With developers and planners alike becoming more risk-averse in response to tougher construction market conditions, the role of digital analytics is going to be crucial to provide assurances that can only be provided through accurate forecasting. Richard Winson, Director at Naismiths Analytics, explores how digital tools are increasingly helping to bring together critical data, and using it to support the delivery of individual construction projects and large portfolios alike.
The last few years have been as turbulent a time for major construction and development projects as there has been in recent memory. The impacts of the Covid-19 pandemic, the war in Ukraine and the unprecedented inflation rises have all had far-reaching consequences when it comes to the cost of projects, and while the market calmed significantly in the latter stages of 2023 into the early part of this year, those recent challenges are still having an impact.
Consider a five-year project that started in late 2019. The investors and financiers behind the project will have made their decisions for backing it based on prices that will have been reflective of the market at the time. However, this perfect storm of external factors – coupled with the ‘normal’ cost inflation that is expected over longer-term projects – mean that those forecasts are extremely unreliable.
This is a growing challenge for consultancies that are acting as the eyes and ears of the investors, who are increasingly looking at ways in which more data-centric approaches can be taken to financial forecasting and bring about a long overdue move to the digital age.
A moveable feast
The biggest challenge when it comes to financial forecasting for construction schemes – particularly those that have a larger gross development value and are therefore more attractive to funders – is that they are by their very nature long-term projects. Ignoring the extreme challenges that have been prevalent over the past couple of years, short-term issues can generally be mitigated by taking a flexible and collaborative approach with the contractor and supply chain.
However, the peaks and troughs of the business and economic climate are much more pronounced on projects that can take multiple years to complete and – in turn – bring return on investment for funders.
There are a multitude of factors at play in this equation, but typically it boils down to having a budget that works for the build programme, and vice versa. The volatility of the current economic climate means that investors are finding themselves in very challenging conditions. While we are thankfully a long way past the inflationary peaks of 2023, there is a reticence to adjust budgets in line with this just yet while the market is still to settle fully.
Combine this with other challenges such as the current labour shortages in the construction sector and the ongoing backdrop of contractors in financial trouble, and it paints a challenging picture for ongoing and upcoming projects.
Using data as an asset
In this kind of climate, data can be your biggest asset, but it needs to be versatile enough to adapt to the changing winds of the industry and detailed enough to help those acting on behalf of investors to make informed, calculated decisions. Platforms such as the Building Cost Information Service from RICS can act as a guide, but the broadness of its parametres and costings mean that getting an accurate estimate can be an inexact science.
Traditionally, the role of the monitoring surveyor would involve the preparation of a written report to consider the viability of a project, and then monthly draw-down reports to sanction the loan. Consultants, such as Naismiths, have historically made assessments of projects and advised clients on potential risks or deficiencies in the business plan, and help quantify and balance them.
However, attitudes are slowly beginning to change. The construction industry doesn’t have the best record when it comes to innovating its processes, but the benefits of digitisation are increasingly becoming clear. There is a real gap in the market for the proper use of granular data, and by combining historical data from previously completed projects and live information from the market, there is the opportunity for real-time risk metrics to be assessed across a range of projects.
That real-time element means that not only can this be used at the commencement of the project but can also be easily adapted for use at various stages throughout the build programme. It can also form a key part of recovery plans should the main contractor on the project run into financial difficulties, allowing the investors to essentially run a ‘lifeboat drill’ and simulate what their level of liability is should such an event happen, and how they can mitigate that risk.
Having the ability to take a truly granular look at data can slow down the moving parts of the process, support the longevity of a project and help safeguard investments. By fully exploring the advantages of digital financial forecasting and working with consultants that can deliver it, investors in construction projects can reap the reward of significantly improved cost predictions and – consequently – more favourable funding outcomes.
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