What is Construction Backlog? Construction Backlog Management

How construction backlog is different from normal backlog

In normal conversation, most people would probably associate the word “backlog” with something that is negative in connotation – a backlog of work, for example, would mean that the person in question has a lot of work to do as soon as possible, up to the point of overwhelming them.

Surprisingly enough, the word does not carry the same meaning in the context of the construction industry. Here, “backlog” is the amount of work that will be done in the future, and it is also one of the most important measurements of a construction company’s success. The official definition of backlog, according to Associated Builders & Contractors is how much work, “measured in dollars, that construction companies are contracted to do in the future.”

The importance of construction backlog

The definition of backlog is not the only difference for the construction industry specifically. Unlike “traditional” backlog, construction backlog cannot simply be described as “the bigger it is – the worse the overall situation is for you.” Construction backlog should not be too big, but it cannot be too small, either, and a nonexistent backlog is very bad for a construction business.

Construction backlog refers to the total value of projects that a construction company has contracted to complete but has not yet begun or finished. This includes both prioritized work that needs to be addressed immediately and future projects that the company has secured bids for.

Construction backlog measurement is a great way to receive a variety of insights into the overall financial state of an organization, as well as its workload in the future. A time-based backlog indicates the estimated time it will take to complete all outstanding projects, while a cash value backlog reflects the total revenue the company expects to generate from these projects.

A healthy construction backlog suggests that the company has a steady stream of work and is likely to remain profitable in the near future. Conversely, a declining backlog may indicate that the company is struggling to secure new projects or is facing delays in completing existing ones. As such, a healthy balance is necessary..

Why is a large construction backlog bad?

Delays in project start dates due to a lengthy backlog can jeopardize your ability to attract new clients. While the backlog may eventually be cleared, it is a precarious situation to put yourself in.

An excessively long backlog is a significant disadvantage for the overall financial state of a construction company. Contractors who amass excessive backlogs often do so by aggressively pursuing every contract opportunity, even at the expense of profitability. This strategy of undercutting competitors can lead to unsustainable financial practices and jeopardize the company’s long-term viability.

Prospective clients may also raise concerns about a company with an extensive backlog. While having clients is a positive sign, an excessive backlog could indicate inefficiencies in project management and a potential inability to meet deadlines.

While a sizable backlog may signal growth opportunities for contractors, rapid expansion without adequate preparation can be detrimental to the company’s well-being. The overextension of resources and financial strain are common pitfalls associated with rapid growth and often lead to long-lasting repercussions for the business.

Uncontrolled expansion is often the result of an eagerness to capitalize on increased demand, leading contractors to accept more projects than they can effectively manage. Therefore, while a healthy backlog can be a positive indicator, contractors must exercise caution and carefully plan their growth trajectory to avoid overextension and financial instability. Sustainable expansion requires a balanced approach that prioritizes resource capacity and financial health to ensure long-term success.

Why is the absence of a construction backlog even worse?

A minimal or non-existent backlog can paint a picture of disorganization and a lack of consistent work. While the ability to take on projects at the last minute may seem appealing, it can also suggest that the company is struggling to generate new business and is barely keeping afloat.

In the dynamic and competitive construction industry, a stagnant backlog indicates limited growth prospects and even potential instability. The inability for a company to secure new projects or maintain a steady workload can threaten its long-term viability.

While some clients may appreciate a contractor’s immediate availability, excessive eagerness to accept projects can raise questions about the company’s expertise and reputation. Reputable contractors often have backlogs, reflecting high demand and consistent performance.

Therefore, a healthy backlog serves as a positive indicator of a construction company’s stability, growth potential, and ability to deliver quality work. While last-minute project acceptance may provide temporary relief, it is not a sustainable strategy for long-term success in the construction industry.

Calculating construction backlog

One common method for evaluating the value of construction backlogs is through the use of work-in-progress (WIP) reports. WIP, a term from supply chain management and production, refers to partially completed projects. These financial reports aid construction companies in tracking the total cost of a project at the time the report is generated. Typical costs included in a WIP report include labor, raw materials, and overhead expenses associated with various stages of the construction process.

The company’s status in regards to its ongoing projects can be revealed by utilizing the percentage of completion method to process the values of both current and upcoming contracts. This method involves the direct comparison of a project’s completion percentage and the project’s expenses and revenues.

Of course, this parameter can be calculated manually, but the use of specialized software is a far better idea for reasons of accuracy and speed. By employing dedicated software solutions, construction companies gain enhanced control over their WIP data, ensuring accuracy and efficiency. These tools not only eliminate the need for manual calculations and error-prone spreadsheets but also provide a centralized platform for managing various aspects of project finances.

There are several software programs to streamline WIP tracking, eliminating guesswork and errors from the process. These programs can also facilitate the organization of various project management tasks, including change orders, job costing, and accounts receivable/payable (AR/AP).

• Jonas Premier is a cloud-based construction estimating software program that is designed for general contractors and project managers.

• Knowify is a cloud-based construction estimating software program that is designed for use on tablets. It is a great option for contractors who need to be able to estimate projects on the go.

• PlanSwift is a Windows-based program integrated with Excel. PlanSwift is a popular choice for construction professionals who need a powerful and versatile estimating tool.

• Clear Estimates is acloud-based construction estimating program designed for small to mid-sized builders and home remodelers.

The use of WIP tracking software empowers construction companies to make informed decisions based on real-time data, optimize resource allocation, and identify potential financial risks early on. This ultimately contributes to improved project outcomes and enhanced financial stability.

Best practices for construction backlog management

It should be obvious by now that a construction backlog is all about balance and finding the middle ground between a lack of contracts and an overwhelming amount of work. However, doing so in an industry as complex as construction can be quite challenging for a number of reasons. As such, we can offer several different pieces of advice for better construction backlog management:

Make hiring decisions with the construction backlog in mind

Striking a balance between labor requirements and financial constraints is crucial for effective crew size management. While the temptation to expand your workforce at the last minute may arise when faced with a pipeline of projects, this reactive approach can lead to financial strain and potential payroll shortfalls.

Conversely, maintaining an excessively small crew can hamper project efficiency and hinder your ability to meet client deadlines. The key lies in proactive planning and strategic hiring practices that align your crew size with project demands and financial capacity.

Ensure clear and timely payment mechanics

Maintaining steady cash flow is crucial for business continuity and growth in the construction industry. However, delays in payments from clients can disrupt this flow and hinder a contractor’s ability to undertake new projects. Fortunately, mechanic’s liens serve as a valuable legal tool to protect contractors’ rights and expedite payment collection.

Mechanic’s liens enable a material supplier or subcontractor to secure their own payment for a specific item, be it services, materials, or the actual on-site work. These liens prioritize the claimant’s rights, ensuring that they are compensated before other creditors.

By understanding the mechanic’s lien process and implementing preventive measures, contractors can maintain healthy cash flows and continue to thrive in the construction industry.

Monitor both current and projected economic conditions

By understanding and communicating your backlog in the context of broader economic trends, you can reassure clients of your financial strength and ability to deliver quality projects within the industry’s standard timelines. This transparency fosters trust and reinforces your position as a reliable partner in their construction endeavors.

Prevailing economic conditions, including inflation, interest rates, and recessionary tendencies, also influence construction backlog. A good example of this is the survey that Associated Builders and Contractors conducts on a regular basis to assess its Construction Backlog Indicator. If your backlog aligns with this industry benchmark, it demonstrates financial stability and positions you effectively to explain to clients why your current workload reflects the current industry norm.

Additionally, aligning your backlog with industry benchmarks can serve as a negotiating tool. If a client expresses concerns about your workload, you can confidently explain that your backlog is in line with the industry average, indicating your ability to manage projects effectively and deliver on deadlines.

Keep track of your backlog on a regular basis

Precisely understanding your construction backlog at all times is crucial. This necessitates maintaining detailed records of your bids, contract awards, ongoing projects, and projected completion dates.

By meticulously tracking these elements, you gain valuable insights into your workload capacity, enabling you to make informed decisions about accepting new projects. This proactive approach ensures that you can effectively manage your existing commitments without overextending your resources.

Moreover, accurate backlog data empowers you to make precise forecasts regarding project timelines. Proactive construction backlog monitoring also enables the timely identification of current or future bottlenecks or delays. It is a lot easier to prepare for these kinds of challenges when you have information about them in advance, ensuring that project schedules remain unaffected by them.

Do not ignore project management and BIM software

Project management solutions allow users to prepare their resources as soon as a bid is closed, improving overall project efficiency. The ready availability of information empowers contractors to effectively manage their workloads and optimize scheduling.

By leveraging project management software, contractors can gain real-time insights into the progress of projects, from lead generation to crew mobilization. This way, project schedules can be adjusted in real time when necessary, and all participants can be easily alerted about potential project delays.

The ability to track and analyze time delays between bid closing and crew mobilization provides valuable data for contractors to make informed decisions about their project portfolios. This information can be used to improve the efficiency of project schedules, optimize bidding strategies, and also boost the effectiveness of the company as a whole.

The same logic applies to other types of construction software. For example, BIM solutions are a great way to improve the effectiveness of a company’s resource management at any phase of a project, from start to finish, while also being a massive advantage in collaboration and communication. Solutions such as Revizto are practically irreplaceable in these situations.

Do not be afraid to turn projects down

Many contractors harbor concerns that declining a project will lead to the loss of future opportunities with that client or damage their reputation. However, upholding a reputation for excellence is paramount, and sometimes, turning a project down is the most effective way to preserve quality standards on current undertakings.

Accepting every project that comes along, regardless of its suitability, can lead to overextension and a decline in the quality of work delivered. By carefully selecting projects that align with their expertise and capacity, contractors can maintain a consistent level of excellence, fostering client satisfaction and enhancing their reputations.

Declining a project can also be an opportunity to clarify capacity limitations and manage expectations with clients. Open communication and transparency can strengthen client relationships, even if a particular project is not a good fit.

Maintain and expand your business contact network

Cultivating relationships with individuals you encounter through your business operations can create a valuable network of resources, including subcontractors, designers, suppliers, or local officials who can provide insights and crucial information. These connections can prove especially beneficial when managing a growing backlog, estimating project costs and durations, or seeking qualified crew members.

By building rapport with these individuals, you gain access to a wealth of expertise and experience, enabling you to make informed decisions and navigate the complexities of the construction industry. Investing in these relationships fosters the mutually beneficial exchange of information and support, and your network of contacts becomes a source of guidance, expertise, and potential collaboration, contributing to the success of your construction endeavors.

Conclusion

In the realm of construction, backlog is the cumulative value of projects a company has committed to but not yet commenced. This encompasses both prioritized tasks requiring immediate attention and future projects secured through the bidding process.

A robust construction backlog indicates that a company has a steady flow of work and a promising outlook for profitability in the near future. On the contrary, a dwindling backlog may signal that the company is struggling to acquire new projects or facing delays in completing existing ones.

The construction backlog is a crucial KPI for construction companies, enabling them to gauge their financial stability, project capacity, and general business trajectory.