By Claire Wilson, Siteline

When times are good, forecasting often takes a backseat. It’s easy for subcontractors to get caught up in the day-to-day and neglect the critical task of planning for the future. However, the current economic climate demands a more proactive approach. 

This is especially true for subcontractors, who are the most susceptible to market fluctuations due to their position in the payment chain. Though they typically front initial project costs, they are the last to be paid, waiting an average of 90 days for reimbursement. This extended period of negative cash flow exposes them to significant risks, where even one ill-timed disruption could tank their profits.

To that end, developing a robust cash flow forecasting process is no longer optional; it’s essential for survival and success in an increasingly unpredictable market. This article covers strategies for managing and forecasting your cash flow effectively.

Essential Cash Flow Forecasting Practices

Effective forecasting empowers subcontractors to make informed decisions about the future of their businesses. By regularly analyzing and evaluating expected revenues and costs, you can more easily identify potential risks and opportunities, allowing for proactive cash management and more strategic decision-making. Here are some actionable tips that can help in that regard.

1. Understand Current Market Conditions and Volatility Drivers

The current economic climate has been anything but predictable. However, it’s difficult to grasp how frenzied the market is—not to mention, create an actionable plan to safeguard your cash—without understanding the factors driving uncertainty. These include:

• Lingering impacts of the COVID-19 pandemic, such as commodity pricing surges, global supply chain disruptions, and exchange rate fluctuations, have resulted in longer lead times and increased costs for essential materials
• Labor shortages that are driving up wages and making it difficult to find and retain skilled workers
• Rising inflation and interest rates, which can increase the cost of borrowing and impact project budgets
• The upcoming election and potential for policy changes that could affect infrastructure spending, tax regulations, and labor laws, creating further uncertainty for the construction industry

2. Develop a Realistic Budget

Market conditions aside, cash flow prediction relies on a well-structured and realistic budget. This should include a detailed breakdown of all your expected income and expenses for each of your current and anticipated projects, such as:

• Current work-in-progress (WIP) and projected work remaining
• Contracted work not yet started
• Current and anticipated project bids
• Geographical distribution of active and potential projects
• Projected labor and project management available throughout the forecast period
• Projected overhead based on volume and headcount
• Anticipated capital expenditures
• Projected financing needs
• Upcoming loan repayments or tax obligations

Be sure to factor in potential contingencies and leave some room for unexpected expenses.  

3. Apply the Right Curves to the Right Projects

Different projects and scopes of work require different cash flow patterns. Apply various curves (such as a standard bell, linear, front-loaded bell, or back-loaded bell) to your schedule of values based on the nature of each project. 

For example, if you’re a concrete subcontractor, a standard bell curve might be the best choice for the majority of your projects, reflecting:

• a slow start (the groundwork and framing phase), 
• an increase in work during the middle (pouring) phase, and
• a decrease in labor and resources as the project nears completion.

Conversely, if your work requires a significant deposit upfront but won’t be completed until later in the project, implementing a front-loaded curve to reflect the initial costs would be wise.

Applying these curves also adds flexibility to your forecasts, allowing you to proactively account for potential delays, cost overruns, or other unforeseen circumstances that often arise in uncertain times.

4. Track Your Actuals

Regularly comparing your actual income and expenses against your forecasted figures is crucial to identifying any discrepancies and making necessary adjustments to your budget. This will help you stay on top of your cash flow and avoid unpleasant surprises down the road. It will also provide you with valuable insights to refine future forecasts, which brings us to the next pointer.

5. Regularly Review and Update Your Forecasts

Cash flow forecasts aren’t static—they should be as dynamic as the project you’re working on (and the market conditions you’re working in). Therefore, it’s important to review and update your forecasts regularly—ideally on a weekly or monthly basis—to reflect any changes in your project timeline, material shipments and costs, or changes to the scope.

Instead of creating a single forecast for a specific period, some subcontractor billing teams continuously extend their forecast horizon, adding new periods as previous ones are completed. Referred to as rolling forecasts, this method enables you to:

• maintain a more up-to-date and accurate picture of your cash flow, and 
• respond more quickly to changes in your business environment.

6. Stress-Test Your Forecasts

While forecasting tools are powerful tools, they are not infallible. Regularly conduct stress tests on your forecasting model to assess its resilience under various scenarios. Stimulate extreme conditions, such as project delays, payment defaults, or sudden market downturns. This practice helps identify potential vulnerabilities in your cash flow management, prepare for potential challenges, develop contingency plans, and ultimately make more informed financial decisions.

7. Use Technology to Your Advantage

Managing complex cash flow projections across multiple spreadsheets is no longer the only option—nor is it the most efficient. Modern technology offers powerful, cloud-based tools that can revolutionize your approach to cash flow forecasting.

Leveraging these tools can help you:

• Run super-fast forecasts to gain deeper, real-time insights into your cash flow
• Achieve a holistic understanding of your outstanding backlog and long-term cash positions
• Enable project managers and other stakeholders to quickly create and share visual representations of project financials
• Utilize historical data to identify trends and patterns that might be missed in manual analysis
• Better predict payment timelines, improving your ability to manage working capital

Plus, those that are industry-specific often integrate with your existing accounting systems, helping reduce manual errors and streamline the process further. 

Investing in these technologies may require an upfront cost, but the long-term benefits in terms of time savings, accuracy, and strategic insight can provide significant returns. 

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In an unpredictable economy, the ability to accurately forecast and manage cash flow can mean the difference between thriving and merely surviving. By adopting these strategies, subcontractors can develop dependable cash flow projections and maintain a proactive approach to financial management, enabling them to navigate uncertainties with greater confidence and success.

About the Author

Claire Wilson is Head of Construction Solutions at Siteline, the only pay app and lien waiver management software for trade contractors. Previously, Claire was a project manager at Tishman Construction in New York City where she worked on monumental projects including Hudson Yards and JP Morgan’s Corporate Headquarters. She has a BS in Civil Engineering from Bucknell University and now serves on the board of the Bay Area Subcontractors Association (BASA).