The iterative process of forecasting predicts the final cost and revenue of a project and is typically performed monthly. Forecast values are used to analyze project profitability, cash flow, and when rolled up to a portfolio, program or corporate level, they can be used to make strategic business decisions. Therefore, the accuracy of a project’s forecast is incredibly important to spot deteriorating trends, identify areas with the most potential for improvement and simply make well-informed project and business decisions. A well-structured, month-end process is key to consistently generating accurate project forecasts. By following these top ten best practices to develop a well-defined month-end process for your organization, you’ll be off to your best start.
#1 Define A Month-End Schedule
A well-defined month-end schedule will ensure project teams submit forecasts on time and that values are based off the same date range and are in sync with accounting. To achieve the best results, you should first establish a standard month-end date. It is a best practice to line up your month-end date with a payroll week ending. For example, if your payroll week ending is Sunday, then a good date to use for month-end would be the last Sunday of each month. Next, you will need to determine the number of days from month-end till forecast submissions are due, which can be referred to as the financial period close date. This period between month-end and the financial period close date is a freeze period where new actuals should not be considered because project teams are working to finalize their forecasts. When determining what to establish as the financial period close date, consider how long it should take project teams to finalize their forecast. Allowing for at least 5-7 days will promote more complete and precise forecasts. Other things to include on your month-end schedule are forecast review dates, accrual deadlines and when standard reports will be run. Identifying all month-end activities and deadlines on a calendar view is the best way to keep project teams well-informed.
#2 Maintain One Central Repository for To-Date Information
To determine the forecasted final cost at completion, you must first ensure you have an accurate representation of the total cost to date. All to-date cost, work-hours spent, commitments and quantities completed should be maintained in one central location that is easily accessible to all who are preforming forecasting functions. It is a best practice for this forecasting hub to be dynamically integrated with your accounting system to ensure cost to-date information is automatically updated with no manual entry required. It should also be integrated with your progress tracking solution to ensure claimed quantities are always up-to-date and earned values are accurately represented. To-date information should be reported against a cost structure that is broken down to the level of detail required for forecasting. The more automated the method that this central repository can be populated by, the less time project teams will have to spend compiling information and the more time they can spend analyzing information. Cost to-date information should be validated for accuracy during month-end and accruals entered for any incurred cost not yet recorded.
#3 Perform Updated Quantity Takeoffs
Quantity-based forecasting promotes the most unbiased forecast values and should be used whenever possible. Our natural tendency toward what is known as “optimism bias” often leads to overly confident predictions of how much work remains and therefore, how much additional cost may be incurred. This human bias can be overcome, however, by performing quantity takeoffs, reporting measurable quantities installed or procured, and updating takeoffs as new information is received. Utilizing quantities in forecast calculations is only as good as the takeoffs are accurate, so forecast quantities should be reviewed every month-end. This is especially important on projects where design is not yet complete, and quantities are continuously updating with the latest revisions.
#4 Utilize the Best Forecast Method
There are several ways to calculate forecast values depending on what the secondary driver of cost is after quantities: production, duration or commitments.
- Production-based forecasting is ideal for direct labor activities where the cost driver is crew performance. How many units a crew can install per hour and how much a crew costs per hour drives the total cost of these items. This total unit cost can be multiplied by the remaining quantity to determine the estimated cost to completion (ETC). Production-based forecasting uses the following formula: Forecast at Completion (EAC) = total cost to-date + (remaining quantity X a forecasted unit cost). Initial forecasts will use the as-estimated unit cost for this calculation. As work progresses, the estimated rates should be replaced with the actual installed rates. This is called straight-line forecasting or average performance forecasting where the final forecasted cost is calculated by projecting the remaining work will be completed at the rates crews have performed the work to date.
- Duration-based forecasting is ideal for indirect items and equipment where the cost driver is duration. How long a salaried employee or piece of equipment is onsite or assigned to the project drives the total cost. For duration-based items, the quantity should be represented as a unit of time: hours, weeks or months. An indirect and equipment schedule should be updated based off updates from the master project schedule as part of every month-end. These updates will provide updated units of time required for each piece of equipment and staff. The same forecast calculation should be used for these items: EAC= total cost to date + (remaining quantity X forecasted unit cost). In this case, the remaining quantity is the units of time remaining, and the forecasted unit cost is the individual or equipment cost per unit of time.
- Committed-cost forecasting is ideal for contracted scopes of work and procurement items where the cost driver is contract and purchase order values, which represents commitments. If buyout is complete the formula for committed cost forecasting should be: EAC = total cost to date + open committed cost. If buy-out is not complete, then you will also need to add in the estimated values for any scopes or material not yet contracted.
#5 Automate Forecast Calculations
Advanced forecasting tools can automate all these calculations to reduce the amount of time project teams spend generating forecasts and reduce the risk of error. Utilizing a tool that automates forecast calculations also enables continuous forecasting during the month. This can drastically reduce delays in identifying areas of concern. With automated forecasting, project teams will have increased flexibility to perform what-if scenarios, can toggle between forecast methods and change forecast variables to quickly understand the impacts, allowing for smarter and faster decision making.
#6 Addressing Changes
As every construction professional knows, changes over the course of a project can have a dramatic effect on total cost and revenue and therefore, must be addressed during month-end forecasting. All potential changes should be identified and tracked on a change or issue log. When dealing with changes it is important to think about cost and revenue as separate but interrelated parts. The cost of a change should be forecasted if costs will be incurred regardless of if a change order will result, i.e., any changes on work that has already been started or changes that must be done to avoid other project delays. The revenue of a change should be forecasted based on the approval probability. Each potential change should be assigned an approval probability rating which, when extrapolated over all changes, will provide a total expected additional revenue. For changes that will not incur any cost until a change order is approved, i.e., a non-urgent owner requested change, then no cost or revenue needs to be forecasted until the month in which the change is approved. Some exceptions related to size and probability of such changes may apply.
#7 Conduct Forecast Reviews
Large-scale projects require many contributors to the total project forecast. The project team member with the most intimate knowledge of a scope of work should be the person responsible for forecasting that scope. This often falls on discipline leads who will need to submit their forecast for review. Discipline review meetings should be conducted with project leadership. These meetings should evaluate all notable forecast variances from the previous month, examine any notable deviations from the straight-line forecast, and identify areas of risk, overly optimistic projections or obvious sandbagging. A truly advanced digital forecasting solution should be able to easily compare such forecast values and flag areas to investigate during reviews. You will want to look for software that features comparison views built specifically to enable the most effective forecast review process.
#8 Maintain A Goal Forecast
The main goal of forecasting is to provide an accurate prediction of project cost and revenue. A secondary goal is minimizing month-over-month forecast variance, which often indicates low levels of accuracy and reduces forecast confidence. In order to reduce month-over-month variances, project teams may take a very conservative approach to forecasting. This can lead to missed opportunities to aggressively manage toward beating budgets. Therefore, project teams should also develop a goal forecast or financial plan that represents a more aggressive target. Teams should call out the ways in which they can achieve this goal forecast and actively work towards it. This financial plan and the means to accomplish it as well as variances from the previous month should also be reviewed during forecast review meetings to better hold teams accountable for their set goals.
#9 Manage Contingency Draw Down
Another way to minimize month-over-month variances is by strategically managing a contingency draw down plan. This starts by understanding the risk that contributed to the estimated allotment of contingency in the project budget. A draw down plan should be established at the time contingency is estimated. This plan may consider specific risk events, progress, schedule, achievement milestones, cost or more likely a mix of these. The contingency draw down plan should be reviewed during each month-end to determine if it is appropriate to decrease the contingency forecast based on conditions that have been met. All contingency draw downs should be noted with the reasoning to provide a clear audit trail and should be limited to only those with proper authority.
#10 Document Your Process
For everything we have discussed, it is crucial to document your month-end process so anyone on any job can read the standard procedure and know what tools to use, what to do and when, and also who is responsible for what. Documentation should include:
- Your month-end schedule
- What tools will be utilized
- How teams can access pertinent data
- Guidance on how quantities will be utilized
- What forecasting methods are permitted for various types of work
- How contingency draw-down should be handled
- What reporting requirements exists for forecast submissions
Ready to take a deeper dive? Find out how InEight Control can help you gain visibility into real-time construction budget and forecast scenarios for complete control of your project. Request a demo today.
