The Briq team was lucky enough to sit down with Carl Franseen, CFO of United Infrastructure Group, for a quick chat about CFO best practices for different construction financial processes. We talked:
- Corporate budgeting
- Revenue & cash flow forecasting
- Project & ELM forecasting
- WIP management
- Process & planning
- And more!
Let’s dig in.
Budgeting - How can you really get a holistic view of your finances and make the best decisions based on that?
“I've had the chance to work with about 80 different construction contractors over the years...GCs, heavy highway, mechanical, specialty, etc. Every one of them has a slightly different way of doing it, but everyone philosophically evaluates the same things.
First, about 80 to 90% of a contractor's costs are spent at the project level. So project specific, job by job.
Second, after the project costs, we all typically have a handful of specific departments- like a shop if you have heavy equipment or a warehouse if you have inventory or a safety department or a business development department. Sometimes, these are referred to as indirect costs. They are related to projects but can’t be tracked to a specific project or cost code.
Last, every contractor has a general overhead or administrative tranche of costs.
Specifically now about United Infrastructure Group, which is roughly a $200MM heavy highway contractor. Our smallest project today is $1.5MM and our biggest project is $550MM and these projects range in duration from 3 months to 3 years. We take all of those project costs out and we budget them basically like they're their own standalone company.
Once that is done, we spend a considerable amount of time budgeting what we call our ‘support departments’ and our overhead. So for us, we have:
- SHOP - supports our fleet of equipment: cranes, barges, excavators, dozers, etc. We look at all those pieces of equipment, and we know how much the jobs require of those equipment. So we know how much the rent is that the jobs will be paying for those pieces of equipment. In turn we know how much we have to spend on buying equipment and repairing equipment.
- BUSINESS DEVELOPMENT - estimating and design build pursuit teams. This is a head count analysis and an outside engineering estimate of the planned pursuits.
- SAFETY - every contractor knows the importance of this and what costs are involved!
- CONSTRUCTION OPERATIONS - general and back office construction people and costs. Again, this is a head count analysis.
- G&A - home office or corporate overhead which is a head count and occupancy costs analysis for the most part.”
Revenue & Cash Flow Forecasting - Best practices for forecasting for the future, not just with week or month old data? What tools can you use (if any) that help you go from gut feelings to crystal ball type predictions?
“Every project that we do has a P6 schedule associated with it. And that P6 schedule has a cash curve, a revenue curve, and a cost curve.
We take the P6 schedule that shows what’s all going to be done and we assign cost to those tasks. P6 then allows us to say, ‘Month six from now, month 16 from now, month 26 from now- here's how much you plan to spend.
If you input your projected gross profit percentage, it tells you what the revenue is. I can project revenue for every month out until November of 2024.
And then on the other hand, every one of those contracts also has a schedule of values which is the payment schedule from the customer. So we can also predict our cash inflow for mobilization as an example which will be different than our revenue.”
It sounds like you've done this once or twice.
“Yes, yes I have. But it's surprising how many contractors haven’t. And so basically I will, at the global level, take every one of those projects and I’ll schedule out columns for months and rows for projects and input each project. The result is a pretty clear and usually fairly accurate projection of revenue, costs and cash flow.”
Project & ELM Forecasting - How do you stay up-to-date on crucial project information? Best practices for forecasting for labor and equipment?
“We look at every project, every single month at an individual project level with the project manager and whoever else is on the key project management team. The project is broken down into the categories (or whatever your specific software calls them) of labor, burden, material, subcontractors, admin, and other.
From the schedule we discussed earlier, we know how many man hours it will take to finish which gives us a labor cost. Once the labor is quantified then the burden is a fairly typical percentage charge. Admin costs for us are items like per diem and lodging and since those are based on crew head count it is fairly easy to estimate those from the labor calculation.
As a heavy highway contractor, equipment is our other major internal cost that we have to manage with our labor. We do an equipment schedule that gets updated every month that quantifies what equipment is on each job already and how many weeks it will be needed based on the schedule and the labor. We know what the external rental rates or the internal rental rates are so we're able, at the project level, to quantify this other major internal cost.
The materials are managed with purchase orders that were established at the very beginning of the project. I would caveat that by saying when construction material costs get as crazy as they are right now, sometimes you have suppliers trying to go back on their price or ask for increases, which you have to manage. Subcontract costs are managed similar to materials but are quantified with a subcontract schedule of values instead of a purchase order.
If you think about it, at the end of every monthly project review, we come away with two key tools: 1) a crew resource schedule (how many crews are needed for how long and 2) an equipment resource schedule (what pieces of equipment are needed for how long. I can then aggregate all the project crew and equipment resource schedules into one global schedule and reconcile that to how many cranes we have vs how many we need and how many crews we have with how many we need. This is critical information that, as you can imagine, needs to be known as soon as possible with the labor shortages and now the equipment lead times.”
WIP - Best practices for keeping your WIP up-to-date AND accurate?
“If you think about the project review I was just talking about, from that project review you come out with the four numbers that make a WIP. You know what your total projected revenue is going to be, you know what your total projected profit is going to be, then you know, obviously with just a standard accounting cutoff, what your cost and billings to date are. And those are the four numbers that drive the whole under/overbilling calculation. For us, it's 25 - 30 jobs. Right now we're approaching $1B of WIP, but it's only 25 - 30 jobs. There are some people that have 2,000 jobs for a $10MM revenue per year company because the jobs are all a couple thousand dollars.
So we take the 25 - 30 rows of jobs, plug those four numbers in and from that we have a WIP schedule. What I think you're really asking is how do you keep it maintained to where you know that the numbers are correct. We only know it's 100% right 12 times a year when we do the monthly review. That's the reality.
In the meantime between the 12 monthly reviews, we run weekly exception and analysis reports. ‘Last week there was labor, burden, equipment or admin costs charged to a cost code that doesn't have a budget. Or there were quantities reported as complete to a cost code that didn't have cost. Something's not right?’ On the other hand, the material suppliers and the subcontractors typically only bill once a month. So budgeting or forecasting once a month is fine. But that's the extra process I would say that we add to the WIP schedule to make sure it's right on a weekly basis.”
Process & Planning - How to keep continuity and communication throughout departments especially as it relates to finance and the field?
“All I’ve ever done is construction. I can hear a project manager make a statement that 99% of every other CPA in America would hear and they would come up with a different interpretation than me or any other true construction industry specialist would come up with.
Having that industry specific knowledge is key to that interconnectivity between the finance and the field. On all of our projects that are $50 million or higher, we actually have an accountant or bookkeeper type person, depending on the complexity, who only works that one job. So then that's another layer of translation between the finance and the field that we have layered in. Otherwise, any finance person being willing to go to a project and actually put on boots and look and see what's happening can reconcile a resource loaded schedule with a budget with what they are actually seeing in person.
It's honestly as simple as that kind of common sense. From a continuity perspective, the biggest challenge to a project budget is changing project personnel in the middle. Sometimes when a project's going bad it's the best thing because you get a fresh set of eyes and they start from scratch and they estimate it and rework it. But that is ultimately where you find out the hard truth sometimes. There's not really a way for continuity in finance other than taking care of your people and keeping them happy.”
The Briq team would like to thank Carl Franseen for joining us and United Infrastructure Group for their continued partnership.
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