Most contractors have management information systems (MIS), but few take full advantage of the capabilities they offer.

An MIS provides valuable insights about the underlying financial support and assumptions used in forecasting margins on a contractor’s backlog. For this reason, surety underwriters have a keen interest in a contractor’s use of its MIS in forecasting business results.

A contractor’s inability to identify problems in a timely manner can be detrimental to its financial statements and ultimately its bonding capacity. In fact, just one or two bad projects can permanently impair a contractor’s ability to continue to operate profitably. Some red flags that indicate a contractor’s MIS may not be functioning properly include key project and financial reports that are difficult to understand or interpret; projects that exhibit late-stage profit fades; unexpected or unexplained unfavorable cash flow issues; or projects that consistently reflect late-stage under-billed positions.

Contractors can take steps to ensure their MIS is providing meaningful reports that drive informed business decisions by selecting a system that meets their operational needs, investing in staff training, and identifying key data and analytics to manage their business.

System Selection
Many factors can drive the decision to acquire a new MIS. Complex projects may require more sophisticated project management capabilities or more comprehensive project cost and accounting information. Or, a contractor may have simply outgrown its existing system. Regardless of the reason, the new system must capture the necessary data elements for a contractor to evaluate the project assumptions used in preparing its financial forecasts.

System selection should always involve a multidisciplinary team with representatives from finance, project management, administration and senior management. A contractor’s CPA, lender or surety underwriter also can provide recommendations and useful insights about industry best practices, so it is worthwhile to consult with these and other external business partners when evaluating MIS options.

While systems offer an array of features, three critical functions should be integrated to allow for a meaningful information flow:
  • cost estimate assumptions used to arrive at the original project bid;
  • cost categories used to capture actual costs incurred on each project; and
  • schedule of values used to invoice the owner for work completed to date.
Most industry-oriented systems offer this functionality, yet many contractors fail to integrate them. A contractor may incorporate one or two features separately, but not connect the data—missing the opportunity to have the system analyze this data and highlight any variances.

To present a meaningful financial picture of a specific project, the system needs to measure original cost estimates in the project bid against the actual costs incurred to date and identify any variances that might require further investigation.

Similarly, invoicing a project owner requires MIS integration to evaluate whether the cash flow at each project stage is tracking according to plan. Although under- and over-billings on contracts routinely occur, a contractor’s MIS reports should show why an individual project is either under-billed or over-billed.

In addition to managing profitability, a contractor relies on its system to help manage cash flow on its projects. Front-end loading is an industry-accepted strategy to assist in project financing, but it requires close monitoring to ensure that excess cash flow derived at the beginning of a project is not masking production overruns elsewhere on the job.

Setup and Training
Simply having a state-of-the-art system does not guarantee profitable jobs, accurate estimates and job costing, nor does it give managers the ability to identify problems on projects in progress. The entire field and home office team must be trained on the system’s capabilities to ensure the data input and reporting functions are generating meaningful output.

Data and Reporting
An MIS is only as effective as its data and reports allow it to be. Successful contractors make it an operational priority to enter critical data in a timely manner and establish regular internal checkpoints to identify potential issues throughout the life of each project. 

More contractors also are recognizing the importance of using an MIS to hold field personnel accountable for successful project financing.

In the construction industry, even good contractors occasionally have a bad project. What distinguishes them from the competition is their ability to use project reports to identify and manage situations early on to mitigate the impact on the project. With early identification of potential issues, these contractors also can communicate proactively to critical business  partners and avoid potential surprises at year-end.


Ken Bronson is manager of the financial services unit for Hartford Bond in Hartford, Conn. For more information, email kenneth.bronson@thehartford.com.