There’s a lot of potential opportunity in today’s construction sector. Unlocking that opportunity can often be a matter of gaining visibility over your market and operations.
The July 2018 update of the Australian Industry Group’s Performance of Construction Index found that it has now been expanding for 18 consecutive months.
So, construction continues to be an attractive opportunity, albeit one where success requires its own set of rules.
In particular, maintaining a cash flow positive and profitable construction business can often be a matter of gaining visibility. Having a full understanding of your internal operations and the external marketplace can help to ensure that business owners stay ahead of the market, the opportunities and any looming issues your projects may have.
To that end, here are nine tips that will help ensure greater operational and marketplace visibility.
Ensure that the information needed to monitor and make decisions about your projects is always available. To enable this, consider:
Project acceptance gate reviews
The aim here is to ensure that profitability and working capital requirements are clearly understood before accepting a new project. These reviews also provide a baseline for ongoing performance assessment.
A simple method to understand a project’s working capital requirements is to split revenue, expense and CAPEX budget for a project on a monthly basis, based on the expected timing of cash receipts/payments. From here, you’ll understand the funding requirement of each project throughout its term.
If a project requires funding (i.e. due to negative working capital), this will need to be considered in conjunction with your current cash position to determine whether the project is feasible and should be accepted.
Regular scheduled reporting
Make sure you identify under performing projects and liquidity issues on time. To do this, maintain:
A monthly project performance and liquidity analysis.
A monthly 3-way financial forecast, which integrates cash flow, the P&L and the balance sheet to provide a full picture of expected performance with a high level of rigour.
A monthly profit and loss report (P&L).
13-week cash flow forecasts.
Make sure that reporting is carefully constructed and detailed. Aggregated reports can often mask problems, because they typically combine revenue and expenses for all projects. Without clarity on individual project profitability, it is difficult to determine whether projects are making or losing money and to rectify issues at an operational level.
Automate your IT Systems to meet data collection, analysis and reporting needs. One way is to create templates for key reports mentioned above. The more automated the reports can be (for instance, via formulas in Microsoft Excel), the lower the risk of error. This will also improve decision-making by increasing the quality and timeliness of your financial information.
Standardise policies and procedures, ensuring that they are all documented, implemented and monitored. By having a standardised process for items such as project pricing, you will ensure you are always comparing apples with apples when deciding whether to accept a project.
Understand the big picture – the broader marketplace and the industry outlook. This plays an important role in identifying potential project risks and new opportunities for the future. Consider:
Take the time to get to know key industry stakeholders. These relationships are critical to good client and supplier selection and smooth project management. Understanding more about stakeholders can also be an important way to identify their needs, plus new opportunities and potential threats in the marketplace.
Stay abreast of the property market and becoming familiar with both local and international trends. The PCI report mentioned above provides a good example of why this is important. While the macro view of the sector shows that it is expanding, the detail behind that shows two areas of potential weakness. The first is the apartment market, which has been contracting for five months. The second is the rapid expansion of input prices. This is placing potential pressure on profitability and cash flow. The deeper the understanding, the better the decisions.
Keep sight of the strategic outlook. While managing the tactical day-to-day operations of a project are critical, maintaining a clear strategic outlook is key to identifying and managing potential future opportunities and risks.
Be diligent about security registrations, such as registration on the Personal Property Securities Register (PPSR). Registering equipment and contracts will help to mitigate potential risk if the project fails. Given its importance and complexity, it is often better to outsource the management of an organisation’s registry to specialists, such as PPS Solutions.
Maintaining both operational and marketplace visibility can be the difference between the success and failure of construction projects.
Without it, project managers run the risk of waking up one morning and finding out it’s too late.
With it, they can identify potential problems before they become crises.
And they can identify potential opportunities before their competitors do.
Which, all in all, makes the argument for increased visibility pretty clear.