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By Missy England
April 28, 2016
According to U.S. Census Bureau data, the number of construction establishments in 2007 was 729,345. The Great Recession winnowed this number by nearly 20 percent so that in 2012 (the latest year for available data), only 598,065 companies remained. The construction firms that survived didn't do so out of luck or happenstance. Using more accurate budgeting techniques and financial projections, these establishments streamlined their operations, improved efficiencies, and pivoted in response to the changing economic landscape.
Indeed, a telling stat for these companies is that while the average number of employees dipped from 10.03 per establishment in 2007 to 9.48 per establishment in 2012, the value of business done per employee increased 1.8 percent, from $237,000 to $241,000, during this same time period. This indicates the construction firms that survived the tumult caused by the Great Recession managed to obtain greater value per employee, thereby boosting profitability with less personnel.
While construction managers can rely on better leadership skills and other motivational techniques to boost worker productivity, these are much more difficult to quantify and measure. However, by creating better accounting and budgeting forecasts with more precise cost estimates, construction firms can better position themselves to optimize employee workloads and operational workflows, ensuring costs are contained and profits continue rising.
One of the main hurdles many construction industry project managers face is properly categorizing and classifying the various expenses, costs, and other overhead necessary for a job. Without accurately isolating and delineating the wide variety of capital outflows, it can be next to impossible to match these to inflows, let alone forecasting long-term correlations between the two.
According to The American Institute of Architects, construction executives and project managers should divide all capital costs into three different components: site, soft, and hard.
Site costs:These are the fees associated with the initial stages of development and includes the cost of the land or plot and any development expenses, such as title insurance, transfer taxes, demolition, and site work.
Soft costs:These are costs that are less physically obvious and not directly related to the building materials or labor. Sometimes soft and site costs can overlap during the development phase, but soft costs are usually incurred to move the project forward. These may include fees associated with architects, engineers, and other professional consultants, as well as project implementation necessities such as land surveys, soil testing, lab planners, expert consultations, and printing costs for blueprints and building specifications. One soft cost that is becoming increasingly important for commercial real estate planning is LEED Certification. As noted by Fundrise, construction firms generally allocate an additional 2 percent of the hard cost budgets for LEED Certification, and roughly $150,000 in soft costs.
Hard costs:This covers most of the tangible expenses associated with a particular project, such as the materials, labor, equipment, general requirements, contractor's overhead, and a mark up. These might also include all relevant utilities, mobile storage units, fencing, partitions, and other items to maximize on-site safety. Hard costs vary by market, with places like New York City, San Francisco, Boston, and Chicago on the more expensive side of the spectrum, and cities like Atlanta, Houston, and Dallas on the cheaper end, according to data from Fundrise. In addition, depending on the type of building, cost breakdowns will vary from one project to the next.
With so many categories of costs and the wide range of variables these expenses can include, it's imperative that construction firm executives and project managers have the right financial tools at their disposal to handle, store, process, and analyze all of this crucial data. However, despite the profound fiscal benefits that construction financial software provides for firms in this industry, it's surprisingly underutilized.
According to a 2015 study of prospective buyers in the construction industry conducted by Software Advice, a software research and review site, 52 percent of industry respondents still use pen and paper for estimating costs and budgeting forecasts. With more than half of these construction firms relying on this analog method, they limiting their growth and profit potential.
Using a cloud-based construction financial tool allows firms to keep all of this important information stored in a digital repository that is instantly accessible by all relevant team members. This means the accounting department can view real time financial data to ensure that each project has accurate estimates, costs committed, and overall cost exposure.
Further, since all of the data is stored in the cloud, it's much easier for executives and managers to crunch the numbers and analyze different aspects of the budget. This informs the company of what's working, what's missing, and what to expect in the quarters and years ahead. Companies continuing to use pen and paper or spreadsheets to manage their projects are quickly falling behind that gain a competitive edge by implementing software.
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