Forecasting Workflow Part 2 – Work In Progress

In this post, we’ll learn how to forecast the outcome of a large construction project.

We’ll continue the Case Study from Part 1, introduce some key concepts, and explore two Forecasting Workflows, with and without automation. We’ll also discuss the benefits of automation.

But first, I’d like to share a personal experience that inspired me to learn more about financial forecasting, as it pertains to construction.

Forecasting Workflow Part 1 – Setup

The Big Dig, A Forecasting Fiasco?

Around the same time Boston was completing their Central Artery/Tunnel Project (CA/T), known unofficially as the Big Dig, I was assigned the mechanical subcontract on a brand new, 50-storey, Class A commercial office tower in Toronto.

The Big Dig was originally scheduled to be completed in 1998[5] at an estimated cost of $2.8 billion (in 1982 dollars, US$6.0 billion adjusted for inflation as of 2006).[6] However, the project was completed in December 2007 at a cost of over $8.08 billion (in 1982 dollars, $14.6 billion adjusted for inflation, meaning a cost overrun of about 190%)[6] as of 2006.[7]

At first, news of the overrun shook my confidence. How was I — then a relatively new Project Manager — going to accurately forecast a multi-million dollar project, when Project Managers smarter than me failed to accurately forecast a multi-billion dollar project? I mean, they weren’t even close.

Fortunately, I was working with the best Foreman I’d ever ever known, and he taught me things about planning that I still use today — thank you L.M.

I’m happy to report that our project had no cost overrun. Sure, some Labour Codes did better than others, but whatever their outcomes — and this was the best take-away for me — we saw them coming.

Key Concepts

Most Contractors track two key elements separately. Work-in-progress — in terms of Hours to Date — is usually tracked using data from time sheets. Work-in-progress — in terms of Percent Complete — is usually tracked separately (if at all) using a construction schedule. Unfortunately, seeing one without the other is almost meaningless. 

Hours to Date and Percent Complete should be tracked together in order to calculate the following:

  1. Productivity
  2. Hours at Completion
  3. Variance

These are essential to Forecasting, as we’ll see in the following example.

Case Study (cont’d from Part 1)

Here’s an example that shows how to calculate the Productivity, Hours at Completion and Variance for a Labour Code. We’ll use a Labour Code from Part 1: TT1

The Labour Codes from Part 1 are copied here for easy reference…

Given: The Planned Hours for TT1 = 900 and the Planned Units = 50 Floors. In other words, a crew is expected to install Inserts on 50 floors in 900 hours. Let’s say that approximately half way through the operation, the crew has completed 20 Floors and booked 450 hours; that is, the Hours to Date for TT1 = 450.

Question: Is TT1 over / under budget? By how much will TT1 be over / under budget at completion? 

Answer: It should be obvious that TT1 is already over budget; the crew used half the hours but aren’t halfway up the building. Let’s forecast by how much the crew will be over budget if they maintain their current pace.

First, calculate Productivity, then Hours at Completion, and finally the Variance.

Productivity=Percent CompleteHours to DatePlanned Hours

where

Percent Complete=Completed UnitsPlanned Units×100%=20 Floors50 Floors×100%=40%

Thus,

Productivity=40%450900=0.8

Hours at Completion=Hours to Date+Remaining HoursProductivity= 450+(900450)0.8=1,012.5

Variance=Hours at CompletionPlanned Hours=1,012.5900=112.5 hours

Therefore, the crew will use 112.5 more hours than was originally planned.

Two things to remember about Variance:

  1. Negative good
  2. Positive bad

 

Next step: Add columns to the Labour Plan, to make it look more like a Forecast, and repeat for the rest of your Labour Codes:

Workflow Without Automation

Now, let’s pause a moment to understand how we got here. Take a few steps back. Here’s what the workflow looks like…

The Workflow includes a step to calculate Labour Cost at Completion, something we didn’t calculate above. So, let’s do it now.

Labour Cost at Completion = Hours at Completion x Blended Hourly Rate

where Blended Hourly Rate = Total Labour Cost To Date ÷ Total Hours To Date.

Thus, Labour Cost can be expressed as a single line item on a job cost report, along with your Other Costs

The calculations for Other Costs At Completion vary depending on the type of cost. Without getting into too much detail, let’s modify our Workflow to include the Other Costs. The modifications are highlighted here in blue…

Now, I’d like to draw your attention to the manual steps. Look for these in the workflow…

These are the gotchas! They are the obvious steps to try to eliminate in any workflow.

Our workflow has 9 manual steps, which are highlighted here in red…

Manual steps highlighted in red = 9 out of 13.

Workflow With Automation

Fortunately, many manual steps can be replaced with a Workplace Innovation Platform, which represents a custom business app designed to save time and eliminate the human errors associated with manual operations. Here is the Forecasting Workflow, this time with automation… 

Benefits of Automation

1. Near Real-Time Performance

The first benefit is Near Real-Time Performance. With automation, Financial Forecasts are refreshed immediately when new data is input. For example, when a Foreperson submits their Progress Sheet, or when Accounting inputs costs… No more waiting for the Project Manager to submit monthly reports.

BTW, Progress Sheets are like Time Sheets, except Progress Sheets show Hours Worked and Units Installed, whereas Time Sheets only show the former. 

2. Transparency

The next benefit is Transparency. With automation, your data can be shared in meaningful ways. For example, to support a claim.

Unfortunately, claims appear to be on the rise in the construction industry. Productivity Claims require good back up. And good timing.

Telling your Client after the fact, “We’re way over budget on the hours,” isn’t good enough. If I was the Client, I’d say, “Maybe your budget was wrong.”

Instead, I think a better better approach is to present your data to your Client immediately — as you’re experiencing the loss. Share your productivity numbers. Plot them on a graph. Make it easy to spot recent dips in Productivity. Show them something like this:

Your Client is more likely to help you if you show them the problem, and do so while there’s still time to fix it.

3. Accuracy

The last benefit is Accuracy. Without automation your Forecasts are more susceptible to human error and other human idiosyncrasies.

“Uncontrolled losses are always the result of uncontrollable optimism.” — A.S. Goldstein, author of Starting on a Shoestring: Building a Business Without a Bankroll

Mr. Goldstein was writing about small business investments, but I think his aphorism applies equally well to Financial Forecasts in the construction industry.

Summary

Use hours-to-date together with percent complete to forecast the outcome of labour codes. This can be done manually or automatically. Forecasting work-in-progress with automation is better for reporting productivity and financial forecasts, in near real-time.

Happy Canada Day!

This post is part of a series aimed at designing excellent workflows for the Construction Industry.

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Leo Di Croce

Can read a psychrometric chart and a job cost report. 1 part Engineer, 1 part project manager, 2 parts geek, and 3 parts back-country tourist. Too many parts?
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