General contractors and subcontractors estimate that the cost of floating payments for wages and invoices represents $136 billion in excess cost to the industry, a 36 percent increase from the cost reported in 2020. Findings indicate those costs are passed on to real estate developers and financiers in the form of project delays and higher bids from contractors.
Project forecasting, also known as “projections,” is a function of construction planning and execution that is relatively easy to understand but incredibly difficult, first, to do correctly and second, to continue to do with accuracy. Knowing capital needs on a construction project is critical to ensuring that proper cash reserves and interest reserves exist.
Essentially, a project is scoped for duration, cost, and performance. A project’s most current figures are taken and an incremental, detailed forecast is created to give relatively accurate predictions and guidelines to follow so that projects adhere to budget, time and quality expectations. This helps a project manager break down, step by step, the project from start to finish.
It is important to track the actual project progress against the projection to identify significant discrepancies. When there isn’t alignment between the current state of the project and the forecasts, the project manager has two choices: figure out how to get back on track with the forecast or alter the forecast to create a more realistic project expectation.
Projecting the timing of costs throughout the life of a project naturally leads to capital planning. In pre-construction phases, an accurate projection enables a development team to predict the exhaustion of their committed equity. The team will be able to determine the extent and timing of capital calls from their equity partners thanks to the cost projection.
A powerful projection built in an integrated software solution also provides important benefits during the construction phase. As progress is made on the project, actuals feed into the projection to create the most up-to-date prediction of the capital needed to complete the project. Development managers can see the premature exhaustion of a loan much earlier and take the necessary steps to avert unforeseen equity injections and delays.
Like previously stated, the initial forecast is just the first piece of the puzzle. The forecasting metrics at every stage of the process thereafter are equally critical to the success of the project.
Project forecasting is important at every stage of the project’s lifespan for many different reasons.
Creating a forecast is one of the earliest things a developer does when the development idea starts to take shape. Money is needed to move the project forward for everything from permitting to securing funding. As the project progresses from stage to stage, it is critical to have a project forecast so all parties involved know what money comes from where and for what.
For example, a project forecast can dictate the exact amount of money a project will need for the next six months assuming everything goes as planned. This helps with gaining funding from an equity partner. This forecast then moves to a lender in order to obtain the loans. A project forecast ultimately helps the developer determine when cash is needed so the developer can plan accordingly.
Project forecasting later on in the project helps the developer stay on track. The forecast helps ensure construction isn’t behind and can help identify when more capital will be needed to finish a project. Oftentimes projects hit roadblocks because money wasn’t appropriately allocated or additional funding wasn’t added when there was time to adjust the budget.
How is project forecasting typically done?
The current process is complicated to put it lightly. Formulas for projections are created in spreadsheets. Not only are these formulas intricate, they are extremely fragile.
Then as the project moves forward, these values have to be adjusted to factor in time, budget and additional costs. These formulas have so many components and then have to be tweaked and adjusted in the spreadsheet. At this point, they have so many factors that they are more than formulas. They are algorithms. Unless someone is a developer by day and coder by night it is an extremely taxing meticulous process. Developers are constantly tweaking formulas and complex spreadsheets which leads to costly errors and often delays in construction and funding.
Why isn’t there an easier way to do this critical task?
We’re so glad you asked.
Project forecasting with Rabbet
Rabbet’s Projections feature simplifies, streamlines, and automates this intricate and necessary process. Rabbet users are able to forecast what funding sources are going to be drawn during which months on the project. This information can then be used to ensure sufficient interest reserves remain available.
Rabbet easily configures a forecast by applying linear, manual or s curve projections to line items or divisions on the project budget. The software can automatically pull and populate data from budgets, invoices and documents. And the real kicker is that Rabbet systematically updates forecasts and compares projections versus actuals to confirm that the project is staying on track.
Like we said earlier, forecasting a project in a traditional spreadsheet is complicated, inefficient and time consuming.
If you would like to learn more about how Rabbet can help you mitigate costly errors and delays, schedule a meeting or a demo today!