In an industry setting where contracting margins are at an all-time low, the need to keep a close eye on the cost of construction projects has never been greater. Profits are fragile—margins often fall under a worrying 1%—owed in no small part to unforeseen contractual modifications which can hit project budgets hard.

Contractors now operate in a volatile industry, as profits hang in the balance, controlling unexpected costs throughout a project is paramount. It’s rare for a construction project to be executed exactly as planned in the initial contract because these contracts are built on estimations and stakeholders are likely to add new features to the contract while the project progresses—all increasing the risk. Contracting organizations must therefore rely on construction-optimized enterprise software to ensure their projects are financially viable from the outset—and remain so throughout the construction process.

It’s essential these platforms provide contractors with the structure, risk mitigation and visibility they need to perform profitable projects. Tools that address complex project financial controls must also be at the center of the software. Here’s how enterprise software solutions can help construction companies monitor contracts, control in-project costs and improve margins.

Transparency from the get-go

All the contractual details are set out at the beginning of a project. These include the project manager’s record indemnities, insurance, liquidated damages, guarantees and other requirements. It’s vital that both parties understand all terms of the contract because, irrespective of the nature of the requirement, failure to address these contract terms will result in financial penalties if they are not performed. Software helps contractors from the start-up process to clearly translate the requirements of a contract into performable jobs to prevent fines.

At this stage of a project, the commercial manager will also work out the amount of contingency that is necessary to cover the potential project risks. As a project evolves, the risks and contingency need to be continually monitored. In addition, project variations in scope must be tracked and controlled to keep the budgeting margin on target. Enterprise software notifies managers of their exposure to such risk, as well as the cost and revenue from project variations so they can make calculated decisions based on accurate and timely information.

Eliminate risk factors and gain a true project perspective

If there are discrepancies between a project’s estimate and actual costs incurred, this will trigger large financial problems for a project. Contractors need tools that account for a variety of procurement methodologies to create an accurate project estimate for contractors. This will in turn reduce the overall risk of a project. A well put together risk register is also required to manage deviations from the originally calculated estimate when necessary.

Scope changes are likely in construction projects and represent the biggest threat to a project’s financial viability. At first, the risk register will contain an unattributed pot of money. As a project progresses, the sources of and exposure to risk are more clearly defined. The commercial manager must ensure project variances are managed and approved in well-documented change orders that amend the scope and budget. To achieve this, they need the ability to determine the true impact of a change on subsequent project phases. This is critical in order to avoid cost or timeline overruns caused by interdependencies.

The most important project financial control process is periodic project forecasting. This involves reviewing the project financial status at the end of a period and forecasting its end margin position. This typically covers the actual and predicted project cost, revenue and margin, project variation status, risks and forecasted cash position. The periodic project forecasting process should be tightly integrated with financial accounting to ensure the information is based on a consistent set of accurate data. Many companies today still use Excel to carry out this process, but this means numbers can easily be manipulated with the risk being that senior executives will not be seeing a picture of truth. In addition to the periodic forecasting process, it’s important to be able to see the real-time status of a project in terms of cost, revenue, progress, contract changes, risks and payments. This is so that critical decisions can be made as early as possible—long before you get around to collecting actuals in the accounting system.

The right tool for the job—software gives commercial managers a leg up

Applications that produce real-time calculations of labor, materials, internal and external equipment rental, subcontracts and other cost drivers ease the burden put on commercial managers. Enterprise tools should provide visibility of project costs and manage risks as they become clear during a project. Software must also be capable of managing actual and forecast cash movements in order to mitigate cash flow bottle necks. The priority for most contractors is managing the financial aspects of a project, but it’s also imperative to manage the project deliverables using a properly integrated work breakdown structure. This will provide the control necessary to ensure projects are not only delivered in line with budgets—but also on time, with minimum defects and health and safety problems.

No pain, all gain

Enterprise solutions geared towards construction provide an opportunity the industry simply cannot afford to miss. Decision-makers who have access to the right software tools can recognize changes in contracts in real-time, which enables them to align budgets accordingly to prevent projects from delivering uninspiring or even no profit margins.

Software should support commercial managers from the beginning of a project right through to its completion, providing the flexibility needed to handle any adjustments that may arise along the way. Only with flexible enterprise software tools will the construction industry navigate potentially troublesome projects with limited profit margins, and work towards achieving greater profits across the sector.