What is a backlog in construction?
In many walks of life, ‘backlog’ can be a pejorative term. A friend might tell us they are facing a backlog at work, and we will envisage someone who is snowed under with an array of tasks.
However, in construction the term backlog has a different meaning. According to Associated Builders & Contractors (ABC), a construction backlog refers to the amount of work, “measured in dollars, that construction companies are contracted to do in the future”.
Why the size of a construction backlog matters
The greater the value of the construction backlog, ABC says, “the more comfortable contractors can be with respect to their near-term economic circumstances. The smaller the value of the backlog, as a share of annual revenues, the less comfortable are the circumstances in which contractors are operating.”
Excessively small backlogs, ABC adds, “imply that contractors are running out of work and need to identify and secure additional sources of future revenues”.
So, it would appear that a sizable backlog is essentially good for the financial health of a construction firm.
But there are caveats to this point of view. Missouri-based construction firm Cannon Builders suggests that having too long a backlog can be an issue as well.
“If you’re telling prospective customers that you can’t start their project for nine months, it’s going to be hard to win new jobs. This will often balance itself out over time, but it’s a dangerous trap to dig your way out from,” it says.
The firm also warns that customers might question a company’s ability to fulfil an obligation to deliver a project if it has a long backlog. “[It] could mean that you’re behind and can’t manage your projects effectively. Absolutely nobody wants to enter into a contract with someone who they suspect can’t hold a deadline.”
So, assuming that we want a degree of backlog–not too much, not too little–to illustrate where we are at as a viable construction firm, how do we calculate what that backlog actually consists of, its value to a company and the overall health of the enterprise?
How to calculate a construction backlog
One of the oft-quoted ways of determining the value of a backlog in construction is to use a work in progress report, or WIP.
WIP is a supply chain management and production term describing partially finished projects awaiting completion. Such financial reports help companies to keep track of the total costs of a construction project at the point when such a document is being drawn up.
Typical costs may include labour, raw materials and overhead costs for different stages of the building process.
Cannon Builders spells out the importance of having a WIP when assessing a backlog’s value: “By including the contract value and information for upcoming awarded projects in your WIP report, a surety can establish where your business stands on the current projects using the Percentage of Completion Method.”
According to the Corporate Finance Institute, the Percentage of Completion Method recognises the revenues and expenses relating to a construction project in proportion to the completeness of the contracted project. This calculation is applied when assessing the backlog figure.
Tips for managing a construction backlog
Given the need to balance having a degree of backlog, but not too small or large, what is the best way to manage one?
As well as an accurate measurement of a company’s backlog from the outset, communicating regularly with clients is very important. Such transparency will help reduce any concerns the client might have about the firm’s ability to deliver the project on time and within budget.
The ability to cope with the amount of work on its books should give an indication as to the well-being of a firm and its ability to attract and retain enough staff to get the job done.
Knowing your limits as a company and being realistic about the scale and scope of work that you can take on is another step in managing the backlog situation effectively.
Bluebeam has an array of tools to help construction firms manage their activities, with construction software which makes it easy to create, organise and share detailed site logistics plans for even the most complex jobsites.
