a very real degree of risk for the business. Working from inexact values to make big decisions can lead to a serious impact on cash, value and profitability for every project when considering the following questions:
- Supply chain: store materials on site or deliver ‘just in time’
- Which subcontractor to use
- Build on site or use off-site fabrication
- Which materials to buy and from whom
- Contract terms to agree with client
- Design changes to implement
- Accommodating speed of work: matching estimates to project plan and performance
A static model which requires manual updates to average values in order to reveal any form of insight based on updated circumstance is not going to drive profitable decision making. Your finance team need to be able to use a dynamic solution to provide more valuable, accurate, real-time insights.
Rather than having your teams using all of their resources combing through one billion pain points to desperately try and meet the evolving needs of your businesses, follow the example of NG Bailey and the Robertson Group and find a better way with IBM® Planning Analytics.