Budgeting during a pandemic is not easy, especially for the construction industry. In the third article of our scenario planning series, review how you should approach budgeting for 2021.
Key insights
- Focus on contracts where you have experience and are reasonably certain you can make a profit.
- Once you determine the contracts you hope to win, convert your prospects to actual dollars spread over the months you will work on that contract.
- Leverage your teammates — sales managers, project managers, and accounting staff.
- Include a Statement of Income that compares actual to budget with a line-by-line narrative on significant variances in your standard monthly accounting package.
Need help budgeting for 2021?
As 2020 comes to a close, many organizations may have outstanding questions regarding how to approach 2021 budgeting. It’s important to have a plan in place, especially for construction organizations, to outline expectations for what you want to achieve in a particular period.
Budgeting has been imperative for construction companies in any business climate, but it’s even more important as we look to navigate COVID-19’s impact. The inherent issue with a budget — and where many contractors get stuck — is that it is difficult to effectively predict which projects will be available to bid and whether your bid will be the one that is accepted. As a result, many budgets never get off the ground because business owners don’t know where to start.
Budgeting is even more uncertain during a pandemic. In the third article of our scenario planning series, review how construction organizations like yours can approach budgeting for 2021.
Budget, forecast, and plan for 2021
Focus on contracts where you have experience and where you are reasonably certain you can make a gross profit that will cover the general and administrative expenses and allow you to generate a net profit. Then determine whether the budget will allow the company to pass debt covenants.
Next, tap into all your business contacts to gain a strong understanding of the current market and the contracts that may be available to bid. Discussions with your bank, bonding company, and chamber of commerce members should provide some clarity. Look for contracts available to bid on various construction bidding websites, as well as through your contacts with previous clients.
Once you determine the contracts you hope to win, along with your current backlog, convert your prospects into actual dollars spread over the months you will work on those contracts. Your team is your most valuable asset during this process. In-house sales managers, project managers, and accounting staff should all assist and have input into the process. For instance:
- Sales managers can help estimate what bids are likely to be successful.
- Project managers can forecast the revenue and expenses by month.
- Accounting staff can update overhead factors and estimate costs.
Direct and indirect overhead are important components of contract costs. These factors are applied to every direct labor dollar or hour and include:
- Payroll taxes
- Benefits
- Union dues
- Other indirect costs like depreciation and rent
Update these elements at least once a year (and preferably, every six months). Margins on successful bids are thin and the difference in overhead items could have a material impact on the success of your bid, especially on contracts that include a significant amount of direct labor.
Include the selling, general, and administrative expenses in your budget and analyze ways you can reduce fixed costs due to the impacts of COVID-19. For example:
- Excess yard space can be rented out.
- Certain employees may want to work fewer hours.
- Telephone, internet, and insurance contracts can be renegotiated.
Start the process early to allow enough time to negotiate these changes.
After the budget is assembled, it may need to be modified, especially if there are losses. Ask the team that prepared the initial calculations to assist in this process.
Budget management is the last — and often most crucial — step. Make sure your standard monthly accounting package includes a Statement of Income that compares actual to budget with a line-by-line narrative on significant variances. Keep a close eye on how your actual performance aligns to your budget — it can help you spot trends and respond proactively to keep your business strong in an uncertain economy.
How we can help
Construction companies face specific challenges during COVID-19. If you need help with the budgeting process for the upcoming year, reach out to our team. We can provide guidance on COVID-19 impacts and how that affects future planning.