18 Financial Planning Tips for Construction Projects
A construction project’s budgeting and financial planning strategy relies on balancing cost controls with quality control, sustainable choices, efficient scheduling, client expectations, and health and safety. What management can afford defines how a construction project is carried out, which guides decision-making regarding costs and cash flow.
Financial planning is essential and requires time and effort, but it is also one of the best ways to ensure that project guidelines are followed. Here are some useful financial planning tips for construction projects.
Start with a Realistic Budget
Create a realistic financial plan and ensure stakeholder interests are fully aligned. Itemize every cost for transparency and accuracy. Be honest and realistic about the financial support required to deliver the finished product that the client desires.
Listen to Experts
Don’t hesitate to seek the counsel of cost estimators, materials suppliers, and/or contractors to develop an accurate perspective on what is best to spend on a given cost category. Combine this with your knowledge of historical data and market rates.
Consider Cost Saving Strategies
There are dozens of ways to cut costs on a construction project, which should be considered in your financial planning.
Purchase materials in bulk where possible. However, be careful not to overbuy as well. Renting equipment instead of buying. Servicing this equipment regularly to prevent work breakdowns.
Track Changes with Contractor Accounting Software
While a project scope ideally won’t change, there is always a risk of financial overruns. Track these changes with contractor accounting software, regardless of how your budget and costs adjust. Ensure you document financial details about materials, labour, and timelines in real time.
Analyze Vendor and Supplier Contracts
Review your contracts with vendors and suppliers. Look for areas where you can negotiate better pricing or more favourable terms. If that option is available, negotiate discounts or extend payment terms.
Include a Contingency Fund
Delays or unforeseen expenses are common in construction. A contingency fund ensures you remain financially stable through any such development. If the fund remains unspent at the end of a project, refund this part of your budget to the client.
Secure Financing
Where you get your financing should be carefully evaluated and secured before beginning a project. Ensure any financing aligns with the construction project budget and repayment capacity.
Keep Detailed Records
Keep your contractor accounting software handy and continue adding detailed records of financial agreements, payments, repayments, and more. Properly schedule how you move project funds so there are no financial penalties.
Prioritize Cash Flow
I monitor cash flow to ensure sufficient funds for each continual project phase. I track incoming payments and outgoing expenses in real time using contractor accounting software. Managing cash flow prevents work stoppages and maintains supplier relationships.
Process Change Orders Promptly
Do not wait any longer than needed to process change orders. Delayed approvals can disrupt a project’s budget and cash flow. Track and manage change orders promptly to prevent financial discrepancies.
Research and Compare
Protect your budget by researching expenditures, such as materials, and ensuring you invest it in the right areas. Compare your costs to previous projects. Look for alternatives that cost less if you are unhappy with current spending.
Include Contractual Provisions
Cost variability is a risk on larger projects that could last years. Consider adding provisions to the project contract stipulating that any expenses that increase during a project will be offloaded to the client, not the contractor.
Review Financial Reports
Construction financial software can be programmed to generate financial reports that track project performance automatically. Carefully review this data to identify issues before they escalate into something more. Use these reports as a bedrock on which you can drive decision-making.
Track Labor Costs
Monitor labour productivity to ensure that those you’ve hired are completing the work they need to complete within the given time frame. A lack of monitoring in this area can easily lead to cost overruns and derail financial planning.
Automate with Software
Use construction accounting software to automate time-tracking, payroll, invoice collection, and other administrative elements of financial planning. This can save a construction accountant or manager several hours throughout a project.
Monitor Overhead
Track indirect project costs, such as office rent, utilities, and maintenance. If left unmonitored, these expenses can reduce profit margins.
Communicate Expectations
Discuss finances with all project stakeholders. The clearer your communication, the more aligned everyone will be. Transparency fosters trust and collaboration at the management level.
Optimize Your Tax Planning
Consult a tax accountant to ensure your spending aligns with tax optimization. Take full advantage of tax deductions and incentives. Track deductible expenses using contractor accounting software and work to minimize errors and/or penalties.