Budgeting and forecasting is how a construction company plans its year and keeps that plan current. The budget is the plan: how much work you expect to do, the gross margin you expect on that work, and the overhead it takes to run the company. The forecast updates the plan every month as jobs are won, lost, finished or delayed. Together they tell you how much revenue you need, what markup to bid, and whether you’re on track.
This guide covers how to build a construction company budget, how to find your break-even point, how overhead drives markup, and how to keep the forecast current.
Budget, forecast and cash flow forecast
| What it answers | How often | |
|---|---|---|
| Annual budget | What should this year look like? | Once a year, before it starts |
| Rolling forecast | Based on what we know now, where will the year end? | Every month |
| 13-week cash flow forecast | Will we have the cash to pay the bills? | Every week |
The first two are about profit. The third is about cash. See how to build a 13-week cash flow forecast.
How to build a construction company budget
- Start with backlog. Signed work not yet done, and when it will be done, job by job. Your WIP schedule has it.
- Add expected new work. Based on your bid pipeline and how much you usually win, by type of work and by month.
- Apply gross margin by type of work. Use the margins you’ve actually earned, not the ones you bid.
- Budget overhead line by line. Office salaries, rent, insurance, vehicles, equipment not charged to jobs, software, professional fees and the owners’ salaries.
- Plan for growth. The staff, equipment and spending you’ll need if the volume shows up.
- Put it in writing, by month, and compare actual results with it every month.
Find your break-even point
Break-even revenue is your overhead divided by your gross margin.
In round numbers: if overhead is $1.5 million a year and gross margin runs 20%, break-even revenue is $1.5 million divided by 0.20, or $7.5 million. Below that, the company loses money no matter how well individual jobs go. To earn $500,000 of profit, it needs $2 million of gross profit, or $10 million of revenue at a 20% margin. We’ve seen a break-even number like this change a client’s bidding decision, because it shows how much work the company needs and at what margin.
Overhead and markup
Every bid has to carry its share of overhead. If you expect $10 million of revenue and $1.5 million of overhead, overhead is 15% of revenue before any profit. Bid below that and a job can look profitable on the job cost report while the company loses money. When volume drops, the same overhead spreads over less work, so check your overhead rate whenever your backlog changes. See construction profit margin for how markup and margin differ.
Keep the forecast current
- Compare actual results with the budget every month, by job and for overhead.
- Update the forecast for the rest of the year with what you know now: new awards, delays and fade on jobs in progress.
- Watch backlog. If it’s shrinking, next quarter’s revenue is already shrinking too.
- Check break-even again when overhead or margin changes.
Common mistakes
- Budgeting revenue without checking it against backlog and the bid pipeline
- Using bid margins instead of the margins you actually earn
- Leaving the owners’ salaries out of overhead
- Building the budget once and never comparing it with results
How we help
We build your annual plan and budget, compare it with your results every month, and update the forecast for the rest of the year. See our growth and exit planning services and monthly financial reporting, or all our construction accounting services. See how we work with HVAC companies and with home builders and remodelers.
FAQs
What’s the difference between budgeting and forecasting?
A budget is the plan for the year, set before it starts. A forecast updates that plan every month with what you know now.
How do you calculate break-even revenue for a construction company?
Divide annual overhead by your gross margin. With $1.5 million of overhead and a 20% gross margin, break-even revenue is $7.5 million.
What goes in a construction company’s overhead budget?
Office salaries, rent, insurance, vehicles, equipment not charged to jobs, software, professional fees and the owners’ salaries.
How often should a contractor update the forecast?
Every month, after the books close, together with the WIP schedule.
Where should a contractor’s revenue budget come from?
Backlog first, then expected new work based on your bid pipeline and how much you usually win.
