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Article | Construction

Construction Companies Need to Use Budgets as a Financial Road Map

In the dynamic and competitive construction industry, financial management plays a pivotal role in companies’ success and sustainability. One crucial tool is a financial budget. Developing and adhering to a comprehensive budget allows construction companies to effectively plan, monitor, and control their financial resources. Financial budgets work in several ways for construction firms:

Financial Planning and Decision Making

A financial budget serves as a roadmap for construction companies, helping them set clear financial goals and objectives. By establishing specific targets, such as revenue, expenses, and profitability, companies can align their strategies and actions accordingly. A budget enables effective financial planning, ensuring resources are allocated efficiently and projects are undertaken with a clear financial vision.

Financial budgets offer valuable insights for decision-making. They help businesses evaluate the financial viability of potential projects, estimate return on investment, and assess risk levels. With a budget, construction companies can make informed decisions about resource allocation, project prioritization, and strategic investments, considering their financial implications. Using the data you have on hand is a powerful way to minimize the frequency of poor performing jobs.

Resource Allocation and Cash Flow Management

Construction projects involve multiple expenses, such as labor, materials, equipment, and subcontractors. A budget facilitates the allocation of resources by estimating the costs associated with each project. It helps identify potential cash flow challenges, allowing companies to plan for adequate funding, manage working capital, and make informed decisions regarding project investments and cash reserves. Jobs will go poorly; it happens to the best companies. The companies that recognize those cases early are the ones that can pivot and adjust quickly to minimize the damage.

Performance Evaluation and Benchmarking

By comparing actual financial results to budgeted amounts, construction companies can evaluate their performance and identify areas for improvement. Budgets provide a basis for measuring financial performance, tracking key performance indicators (KPIs), and benchmarking against industry standards. This allows companies to assess their efficiency, profitability, and financial health, facilitating continuous improvement. Using the industry benchmarking process allows companies to compare themselves to their peers and understand their strengths and weaknesses more clearly. It is critical to have a strategy that maximizes your strengths while minimizing risks associated with the weak areas of your company.

A critical step that almost all construction companies fail to adequately use is post-mortem job cost reviews. Preparing a budget for jobs is a great first step but the paramount step is comparing that initial budget to the actual results of the job. An applicable adage: “If you learned from it, then it wasn’t a mistake. It was a lesson.” By comparing the actual results of a job with the budget, your construction company will learn lessons that will help minimize the recurrence of similar poor results on future jobs.

Contingency Planning and Risk Mitigation

While it is impossible to control all aspects of job performance, budgets help construction companies anticipate and plan for unforeseen circumstances and risks. By incorporating contingency funds within the budget, companies can address unexpected events, such as project delays, material price fluctuations, or regulatory changes. This proactive approach minimizes financial disruptions and enhances the company's ability to navigate uncertainties. The most successful construction companies build contingency plans into their bids. The critical step is recognizing when these contingencies first appear and being able to react immediately. Construction companies that use their budgets faithfully are always a step ahead of their competition when it comes to risk management.

Performance Incentives and Employee Motivation

In the construction industry the competition for high level talent is cutthroat. Construction firms find themselves needing to be increasingly aggressive to attract and retain the best talent. Some use performance incentives. Budgets can be used as a tool to set performance targets for employees, departments, or project teams. When individuals and teams are aware of their budgetary responsibilities, it promotes accountability, fosters cost-consciousness, and encourages efficient resource utilization. Rewarding employees for meeting or exceeding budgetary goals can also boost motivation and create a culture of financial discipline. If a company does not use budgets effectively to set goals, they will find themselves either over or under rewarding key employees, both of which can lead to financial ruin.

Financial budgets are invaluable tools for construction companies seeking to establish a solid financial foundation and achieve long-term success. By facilitating financial planning and decision making, resource allocation and cash flow management, and risk management, budgets empower construction companies to navigate challenges, optimize profitability, and maintain healthy cash flow. Construction companies that embrace the benefits of financial budgets will enhance financial stability, drive growth, and enjoy a competitive edge.

About the Author(s)

Mike is a Principal in the Youngstown, Ohio office of HBK CPAs & Consultants and has been with the firm since 2001. He is the National Director of HBK Construction Solutions, a team of specialists focused on contractors and their unique business needs.

In 2008, Mike received the designation of Certified Construction Industry Financial Professional (CCIFP) from the Institute of Certified Construction Industry Financial Professionals, Inc. (ICCIFP). ICCIFP is a not-for-profit corporation established to promote the highest standards of construction financial management through the credentialing of construction financial professionals. Mike works closely with hundreds of construction clients helping them achieve their financial goals.

In addition to his CCIFP distinction, Mike is a member of the Mahoning Division of the Builders Association, serves as Treasurer of the Construction Accounting Network, and is a member of the Ohio Contractor’s Association. He was published in the national construction magazine “Breaking Ground” as a subject matter expert on Financial Perspective in an article titled “Give Your Workforce the Financial Tools to Manage a Successful Project” in 2019. He also attends several national construction conferences each year to always stay ahead of industry trends and regulatory changes.

During his career, Mike has gained significant expertise in accounting and management consulting related to the construction industry. Mike’s industry distinctions include:

  • Assisting clients with cash flow projections and financial statement projections. In one case, it helped lead to a contractor client obtaining more than $100M in a single contract bond.
  • Helping a contractor secure a line of credit with a financial institution at seven times the level they had prior.
  • Assisting in the negotiation of a settlement of sales tax liability, which resulted in a reduction of more than $200,000 from the original assessment.
  • Aiding a contractor client in claim negotiations resulting in more than $1M of additional revenue.
  • Providing expert witness testimony on behalf of a contractor, resulting in a successful lost revenue claim.
  • Helping develop a training program for the management team of a contracting firm, to improve internal communication and overall profitability.

Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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