Business planning in the construction business

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It was recently brought to my attention that months ago I promised but never wrote my own blog on the topic of optimizing business planning processes in the construction industry. Herewith I make up for this.

As I have emphasized several times, given the weakness of margins in the construction business, minimizing the use of capital is absolutely critical to achieving a result that is acceptable from an investor's perspective. From a corporate planning perspective, therefore, there is a need for integrated planning to correlate earnings and capital requirements.

In addition, operational site managers, from their site management perspective, quite justifiably think mostly in terms of output and earnings, but not in terms of sales and cost types.

If the operational managers are to be integrated into the planning - and this is unavoidable from a certain size of construction company onwards - additional integration is necessary, namely between performance/results planning and P&L planning.

Experience has shown that this is best achieved by defining cost element profiles (allocation of the difference between performance and result to cost elements) and cash profiles (representation of payment periods on the client and subcontractor side).

This results in far-reaching requirements for the planning process as well as for the planning tool used.

An analysis of the planning tools available on the market would go too far at this point, but it can be said that none of the usual suspects provides these requirements as standard. A certain amount of additional programming is therefore absolutely necessary. Since planning is always based on actual data, the interface to the upstream ERP or BI system is of great importance.

For smaller and medium-sized construction companies, a (professional) Excel solution is generally recommended. For larger construction companies, care should be taken when choosing the architecture not to "enter" too many different product families.

Process-wise or function-wise, the optimal planning process can be represented as follows:

  • Maintenance of master data required for the planning run (cost centers/companies/cost element profiles/cash profiles/participation records).
  • Planning of L/E & selection of a cost element profile for the purpose of generation of a preliminary P&L planning
  • Selection of cash profile for generation of preliminary direct CF planning
  • Derivation of a balance sheet planning (automated based on P&L/CF)
  • Making corrections on cost center level
  • Making corrections on company level (e.g. planning of financing actions)

With regard to the planning rhythm, a quarterly repetition is recommended. Here, it should be kept in mind that the operational control of the construction sites is carried out on a different level (see my blog post "Controlling & commercial project management"). If the planning process takes more than one month, the introduction of a plan/actual feed is recommended, which is only corrected in exceptional cases after the import of the new actual data.

The devil is in the details when introducing an integrated planning solution, and such projects are truly no walk in the park. Nevertheless, the advantages outweigh the disadvantages in the long run.