Sensitivity Analysis Explained: How Construction SMEs Can Protect Their Profits
- Jones Financial Accounts
- 2 days ago
- 4 min read
Running a construction or engineering business means managing constant uncertainty, material prices, labour rates, project delays, and client payment terms. Yet, too many companies rely on “best-case” budgets and hope for the best.
That’s where sensitivity analysis comes in. It’s one of the most powerful (but underused) tools for construction SMEs. It helps you see how changes in key assumptions, like a 10% material price increase or delayed stage payment, will affect your cash flow, profit, and project viability.
In plain English: it answers the “what if things change?” question.
Most directors don’t realise how much this tool can protect profit margins and support better decision-making, not just for big firms, but for every contractor, subcontractor, and engineering business looking to stay one step ahead.
Let’s break it down.
1. What Is Sensitivity Analysis — and Why It Matters
Why It’s Important
Sensitivity analysis is simply a test of how “sensitive” your results are to changes in key inputs. For example, how would your profit change if:
Labour costs rise by 5%?
Steel prices jump by 8%?
A key project runs two weeks late?
Instead of being caught off guard, you can model the outcome and prepare a plan.
In construction, small changes have a big impact. A 5% overrun in materials on a £2m job is £100,000 off your bottom line, and if cash flow is tight, that could mean delayed wages or supplier payments.
Impact on SMEs
When you perform sensitivity analysis, you can:
Identify which projects or clients are most at risk
Understand the “breaking point” where jobs become unprofitable
Make better pricing, tendering, and funding decisions
Keep the board focused on risks that actually move the numbers
It’s not a luxury, it’s a control tool.
What You Need to Review
Your project margins (gross and net)
Key cost drivers: materials, labour, subcontractors, overhead allocation
Project payment schedules vs. cash inflows
External dependencies (lead times, retention recovery, supply chain issues)
Strategy
Start by running best case, expected case, and worst case forecasts.A 13-week cashflow forecast (you can download a free template here) is the perfect foundation.
Then adjust key variables like revenue timing or material costs by 5–10% and observe the effect on liquidity.
2. Sensitivity Analysis in Project Costing
Why It’s Important
Project costing is where most construction firms lose visibility. They assume labour or materials will stay consistent across the project, but any delay or rate increase erodes margins fast.
By applying sensitivity analysis to project costing, you can spot where small deviations could cause major overruns.
What You Need to Review
Labour utilisation and overtime costs
Material inflation and supplier quotes
Retention timings and release probability
Job overheads (plant, fuel, hire)
Strategy
Build a job profitability matrix showing “what if” margin scenarios
Test changes: e.g., “What if we lose 2 days per week due to bad weather?”
Set cost-to-complete alerts when thresholds are hit
Misconception
“Only large developers or QS teams use these models.”Not true, with today’s digital tools, even SMEs can run simple sensitivity models in Excel or Xero forecasting add-ons.
3. Sensitivity in Cash Flow Forecasting
Why It’s Important
Cash flow is the heartbeat of construction. Stage payments, retention, and delayed certifications all affect liquidity. Sensitivity analysis helps you stress-test cash flow so you can predict pinch points before they hit.
What You Need to Review
Client payment terms (30, 60, 90 days?)
Timing of supplier payments
Payroll and subcontractor cycles
VAT and CIS payment schedules
Strategy
Run at least three cashflow versions:
Base Case: everything goes as planned.
Delayed Case: one major client pays 30 days late.
Cost Inflation Case: materials increase by 10%.
Then identify how much buffer or overdraft you’d need in each scenario.
You can read more here: How to Keep Cash Flowing in Construction Without the Stress
4. Sensitivity in Pricing & Tendering
Why It’s Important
Tenders are often won or lost by a few percentage points, and many SMEs underprice due to optimism bias. Sensitivity analysis lets you see how robust your tender margin really is.
What You Need to Review
Material and subcontractor quote expiry periods
Labour rate variations and availability
Contingency allowances and overhead recovery rates
Strategy
Model your tender at 3–5 different price levels
Include a “risk factor” % for unknowns (weather, design changes)
Benchmark against previous job margins using management accounts
Download our free Break-Even Calculator to test how small pricing changes affect profitability.
Real Example
A mechanical contractor priced a £1.2m design-and-install project at 11% margin. A 5% wage rise would have cut profit to 3%. Sensitivity testing prompted them to build in a cost escalation clause, protecting the job’s profitability throughout.
5. Using Sensitivity Analysis for Strategic Planning
Why It’s Important
Beyond projects, sensitivity analysis helps directors make smarter long-term decisions, whether it’s expanding into new regions, buying equipment, or hiring more staff.
It helps answer:
How much turnover can we lose before breaking even?
How will a new crane or yard facility affect cash flow?
What happens if interest rates rise by 2%?
Strategy
Use rolling 12-month forecasts to test future growth scenarios.
Pair with management accounts for data-driven board meetings.
Apply the results to shape hiring, investment, and pricing strategies.
Key Takeaways
Sensitivity analysis shows how small changes can make or break your margins.
Use it for project costing, cashflow forecasting, and tendering.
It’s not a big-business tool, it’s a must-have for every construction SME.
When combined with management accounts, it drives confident decision-making.
At Jones Financial Accounts (JFA), we help construction and engineering SMEs use forecasting, management reporting, and sensitivity analysis to make confident, data-driven decisions.
Download free tools and templates to build your first sensitivity model here:👉 JFA Resource Library
Wrapping up today's insights, tomorrow we simplify another accounting challenge.
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