Estimation: Why Finance Should be a Part of Your Project Management Strategy

Editor’s note:
This is the first in a series of articles on construction financing that Masonry Design has planned with CreditSuppliers. Look for parts two and three in future issues.

By James Nielsen, Esq.,
CPA, CEO of CreditSuppliers

When it comes to being successful in business, money matters. In construction (and the masonry industry specifically), budget is especially important.

In a time when approximately 85 percent of projects go over budget, it is important to understand how finance fits into the overall project management strategy for each job. Stone is an expensive material to incorporate into a project and its installation requires the work of a skilled craftsman.

According to the Project Management Institute, there are four phases of a project’s cash cycle: financing, investing, operating, and returning. The structure of a project should be shaped around this cycle.

This cycle likely feels familiar. However, that first step in the process often stifles progress for many construction businesses. The financing step involves selecting a project and securing the capital necessary to complete it. Investing occurs when the contractor invests capital in labor and materials to complete the project. The operating phase encompasses the time that the company is working on the project using financing in addition to working capital. In the returning phase, the company pays back interest on financing and provides a return on investment to shareholders if necessary.

You may have the skills and the employees to get a project started and to move through the operating phase, but if you lack financial backing it can be tough to complete the investing and returning phases and grow your business.

How do you escape this vicious cycle? Here are a few ways to break down the financing portion of your payment cycle and smooth out your project management strategy.

Select the right projects

Project selection has its roots in finance; without the proper financial support, you will not be able to hire or pay employees, buy materials, or complete the project.

The project selection process should be a strategic one that requires continual evaluation of your business and its readiness to take on a proposed project.

In addition to financing, the project selection process should include an analysis of your current portfolio of projects to determine whether your company has the right expertise and that your team can work with the proposed project schedule.

Estimate accurately

Estimation is a part of the bidding process and determines the initial budget and timeline for the project. Accurate estimates can save time, money, and stress during the project’s operation stage if something goes awry.

During the estimating process, account for potential change orders and situations that could derail the project budget and timeline. You should be prepared to cover the costs of the most expensive and drastic changes. In this instance, it is important to have experience with the project at hand in order to fully understand the types of roadblocks you may encounter.

However, many contractors do not have a large sum of working capital available. They invest it in materials and employees for current projects and must wait until they are paid to replenish capital and increase cash flow. That setup can put a strain on businesses in any industry.

The solution to these periodic cash flow issues is simple: secure solid financing before every project. This is nothing new—contractors have been using financing from banks, credit card companies, trade credit, and other third parties to pay for projects. Financing increases cash flow and allows contractors to be more agile and flexible throughout a project cycle.

Incorporating financing into your project bids and estimates will allow you to mitigate risk and expand your cash flow so you can take on bigger projects.

Keep track of your projects

A strong project management strategy can help your team work more efficiently, which may allow you to take on additional projects that increase revenue.

Make sure to take a step back and get a bird’s-eye view of each project you are working on. This practice helps ensure that projects do not go over budget and that they stick to the original timeline—the more closely you adhere to the project scope, the easier it will be for you to deliver the best possible final product.

I don’t need to remind you of this, but finances are important. Set yourself up for success by putting in the work to create a sound project management strategy with money at the helm.

About the Author

James Nielsen, Esq., CPA is the CEO and founder of CreditSuppliers. Nielsen combined his backgrounds in law, accounting, construction supply, and venture capital to found CreditSuppliers, a financing platform that provides contractors and subcontractors project funding. He earned his bachelor’s and master’s degrees in accountancy from Brigham Young University. He earned is law degree at Arizona State University. He is currently a CPA and an active member of the Arizona State Bar.