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Variance Analysis
What is Variance Analysis?
Variance analysis in the construction industry refers to the process of investigating the difference between actual and planned costs, schedules, or resources during a construction project’s life cycle. It focuses on identifying and understanding discrepancies between what was initially proposed and the actual outcome, allowing project managers to spot inefficiencies, control costs, and adjust project goals accordingly.
For instance, if a construction project was expected to consume $200,000 in materials but actually consumed $250,000, a variance analysis would examine why this $50,000 overspend occurred—whether due to price inflation, inaccurate estimating, or uncontrolled scope changes. It is a crucial tool for proactive project management, allowing early detection of performance issues and enabling timely corrective actions. Understanding the causes of variances also informs future project planning, improving the accuracy of estimates and success rates of subsequent projects.
For subcontractors specifically, variance analysis offers several key benefits that ultimately help to improve overall business performance. Regularly running variance analyses can help:
- Refine the bidding process by identifying areas where estimates were off, leading to more accurate future bids
- Aids in cash flow management, allowing subcontractors to better predict and manage their financial resources by anticipating potential overruns or savings
- Highlight areas for efficiency improvements, potentially increasing profitability
- Provide concrete support for change order requests when unforeseen circumstances affect project costs
- Identify potential risks in future projects and develop mitigation strategies
- Proactively communicate variance causes to general contractors (GCs) or the client, building trust and demonstrating professionalism
- Inform better resource allocation decisions, ensuring labor and materials are used most effectively across different projects
Effective variance analysis demands comprehensive financial data. Siteline streamlines this process by meticulously tracking change orders and generating precise pay applications, ensuring all A/R functions are accurately documented and seamlessly incorporated into variance calculations. This allows subcontractors to focus their energy on interpreting results and implementing corrective actions, ultimately improving project management and profitability.
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Other construction terms
What is Progress Billing?
Progress Billing is a method commonly used in the construction industry, where billing for a project is done at different stages as it progresses, rather than asking for full payment upfront or at the completion of the project. This type of billing is beneficial both for constructors and clients. For constructors, it helps maintain the cash flow required for the ongoing expense of materials and labor. For clients, it provides assurance that they are paying for the work only as it is being completed and allows them to budget effectively. Each invoice is usually based on the percentage of work completed, thus it is also known as percentage-of-completion billing method. Proper documentation, like progress reports or photos of the construction site, often accompany these invoices as a proof of progress.
What is a Performance Bond?
A Performance Bond is a type of surety bond issued by an insurance company or a bank to guarantee satisfactory completion of a project by a contractor. In the construction industry, a Performance Bond is often required to protect the client if the contractor fails to complete the contract or does not meet the agreed standards or time frame in performing the project. It is essentially a safeguard tool that ensures the project owner will not incur financial loss due to the contractor's inability to fulfill the contract. This bond provides assurance that the contractor has the necessary resources and competencies to execute the project according to the stipulated terms.
What is a Cash Flows Statement?
A Cash Flows Statement, specifically in the construction industry, serves as a financial document that provides a detailed summary of a company's cash inflows and outflows over a certain period. This statement plays a crucial role in understanding the liquidity and solvency of a construction company as it helps track where the funds originate and where they get spent. It is segmented into three elements: operating activities (day-to-day operations of the construction business), investing activities (acquisition or disposal of assets), and financing activities (transactions with owners or lenders). It provides invaluable information for contractors, investors, and stakeholders, enabling them to scrutinize the financial health, operational efficiency, and investment potential of the construction company.
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