industry alert
October 21, 2013

Construction Industry Alert: The Importance of Accurate Cost Forecasting

Nicholas A. Barrell, Senior Associate, Audit & Accounting

Accurate cost forecasting is a crucial step contractors should not overlook. The estimated cost to complete is a key factor in determining just how profitable a contract will be. In the current economic environment, with competition very high and profit margins slim, even a small improvement in a contractor’s cost forecasting can have a significant impact on the bottom line.

The more accurate a contractor’s cost to complete estimates, the sooner management will be able to identify jobs with profit fade. This can provide management with an enhanced opportunity to improve a job’s profitability before it is too late. In the construction environment, funding for the next job can be directly impacted by poor performance on existing jobs. When a company has multiple construction contracts that are underperforming it can negatively impact cash flow with a resulting drain on its capital and credit resources.

Improving a company’s cost forecasting will allow management to identify key employees that are performing at a high level as well as identify other employees who, although valuable to the organization, may not be suited to work on a particular type of job. Project managers and field personnel who are excelling in their positions may be easily identified and given more opportunity to showcase their talents.

Lastly, third party users of the financial statements, such as banks or sureties, are now more than likely reviewing your company’s financial results on a reoccurring basis throughout the year. Inaccurate cost forecasting can impact such third parties’ credit evaluation of your company, which may lead to less favorable financing arrangements.

Improving your company’s cost forecasting will allow you to increase profits and take advantage of other opportunities.

We will be happy to provide further information relating to this subject.  For more information, contact Nicholas A. Barrell, Senior Associate, Audit & Accounting and member of Kreischer Miller’s Construction industry group at nbarrell@kmco.com or 215.441.4600.

 

Information contained in this alert should not be construed as the rendering of specific accounting, tax, or other advice. Material may become outdated and anyone using this should research and update to ensure accuracy. In no event will the publisher be liable for any damages, direct, indirect or consequential, claimed to result from use of the material contained in this alert. Readers are encouraged to consult with their advisors before making any decisions.