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FINANCIAL MODELING FOR CONSTRUCTIONHere are some project management best practices in financial modeling.   

By Paul Brussow

With construction costs comprising between 60 percent and 85 percent of the budget for commercial developments, the need to efficiently oversee and balance resources is a top priority. Key to this challenge is the project manager (PM), who synthesizes data on costs, materials and time to maintain the integrity and momentum of the job. 

An independent project management team can serve the contractor as well as other stakeholders – including owners and architects – by prudently shepherding the schedule and proactively monitoring costs. In order to extract the full value a manager can bring to a project, it’s wise to have them on board at the earliest stage of design. To wait until there’s a problem with the job before consulting with a PM wastes valuable time when a project is at its most vulnerable point, and often results in a band-aid type of fix instead of a well-reasoned, strategic solution.

Performance and Precision

It’s essential for PMs to have reliable, up-to-date information on which to base their counsel and recommendations to owners. While sophisticated software programs have greatly simplified data collection, it’s human expertise – a high degree of skillful interpretation and application – brought by project managers that is often the telling factor in the successful delivery of a job. 

Having the ability to tie the financial modeling of a project into a single robust software package that provides clients with a real-time picture of their budget, expenditures and financial risks is effective for the project. By linking six key functions – contract management, invoice management, project forecasting, change management, cash flow management and executive reporting – into a single system, clients are able to make informed, timely decisions about the direction of complex projects. 

Computerized project management can take many forms, from using off-the-shelf software to working with clients to develop exclusive programs that address specific issues. The common goal is to streamline the process of project management, while also achieving the highest levels of flexibility and integration. 

Among the dynamic forecasting features that are particularly helpful in effective modeling are these:

• Big-picture view of change-orders – Change-orders are a time-consuming reality of construction. Typically, by the time they are agreed upon, drawn up and ordered, up to three months may pass, putting progress at risk. Programs that can forecast fiscal impacts at the time change-decisions are made and can track their implementation enable owners to have an accurate budget in real time.

• A calendar for cash – To assist in financial reporting, benchmarks and milestones are used to track and forecast the cash flow of a project. 

• Inclusive vendor interaction – Large projects typically have an extensive consortium of consultants and vendors, each generating its own stream of transactions. It’s critical to manage the execution of each individual contract against the overall construction budget. 

• Currency exchanges – International construction projects pose unique payment problems. For example, a new development in Dubai is being financed with U.S. dollars, supported by consultants from the European Union, and materials are on order from Asia. The ability to seamlessly resolve complicated currency conversions is a must for accurate modeling, and eliminates piece-meal calculations that can be prone to error. 

Coupling these capabilities with a construction-cost management tool that allows accurate estimates and bills of quantities to be prepared from diverse information sources (including BIM models, 2-D and 3-D CAD drawings, illustrations, schedule, and other project documentation) rounds out the package. 

In the same way that BIM and CAD models are facilitating re-use and integration, a computer application that takes a modular approach to build a working cost model of a project offers tremendous flexibility. Complete costings can be prepared from minimal project information, and can be continually improved and refined as the project design is further developed. The cost model makes it easy to analyze alternative scenarios. 

The right software can bring clarity and economy to the increasingly complex task of construction management, and contribute to the development of modern construction methods while advancing the central role of the project manager. 

Paul Brussow is executive vice president of Rider Levett Bucknall and is the project management service line manager in North America. He joined RLB in 1995, providing quantity surveying services from project inception through to completion and closeout in the firm’s Sydney office. An expert in construction project management, during his 24-year career he has advised clients on more than $10 billion worth of projects, developing and executing custom construction-management programs. With a specialization in hospitality project management, he has also worked on healthcare, residential and commercial projects. His services include construction project and cost management, change order negotiation and review, monthly progress monitoring, and litigation support. A member of the Association for the Advancement of Cost Engineering, he holds a bachelor’s degree in building/construction economics from the University of Technology in Sydney.

 

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