Mitigating financial risks in construction is a lot like playing Monopoly. And if you’re like me, you love Monopoly. So, how do you approach financial projections and make them as fun as possible? Let me take you through my approach and explain what to look out for.
Embracing Financial Responsibility in Construction
To start, I’ll be honest—much of my career was spent avoiding the financial aspects of construction. I used to think, “Let the PM worry about that, I’ll focus on building.” However, I soon realized that this mindset wasn’t accurate. It’s crucial for superintendents and project managers (PMs) to collaborate and strategize about finances together, using key tactics to ensure that profit targets are met.
In this blog, I’ll outline my general approach. If your company has a system that allows you to track financial data clearly, you can make it not just manageable, but also engaging.
My Journey in Understanding Construction Finances
There was a turning point in my career when I grabbed the PM and said, “I want to understand everything—gross profit, net profit, contingency calculations, and more.” I expected that everyone else had a handle on this, but as I asked more questions, I started getting responses like, “Oh, we don’t track it that way,” or “We haven’t finalized that number yet.” I quickly realized that we were in a chaotic situation.
If you’re not a financial expert, don’t worry! If something doesn’t make sense to you, chances are it doesn’t make sense to the “experts” either. In fact, every company should have financial data that’s so clear, even a teenager could understand it. If your numbers don’t add up in a straightforward way, then you likely don’t have the right data.
Monopoly and Risk Mitigation
One day, I was playing Monopoly with my kids. I have 11 children, all of whom enjoy playing Monopoly with me. While playing, I realized some key insights into the game, which also apply to financial management in construction. The trick lies in organizing your cash and properties. In Monopoly, if you know how much money you have and where your assets are, you can make smarter decisions. The same goes for managing financial risk in construction.
Monitoring Your Financial Health
In construction, as in Monopoly, you need to know three things:
- How much money is coming in (from pay applications).
- How much money you have on hand.
- How much money is at risk of going out.
Understanding these factors allows you to “play the game” and mitigate financial risks effectively. You can’t make informed decisions without seeing the full picture.
The Definition of Mitigating Risk
Mitigating risks means making them less harsh or severe. In construction, this requires identifying and tracking risks and opportunities. Anchoring to historical data can help, but managing the budget and numbers in real time is key.
Managing Subcontractor Budgets
One of the most critical aspects of financial management is keeping an eye on subcontractor budgets. Your financial projections should clearly show:
- The original target for each subcontract.
- The current status of these contracts, including any contingency funds.
Monitoring these projections helps you manage risks, especially when you’re working with tight margins.
What to Include in Your Financial Projection Sheet
In your projections, you should be tracking:
- Subcontractor budgets and contingencies.
- Labor gains from staff and general requirements.
- Gains on bonds, insurance, and equipment rentals.
These elements provide a comprehensive view of the project’s financial health. They also allow you to make strategic decisions, such as whether to reduce costs or allocate more resources.
Strategic Decision-Making
Sometimes, managing finances means making tough decisions, like whether to keep additional staff on a project or rent equipment for longer than planned. For instance, I once had to decide whether to extend a crane rental by six weeks. We were renting the crane from ourselves, and while there were no shared savings, keeping the crane simplified our logistics and benefitted us financially.
Final Thoughts
To mitigate financial risks in construction, you need to understand the numbers. Ask the right questions, track your financial projections carefully, and always aim to see the full picture.
This blog provides insights into mitigating financial risks in construction. By embracing financial data and using the right strategies, you can ensure your project remains on track and profitable.
