4 Common Forecasting Mistakes Construction Companies Should Avoid

Few industries are so sensitive to the whims of the economy as construction. Supply chain disruptions, labor shortages, inflation and regulation have left many businesses feeling as though they just can’t keep up. How can anyone make meaningful, actionable projections when every month brings a new and unforeseen change?

The answer is that a good projection model does not rigidly predict the future but responds and adapts to conditions as they change, highlighting contingencies and equipping businesses to manage the uncertainty in their strategy. Models that fail to do so generally suffer from one of a few fundamental misconceptions about how projections should work. Avoiding the four pitfalls that follow will help construction businesses build a projection model they can count on.

1. Over Relying on Top-Down Analysis

Many construction businesses rely extensively on national-level economic or housing data to predict future demand. This information is often readily available and requires little to no independent recordkeeping or research. Expert commentary also tends to be forthcoming, making it easy to substitute top-down analysis for case-specific projection.

The problem is that businesses operate first and foremost in their local marketplace. For some businesses — especially larger ones — this may reflect the broader economy; for others it may do the opposite. A business’s geography, sector and particular clientele will ultimately determine whether a given national trend ever affects its own bottom line. If a contractor in a shrinking city like Chicago decides to invest in major new projects because national forecasts indicate growth, they will soon find that the market they had bargained for is somewhere else entirely.

Instead, construction businesses should compare the insights they receive from macroeconomic indicators with local trends and their own internal data. When they align, the top-down data can offer high-level insight into where the market is headed. When they do not, businesses should identify the local countertrend and plan for the conditions that will actually affect them.

2. Over Relying on Bottom-Up Analysis

The risk goes both ways, of course. It is easy to become fixated on the details of an internal report sheet, building projections based on the hard numbers at a business’s disposal. Such bottom-up analysis tends to rely on project pipelines, sales data or client inquiries to arrive at a conclusion about where the market is headed.

The unsurprising problem with this strategy is that bottom-up analysis is too narrow and subjective on its own. Internal indicators cannot consistently point out the broader shifts behind specific outcomes. Sales leads may suggest a spate of new projects and a correlating jump in revenue; the conditions of the wider market — rising interest rates, for instance — may prevent many of those deals from ever closing. Likewise, a dip in close rates may be interpreted as a major downturn and lead a business to cut back on bidding when the conditions are favorable for a steep growth period.

The solution is, once again, to take a hybrid approach. Construction businesses should absolutely monitor and analyze internal metrics but should use them in relation to macroeconomic trends to add nuance and depth to a broad understanding of the market. Such an approach keeps decisions grounded in the business’s operational circumstances while allowing leadership to plan with strategic direction.

3. Overlooking Depreciation

Construction projection models are often just too simple for the nature of the business. Companies tend to limit their forecasting to a sum of material costs, labor costs and revenue. Such a model operates on the erroneous assumption that equipment will operate indefinitely at full capacity. The result is a serious blind spot that will skew budgets and lead to misguided strategic decisions.

Heavy equipment like cranes, bulldozers and excavators inevitably wear over time. This makes machinery more prone to breakdowns, leading to an increase in maintenance costs and a decrease in performance. Projections that do not factor downtime, repairs, and capital replacement into the profit margin will consistently diverge from reality.

To incorporate depreciation into a projection model, construction companies must track maintenance history, usage hours, and manufacturer lifespans. This information can then be fed into a depreciation schedule to estimate when specific equipment will need to be refurbished or replaced. Regular repairs should be worked into the budget, while long-term planning should incorporate contingency funds for larger capital expenditures. Businesses can choose to automate these processes through fleet-management software or rely on manual inspections and logs.

4. Failing to Adapt Over Time

Too many construction businesses treat their forecasts as fixed maps. The assumption a projection model that has been accurate for years is not guaranteed to be accurate another month down the line. The construction industry is especially sensitive to a range of mutable conditions, from new regulations to inclement weather, that can invalidate old assumptions overnight.

The best projection model is one that can incorporate these factors whenever they come into play. Those that do not will inevitably veer off course. This means that no rules should ever be hard coded into the model, and the analytics team should be able to exchange one indicator for another without delay.

Construction businesses should then schedule forecast reviews to reassess assumptions and accommodate for the latest developments in local and national market conditions. This should be done on a regular — at least quarterly — basis, while explicit rules should be created for when unscheduled reviews are warranted. Such triggers could be external, such as if material costs increase by a certain amount, or internal, like if revenue drops 10 percentage points below forecast.

The Final Projection

Effective economic forecasting is not so far out of reach as it may seem. Most of the difficulties construction businesses encounter are attributable to a simple oversight or misunderstanding and can be rectified by reconsidering how they manage risk and prepare for the future. Once they know where to look, uprooting problems like the ones discussed here will bring them halfway to making projections they can plan on.