The Importance of Backlogs in the Construction Industry

Successful contractors are always planning ahead to make sure they have plenty of jobs scheduled.  This process is also referred to as building a construction backlog.

Tracking your backlog allows you to forecast future earnings, allocate the proper resources for each project, and ensure projects are delivered on time and within budget.

A backlog in construction provides valuable insights regarding a company’s workload and potential revenue and serves as a great tool to forecast growth.

Keep reading to learn how backlogs have a direct impact on your operations, how to build the best backlog for your company, and how to balance and manage it effectively.

Key Takeaways

• Creating a construction backlog gives you greater control over your cash flow to determine your company’s profitability.
• A nonexistent, limited, or inaccurate backlog puts undue financial stress on your company.
• Compiling too much of a backlog could lead to missed deadlines and a perception from others that your company underdelivers or stretches itself too thin.
• Accurately measure your backlog levels by building job profiles, leveraging available resources to determine your workload capacity, and reviewing timelines and expected profitability.
• Begin building an accurate backlog by developing an effective job costing strategy to avoid cost overruns, leverage WIP reports, and assess past project performance.
• Construction accounting software can help you manage your backlogs by giving you more insights into job costing, cash flow, and WIP reports.

The Danger of Not Having a Backlog

Contractors who do not have a degree of backlog or have a minimal number of scheduled jobs risk running out of work, putting their business in a precarious position.

Without a healthy backlog of work, a contractor’s business is essentially surviving job-to-job — which is not sustainable long term.

The absence of a backlog means it’s nearly impossible to accurately forecast cash flow totals or the amount of money a contractor receives and spends throughout a project — forcing construction companies to rely more on their cash on hand and lines of credit.  

Creating a backlog allows for greater control of cash flow, meaning your company can more easily allocate funds for current and future projects.

An accurate backlog allows you to measure your profitability and capacity to take on future projects.

How to Build a Backlog

To create an accurate backlog, there are a few important steps you should take:

      1. Develop an Effective Construction Job Costing Strategy

When you establish an effective job cost structure, you can track every dollar spent to determine your current cash flow.

A positive cash flow means you’re making money on a project, giving you more financial flexibility because the client is paying for the project.

Whereas a negative cash flow shows that you’re losing money, and any project expenses are coming directly from your company.

Accurately calculating your cash flow allows you to forecast and allocate the necessary funds across multiple projects.

Ultimately, this gives you a better understanding of the types of jobs you can take on and when based on your cash flow over a certain period of time. It also helps improve your financial strength which is a good sign to prospective customers.

      2. Leverage WIP Reports

Using a work in progress (WIP) report is key to balancing your backlog. WIP reports track the total costs of each construction project a contractor is currently working on, giving them increased visibility into where a project stands, the typical costs associated with it, and the potential revenue they can earn from their current projects.

Contractors can also use WIP reports to identify when they need to increase their backlog because they can see their cash flow drying up.

       3. Assess Past Project Performance

Oftentimes, past projects can serve as an indicator for your company’s ability to take on future, similar projects. Reviewing past performance, deadlines, and revenue earned from these projects can provide you with helpful insight as you build out your backlog.

What You Should Keep in Mind When Measuring Your Construction Backlog

While building a sizable backlog seems like a good idea, it’s important to keep a few factors in mind to avoid potential pitfalls, such as overextending your team, which can lead to missed deadlines.

      1. Build Job Profiles

Before building your backlog, it’s important to have a particular type of job, or profile, in mind. This will allow you to create a potential time frame and estimate profitability for each profile before bidding so you can make more informed decisions on jobs you should pursue.

       2. Know When to Add to Your Backlog

You should review the job profiles that make up your current backlog to determine expected timelines and profitability to decide when you should add to your backlog.

If you feel that you won’t come out profitably by the end of the fiscal year, or you’re concerned about keeping all your workers employed through the slow season, then start adding more jobs to your portfolio.

       3. Leverage Available Resources to Determine Your Workload Capacity

Establish a threshold based on WIP reports, workers’ schedules, and equipment availability. This threshold will help you identify when to slow down or stop bidding on jobs to avoid building too much backlog.

If your backlog becomes too large, it can lead to missed deadlines, and your company’s reputation could be negatively affected, leading to project owners not selecting you for jobs in the future.

 Before bidding on jobs, you should review your current backlog, WIP reports, resource availability, construction costs, and current cash flow to determine if adding more projects is beneficial at that time.

       4. Review Timelines and Expected Profitability

Project owners value timeliness and quality of work when selecting a contractor during the bidding process.

Keep in mind that a bloated backlog may rule out certain, more profitable opportunities because your wait times could be too long for some projects.

Before building your bid, it’s important to review the project information, your current backlog and forecast the resources you would have available during the project you’re bidding on.

You should also determine the profitability of the project and compare it to other projects you are planning to bid on to ensure you have the most profitable backlog possible.

Balancing Your Construction Backlog

A balanced construction backlog means having the right amount of work for your construction business. Enough that you can cover your expenses and bank a profit while not overstraining your workforce.

 The process of creating a balanced construction backlog largely depends on the size of your company, your available resources, and the type of work you’re being asked to complete.

      1. Why It’s Important

Building a balanced construction backlog means your company gains more visibility into critical insights, such as revenue streams and overall financial stability. You can also:

• Have better resource allocation across multiple projects.
• Improve your company’s reputation by successfully completing projects on time and within budget.
• Be more particular when selecting projects to pursue to maximize profits.

Effective backlog management allows you to keep a balanced backlog and sets you up to bid on future contracts and still hit client deadlines.

How Construction Software Can Help You Manage Your Backlog

Construction accounting software plays an important role in construction backlog management to help contractors build and maintain an accurate backlog. With construction accounting software, you can easily build and manage your backlog by:

• Accurately tracking job costing data
• Calculating cash flow
• Reviewing WIP reports

Construction accounting software automates this information, so it updates during each step of your projects.

Having access to this real-time information at a moment’s notice means you can make the most informed decisions when building your backlog to avoid potential pitfalls while enhancing your profitability. This will help you deliver your contracts on time. 

Additionally, FOUNDATION®, a leading construction accounting software, can precisely calculate your cash flow, give you valuable insights into job costing data, and help you manage your WIP reports.  With FOUNDATION, you can easily measure and balance your construction backlog to maximize productivity and profitability while expanding your project portfolio.