What we know about the Industrials
Industrial businesses — such as airlines, construction, or logistics companies — may engage in fixed-price agreements for projects that last many months or years. Infrastructure projects are regularly commissioned by institutions with fixed budgets, which can lead to pricing pressure during negotiations. Subsequent cost overruns have led to insolvency by some of the UK’s best-known industrial contractors.
Scenario modelling is useful
Industrials must have strong forecasts and cost certainty. Yet, over long timeframes, uncontrollable factors can impact performance — making financial models of worst-case scenarios a must pre-contract. Can the project withstand upcoming legislative changes? Or will a machine incur tariffs on export once the UK leaves the EU? The answer to these questions can be simulated.
Simulations and forecasts can also instigate more flexibility in contracts — e.g. pricing adjustments for changes in import costs when rates are not hedged. In our experience, customers in this sector tend to prefer contracts that allow for change, rather than having a contingency for unforeseen events. This approach keeps pricing competitive and relevant to the economy whilst avoiding supernormal profiting by suppliers.
Use the PoC method
Typically, industrial project accounting follows the Percentage of Completion (PoC) method. This is where revenue and profit are recognised in line with the completion of milestones on a roadmap. However, this approach is open to manipulation; costs can be moved to a future period undetected, because costs are recorded according to a pre-defined set of percentages - therefore we recommend that Industrials using the PoC accounting method run an activity-based Profit & Loss at the same time.