Financial Visibility: A Crucial Factor In The Construction Industry.
For decades, the construction industry has struggled with a lack of shared communication and transparency, particularly with project finances. As teams waste hours and resources on outdated processes—that may not produce accurate, up-to-date information—significant financial blind spots occur making financial visibility critical for General Contractors (GCs). Without it, GCs can suffer from poor profit margins, effectively jeopardizing their business.
Thankfully, new technologies like cloud-based construction management software are making their way into the market to help modernize processes, increase collaboration, and improve financial visibility. This technology empowers GCs with the insights they need to make better, faster decisions, reduce the risk of errors, and maintain healthy margins—a must-have in today’s uncertain market.
Financial Blindspots are a Major Driver of Fee Erosion for Commercial General Contractors
Commercial GCs work in a highly competitive and demanding environment, often operating on very slim profit margins. With project fees ranging from just 1–6%, even small changes can have a major impact on the overall profitability of a project, which in turn can affect the financial health of the entire company, making it crucial for them to have total transparency on project costs and financial performance.
Fee erosion, when associated costs exceed the original budget, is one of the biggest risks to project budgets. This can include unforeseen circumstances, increased labor and material costs, and Change Orders which can be a significant source of fee erosion as they often add costs to a project that were not initially accounted for in the original budget. This lack of visibility around Change Orders can contribute significantly to the overall fee erosion.
Without the ability to easily integrate and interpret historical data that shows just how much fee erosion creeps into each project, it becomes increasingly difficult to pull together accurate bids for future projects, leading to shrinking margins. In a dynamic climate where labor and material costs remain big question marks, it’s essential to know what completed projects have entailed in the past, along with emerging trend lines. It’s also imperative to be able to pass this data along to other project stakeholders.
In the construction industry, things happen fast. Because of this, communication is fragmented, and financial blind spots emerge. When stakeholders work off of outdated or inaccurate data—or when there’s a lapse in data communication—costly decisions are made in the dark. Issues mount, which creates unnecessary tension and mistrust on top of financial black holes.
It’s easy to say, "Turn to technology", but GCs have been historically disappointed by much of the financial software available because it hasn’t been designed around construction issues, needs, and processes. Most financial software is internal-facing, so project teams must rely on static and manual processes outside those systems to align any changes to the project scope, schedule, and cost, and communication issues remain.
Additionally, because these tools are manual and everyone creates their own process, there’s an inherent risk of inaccurate data and room for error and misinterpretation of actual costs. Fortunately, with new investments and advancements in construction technology tailored to the industry’s unique needs, the costly barriers can be overcome.
Peaks and Potholes in Construction Tech
In recent years, the construction industry has introduced cutting-edge designs, methods, and advancements that have created a faster-paced industry with increased opportunities for stakeholder collaboration. However, many outdated core processes, or “potholes,” within the industry still lack innovation and remain stuck in the past. Examples of these include staffing allocation, workforce planning, and of course, reconciliation of Change Order Requests.
These potholes consume a significant amount of time and resources, weighing down already-lean project teams, and can potentially cause major delays and significantly reduce margins. There’s an urgent need to digitize processes to optimize data capture, improve job site efficiency, and gain greater financial visibility.
New Foundations for the Industry
Historical project data is essential for making data-informed decisions on bidding, allowances, and contingency budgets for current projects. But in many cases, once the project is completed, project financial data isn’t easily accessible or available to project teams. This makes it difficult to learn from past projects, making it difficult to plan future projects accurately.
But a new breed of construction-specific applications is being introduced that enable GCs to access both historical data and real-time information from ongoing projects—helping GCs proactively address potential issues before they arise. The results are more accurate cost predictions, improved overall project management, and better financial outcomes. With the right tools and insights, GCs can stay ahead in the ever-evolving construction industry.
Constructing the Future
An undeniable fact is that financial visibility and transparency play a critical role for all construction teams. By eliminating outdated manual processes and embracing technology with applications that also track and combine historical and current project data, GCs can use real-time data to avoid fee erosion and financial blind spots, manage project budgets more effectively, and maintain margins from start to finish.
Knowledge is power, and unlocking financial visibility allows GCs to stay ahead of the curve. And the GCs that take advantage of new construction technology will be the ones who weather the instability of the markets with their teams, reputations, and bottom lines intact.
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