Reno Budget Tracking Australia: Forecast Final Cost Early

Reno budget tracking aims to tell you what you spent, but you can't tell your earnings. That number is important because it is what dictates your profit margin. A lot of property flippers learn it in the twelfth week, when the final bill arrives and nothing else can be done. But you can actually predict that number in the fourth week with a really simple technique of six cells, two divisions. This post will detail how to predict that number on a specific renovation project, giving you four readings, three different ways to project the end, and the warning thresholds.

Reno Budget Tracking Australia Baseline: The $120,000 Reno Behind Every Reading

All figures here are made-up and used here for the sake of explaining. The calculations are done in FlipSync IQ and we suggest you to swap these figures with your own scope and quotes.

The renovation is scheduled to take 12 weeks at a cost of $120,000 (excluding GST). There is also an additional contingency of 15% ($18,000) that is set aside. The first four project packages are to be finished by week four.

Planned value in week four is $49,000. Remaining packages (tiling & waterproofing, Kitchen, Paint, Floors) are given remaining $71,000 and are scheduled on week five to twelve.

3 important definitions will be used in this methodology: the Planned Value is the budget for work scheduled as of a specific date. The Earned Value is the budget for work performed as of a specific date. The Actual Cost is the cost incurred or to be incurred for the work. In other words, the Earned Value will be the only metric that pays for work, rather than money.

Reno Budget Tracking Reading 1: The Cost Index at Week Four

Here is what the site looks like at the end of week four.

CP Index has been calculated as the ratio of Earned Value/Actual Cost, which is $44,500/ $55,500 ($0.80). Hence, for each dollar this employee is spending on the project, they are getting 80 cents worth of work completed.

A normal report of expenditures would show $55,500 as being spent compared to the $49,000 plan. The expenditure report might say that you are $6,500 over. That might be OK. But the CPI indicates the real issue, which is you are work-to-date wise, showing less than the $49,000 plan.

Earned Value should be awarded only for completed milestones. For example, the framing package gets a 75% because three of the four milestones have dated photographs that verify their completion. "Almost done" does not even get a credit. Padding Earned Value is how a bad CPI can look good.

Reno Budget Tracking Reading 2: The Schedule Index and Your Holding Costs

The Schedule Performance Index (SPI) is Earned Value divided by Planned Value. In this case it is 44,500/49,000=0.91. Week four shows that 91% of the planned work has been accomplished.

Time is directly related to cost by the holding costs. 12 weeks divided by 0.91 = 13.2 weeks as opposed to 12 weeks, this is 1.2 weeks extra. If holding costs are $1,000 a week (interest on a $480,000 loan at 6.2%, $400 for rates and insurance) then the delay is costing an extra $1,200 above the budget blow out.

While this is an insignificant value in comparison to the overruns on this project, it will increase if the duration is increased, so the SPI should be recorded with the CPI.

The calendar logic should also be face to face. For reasons of simplicity a package delivered on schedule but with a cost of 37% might look acceptable on a Gantt chart. But the cost reading and the time reading note two different failures.

Reno Budget Tracking Reading 3: Allowance Burn on PC Items and Provisional Sums

In Australian building contracts, the most substantial prediction inaccuracies can be hidden within allowances. There are two of these in a Queensland Building and Construction Commission guidance statement. A Prime Cost (PC) item is something that you as the customer will choose after the contract is signed (like tapware or tiles), and a Provisional Sum (PS) is an item that the contractor will give a price for, but they won't be able to be more specific about this until later (like earthworks).

The guidance says: owner pays the difference if a PC choice comes in higher than the estimate or if a PS comes in higher than estimated, but is credited if it's lower. This document is an internal QBCC guidance issued under a Right to Information request, and applies only in Queensland. Check your own contract and state laws.

Track each allowance as a different line, with three columns, the allowance, the choice or actual amount, and the excess. Here are three illustrations of this renovation:

Two of these excesses have not been included in the ledger yet. We have decided on the tiles and tapware, and therefore the cost is committed. The forecast that ignores a signed choice will understate the final cost by $2,550, and I need to include committed excess to the forecast on the day the choice is made, not when we see the invoice.

Reno Budget Tracking Reading 4: Three Forecasts and the Contingency Test

The final estimate is calculated using three different formulas, each of which assumes a different amount of work is left to complete.

Including the committed allowance excess of $2,550 to the second row one-off forecast is $133,550. The contingency left is therefore reduced to $4,450.

An estimate in between those projections is where the honest estimate is. Both packages seem to be the "bad news" estimate, with the plumbing stack and the rotten framing surely being singular events, not to be repeated, making the middle estimate more like the "all packages" baseline rather than a projection. The trend estimate is the high estimate if both packages were to continue to run 13-37% over budget. That leaves roughly $18,700 between the two estimate, representing the uncertainty, and further updating as weeks go by will help tighten the estimate.

Another metric to look at is the to-complete index which is done by the remaining budget over the remaining funds 75500/64500=1.17. The project would need to be completed the rest of the work at a 17% under budget to get to the $120,000 goal. Considering that four weeks in the project has already been run over, this is quite unlikely.

Reno Budget Tracking Action Thresholds: When to Stop and Re-Price

A forecast only matters if it enables you to make a decision. These represent my assumptions, create your own with your financial partner before the start of the plan.

For this renovation the current indicators are red on cost, amber on schedule, red on to complete, and red on trend forecast. Consequently four decisions are required by week four as opposed to week twelve. It is advised to review the remaining scope, win the next package at fixed prices, notify your financier straight away and re-estimate your Maximum Purchase Price on future deals with a greater repair budget.

This explains why the weekly reported index is more stable than the monthly. The index changes with each invoice posted. By doing this on the same day each week, you observe the trend before the issues become apparent.

How Reno Budget Tracking Works in FlipSync IQ

FlipSync IQ has all of the inputs for the individual metrics. Comparing budget and actual expenses shows a red and green variance on each line item. Receipt, invoice, staged payment are all tracked against budget to keep the true cost up to date. Cost Library has purchase, hold, sell, and renovation items with custom lines for allowance.

The workflow view can be a list or a Gantt chart of tasks and the hold costs are synchronized with the calendar. Calendar offsets are accounted for in the money. The history of site check-in and check-out and dated photographs substantiate every earned-value claim. A financial partner can view the data according to roles and permissions but not edit the data; the financial modules can be locked.

It has not been confirmed that FlipSync IQ includes a CPI or forecast report on its feature pages. Yet, it is possible to do the two required divisions in another cell and use the platform for inputs. The ROI dashboard then compares estimated and real returns as the forecast progresses. Plans start at A$39.99/month for three projects, with a 7-day free trial.