Today more than ever, customers expect businesses to demonstrate seamless execution and enhanced visibility—this especially applies in the construction industry where decision makers take lead over highly expensive, mission-critical projects. It’s for this reason that enterprise technology must now be recognized as a priority.
In the construction space, even one unprofitable project can have significant short and long-term implications on the future of a business. Backwards, overly basic or isolated IT systems can all contribute to this by not providing sufficient visibility, governance and control of financial projects.
For example, all construction companies have accounting software, but often the project operational activities that determine whether the business is making a profit or loss reside outside of that system. In addition, the industry’s demand for IT solutions has been met by a high amount of point solutions for almost any function or process on a construction project. Even companies that have implemented best of breed systems will not realize the full benefits due to their lack of integration and siloed data.
Still managing information through spreadsheets?
Construction companies managing monthly project control reports through Microsoft Excel spreadsheets is commonplace. They often have several tabs and perform simple functions such as tracking the project from estimate to a project budget and track performance against baseline. Perhaps the most vital tab in that spreadsheet is the project forecast, which should give management a clear view of the estimate to complete and estimate at completion for an end position of revenue, cost and margin.
But what’s the problem with running construction projects in Excel or other disconnected IT solutions from the system of record?
The risks of UNAUTHENTICATED reporting
Excel and other systems outside of an enterprise software application such as enterprise resource planning (ERP) do not contain preventive and detective controls against manipulation.
It’s easy and perhaps too tempting for a project or commercial manager to “massage” the data to make their project appear profitable, hiding landmines that may blow up in the controller’s face in project phases further down the line. This is a big risk because without a single ERP system, there is no way to reconcile the contents of the project forecast against any authoritative source.
Having control of projects means making sure the project plan and financial forecast is in an auditable and secure ERP application. This is necessary for organizations across the board. Some may run multi-year projects with hundreds of subcontractors including the management of project variations that impact the client contract and linked subcontracts.
The fundamentals of strong financial project control
All-encompassing enterprise software must be built on integrated functionality to control all the construction project cost drivers such as procurement, subcontractors, external and internal equipment rental and last but not least, labor. This includes the ability to create a forecast based on trusted data as opposed to spreadsheets that can easily be massaged to serve the interests of individual project managers or internal teams.
Every project development must revise the profit and loss forecast through the end of the project life—robust solutions can handle changes efficiently while preserving margin and preventing surprises. As change orders are issued, it will be impossible to miss or obscure the financial impact, which takes the engineer risk out of the construction operation.
With high turnover comes risk—so learn to manage it
While cost, revenue and margin are critical, so is cash flow where businesses need to have enough cash available to support project operations. A large amount of the risk involved in the project may come from an imbalance between the inflow of cash resulting from payment milestones or payment applications and the outlay of cash for subcontractors, materials, equipment and labor.
This highlights why ERP systems need to be able to predict the cash position of the organization over the project life cycle. During estimating and in the early negotiation stages with the project owner, the business will be able to establish tie-ins between risk and opportunity. As the project scope evolves, it can quickly place a value against risk in terms of cost and impact on the expense and cash flow timeline.
It is paramount businesses choose tools that enable them to manage other project risks with an embedded risk management module. Managing risk enables decision-makers to continuously identify the necessary contingencies in the forecasting process and ensure that risks match up with the forecast. Most importantly it allows actions to be assigned and tracked to mitigate the risks.
A structured look behind construction costs
Contractors tend to think about cost in terms of cost code structures tied to account numbers in a general ledger. A cost breakdown structure (CBS) is appropriate for breaking down cost such as labor, equipment, materials and subcontractors in a granular fashion, without resulting in an overly complex general ledger. A consistent CBS across projects means decision-makers can effectively template costs from one project to the next, and more significantly, gain a consistent management view and cost reporting coding structure to rollup project performance across the entire enterprise.
A work breakdown structure (WBS) can however be unique for each project according to the project owner’s requirements. Combined, WBS and CBS allows businesses to meet unique customer expectations at the same time as preserving a consistent approach across multiple projects. When WBS is integrated with the project plan, the project timeline can be used to drive the financial forecasting as well.
Transparency trumps unpredictability
Volatile economic conditions and new business structures are demanding stricter control of financial projects from construction executives. Key to their success is having the flexibility and transparency to manage the project budgeting and monthly project forecasting process at any level of the cost or work breakdown structure. ERP must be at the heart of this to empower construction business leaders to proactively manage risk and stay in control of operations that positively impact their bottom line.
