When running a successful construction firm, thinking about future jobs is just as important as focusing on projects. To keep your crews busy and ensure consistent revenue and growth, you must ensure you have a good amount of work in the pipeline.
That pipeline is often referred to as a construction backlog.
In this guide, you'll learn how to calculate your backlog, current trends surrounding project pipelines, and how to maintain a healthy construction backlog in your firm.
A construction backlog is the total amount of work a construction company has in its pipeline, representing all the projects that have been contracted but not yet concluded. It's essentially the uncompleted work that the company is scheduled to perform, and it can provide a clear picture of future revenue and workload.
Because a construction backlog reflects the company's upcoming commitments and capacity, it helps inform how contractors should be bidding and is an important consideration when taking on new business.
A construction backlog is usually measured in dollars and project volume, though some firms also calculate it based on available labor, because it's a finite resource.
You can measure construction backlog simply by calculating the dollar amount of all contracted work you have lined up but haven't completed yet.
For example, if your construction firm has $5 million worth of contracts for projects that are scheduled over the next 12 months but have not yet been completed, then your construction backlog would be $5 million.
That figure represents the total value of work your company is committed to delivering in the future.
If you want to take things a step further, you can also convert your backlog into a measure of time, showing how many months of work you have under contract.
Associated Builders and Contractors (ABC) offers a Construction Backlog Indicator, which provides a standardized approach to measuring the amount of work contractors have under contract.
The ABC uses the following formula to convert reported backlog amounts in dollars into the number of months of available work:
Current month's level of backlogs (reported in dollars) ÷ Previous fiscal year's revenues (base year) × 12 = total months of forward-looking work under contract
Because labor is a finite resource and directly your capacity, some firms measure backlog based on the availability of labor. Doing so will help you determine the number of total labor hours available for open jobs.
According to AsphaltPro, you can calculate this using the formula:
Backlog Months Labor Hours X Avg. Gross Profit Per Labor Hour ÷ (Avg. Annual fixed cost + budgeted net profit) ÷ 12
Regardless of how you calculate backlog, remember that your pipeline can be in constant flux as you continuously complete jobs and bring in more work. That's why it's important to regularly monitor and adjust your backlog to ensure it aligns with your firm's capacity and strategic goals.
Data released by ABC shows that construction backlog "held steady at 8.4 months in July [2024]," though that figure is down 0.9 months compared to the previous year.
Moreover, according to ABC, "Only the largest contractors, those with greater than $100 million in annual revenues, have longer backlog than one year ago. On a monthly basis, the decline in backlog was driven by declines among the smallest contractors, those with less than $50 million in annual revenue."
This tells us that the construction market is becoming increasingly challenging for smaller contractors. Some of the factors contributing to this include:
Labor shortages. The construction industry continues to face significant labor shortages, particularly among skilled trades. Contractors (especially smaller ones) may struggle more to attract and retain the necessary workforce, limiting their ability to take on new projects.
Elevated prices. Inflation has stabilized this year, but the costs of key construction materials remain high.
As ABC Chief Economist Anirban Basu points out, "While inflation has moderated in recent months, construction materials prices remain almost 40% above pre-pandemic levels… With construction spending down for the past two months, the industry eagerly awaits lower interest rates."
Interest rates. Speaking of which, high interest rates have led to increased borrowing costs for construction projects, impacting the affordability of new developments. Smaller contractors who rely on financing to manage cash flow and fund operations are more vulnerable to these higher costs.
The term "backlog" often has negative connotations because it suggests delays or unfulfilled obligations. But in the construction realm, firms want to have a fair amount of backlog. Having a healthy backlog ensures continuous work, helps manage resources efficiently, and provides financial predictability.
Consider the following.
Financial stability. A solid backlog means more business is in the pipeline, which translates into future revenue and cash flow. Construction backlog also offers a financial cushion so you can better navigate the ups and downs of business and the economy in general.
More informed planning. When you have a good idea of the work coming up, you can be more effective at planning and resource allocation. A well-managed backlog enables better scheduling and reduces the risk of overcommitting or underutilizing your workforce.
Increased negotiating power. Having a steady stream of work lined up gives you more leverage in negotiations with clients and suppliers. You can be more selective about the projects you take on and focus on higher-margin opportunities.
A better reputation. A healthy backlog can also impact how clients perceive your business. They may be more likely to trust a firm that consistently has work in the pipeline, so having your backlog in check can lead to more opportunities and a stronger market position.
Now that you know why a healthy backlog is important, let's talk about how you can achieve it. Here are five tips on how to add and maintain work to your pipeline
As mentioned above, you must regularly monitor and calculate your backlog. A construction backlog is one of the most dynamic measures in your firm because you're constantly delivering projects and (hopefully) adding work to the pipeline.
With that in mind, keep your backlog updated and top of mind. Use construction project management software and resource tracking tools to track your ongoing and future projects accurately. Doing so offers transparency so you and your team always know where the company stands regarding current and future projects.
Constantly measuring your backlog also helps you be more proactive with finding work. If projects in the pipeline are trending down, you can identify this issue sooner rather than later and take steps to correct course.
Clients are more likely to continue sending work your way if they trust your firm. One of the best ways to win their confidence is to be a good communicator. You can do this by:
Providing regular updates. Keep clients informed of project progress through consistent updates. Whether it's weekly reports, progress meetings, or even just a quick email, regular communication helps clients feel involved and reassured that everything is on track.
Setting clear expectations. Ensure that all parties have a clear understanding of the project scope, timelines, costs, and any potential challenges. This reduces the chances of misunderstandings and keeps everyone on the same page.
Being transparent about challenges. Communicate issues ASAP. Clients appreciate transparency and are more likely to trust you if you're upfront about problems and proactive in finding solutions.
Having more work in the pipeline is great, but you need to ensure you have the resources and capacity to deliver. This is particularly important given the tight labor market, where competition for skilled labor is fierce. Proactively managing your workforce and providing ongoing training can give you a competitive edge so you can meet current and future demand.
It can be tempting to keep adding work to the pipeline or to immediately commit to your clients' timelines. However, overcommitting can lead to missed deadlines, strained resources, and ultimately, dissatisfied clients, and less work in the pipeline.
That's why you must carefully assess your current workload, resource availability, and realistic capacity before taking on new projects. Be upfront with your clients about bandwidth and scheduling constraints so you can manage expectations and prevent overextension.
Additionally, being selective about the projects you accept allows you to focus on quality over quantity, leading to better outcomes and stronger client relationships in the long run.
Finding new work and potential clients is a big challenge for many firms trying to maintain their backlog. Oftentimes, websites that list jobs are difficult to search or are already outdated by the time jobs are found.
Tools like Plan Room within Bid Board Pro can help contractors easily discover projects that have been publicly shared in BuildingConnected. This way, contractors can find and bid on work to help build their backlog and maintain financial stability.
A well-managed backlog not only secures your future work, it also strengthens your reputation in the industry, positioning your firm for continued growth and success. So, make your backlog a priority by measuring it regularly, improving your capacity, and being proactive with adding jobs to the pipeline.
