In construction industry circles people sometimes joke that a bid is a wild guess carried out to two decimal places. And that the critical path method for construction resource scheduling is a management technique for losing your shirt under perfect control. These bits of gallows humor reveal construction management’s longstanding agita with regard to managing the complexity of their project-based businesses.
Yet the very survival of small to midsize construction companies depends on productivity and the ability to manage ever more complex business processes. Their life blood is efficient management of dynamic projects to maximize value and minimize waste. In the past, however, without access to management systems with content for their project-based requirements, home-grown and single-purpose accounting, project management, and maintenance support applications were the norm.
Construction is a business domain not for the faint of heart. There are as many risks as there are rewards. Rewards lie in profitability, good will, and burnished reputation for reliability. On the downside: crippling cost overruns due to labor delays, problems in scheduling handoffs between trades, bad weather, and other variables. 90 percent of projects have cost overruns because of the labor cost.
Beyond that, some contracts include specific risk/reward clauses, like the California Department of Transportation (Caltrans) contract for a Santa Monica, California, freeway project to rebuild the roadway damaged in the 1994 Northridge earthquake. It specified a penalty of US$200,000 for every day the freeway remained closed past the 140 days in the projected estimate. The upside “carrot” was an incentive of US$200,000 for every day the freeway was open ahead of schedule. This project had a happy ending. It was completed in just 66 days, and earned the construction firm a bonus of US $14.8 million.
John Carpenter, CPA with Clifton Gunderson, specializes in consulting to construction companies. He says, “Every contractor needs to develop long-term strategies for optimal business and project management, as well as short-tem agility to respond to emerging opportunities and changes in the economy. In our consulting we place heavy emphasis on solid, integrated information technology to accomplish these goals.”
Carpenter’s point of view is that achieving any degree of success in operational integration requires the implementation of technology that supports greater overall business integration and sustainability. Where operational processes continue to be automated based on obsolete technology standards and addressed in isolation from one another, the strategic business plans defined by senior management will be hindered and progress toward greater business efficiency and adaptability will continue to be elusive.
Many SMEs are spending vast sums over the long term to bolt applications together and to add functionality. And the develop-it-yourself integration route still does not lead to the optimal single view of all operations, including visibility into bid history and data for forecasting profitability, current project schedules, change orders, materials movement and labor costs, subcontractor bids, and other project variables, as well as project billing. Inevitably non-integrated systems become a nightmarish maintenance issue and a significant cost center.
Among the reasons that SMEs in the construction industry need to improve operations is the trend toward the adoption of lean principles. The lean methodology enables companies to work more efficiently and restrain costs by addressing potential problems before construction even begins. It centers on workflow reliability. For example, just as in lean manufacturing, instead of ordering all supplies and materials at the beginning of a project, lean construction encourages ordering materials on an as-needed basis to reduce the likelihood of storage costs and expending extra efforts to move the materials out of the way of progress.
Gordon V.R. Holness at the ASHRAE American Society of Heating and Refrigeration Engineers analyzed how many steps it took to translate design information into final field construction. In looking just at door hardware for a hospital, he observed that “one simple piece of hardware information passed through at least 23 to 25 hands in a variety of formats. Each step had associated handling and processing cost, time delays and the potential for error.” The potential improvements through the use of lean construction techniques can be as high as 30 to 40 percent in terms of both design and construction hours.
Still, many SMEs are resistant to change, continuing to rely on non-adaptive niche solutions. Why? For some it’s simply a lack of awareness of viable solutions for the SME construction market by ERP vendors.
But in a November 2005 IDC Opinion White Paper, “ERP Blueprint Enriches Engineering, Construction, and Operations Companies,” Albert Pang reinforces how important it is to have the right systems in place to take advantage of such current thinking as lean principles as well as expanding worldwide business opportunities.
He asserts, “Construction companies that are not willing to part with their current homegrown infrastructures may find themselves failing when their fundamentals are undermined by years of system overload, limited spending on product data maintenance, and general indifference to information consistency.”
Having the whole nine yards
Historically ERP vendors have not focused as much attention on the construction space as they do today. Enterprise application vendors’ primary expertise lies in broad, horizontal and functional business management, not in the highly variable and volatile project management domain. While comprehensive solutions exist in the market, they focus primarily on large enterprises. An ERP mindset has therefore never had an opportunity to take a real hold within small to midsize construction companies, and with the lack of an alternative strategy; the best of breed approach became entrenched.
Today, however, companies such as SAP provide enterprise platforms specifically for SME construction firms. One such solution to consider is et alia CREW, a qualified SAP All-in-One solution.
Now construction SMEs can have it all. In evaluating new business platforms, companies are wise to look for pre-configured business management solutions designed specifically for small and midsize project-based organizations. These are businesses that deal with high degrees of variability and changes. Equipment breaks down, good weather turns bad, trade handoffs don’t always happen smoothly, subcontractor schedules clash and materials arrive early or late. All of these can disrupt timelines and cause costs to escalate. That’s why, in addition to solid horizontal business management functions such as financials and human resources, solutions must include proven project management capabilities, scheduling, job costing, inventory management, materials management, financials, workforce management, sales, and break down communication barriers that often result in cost overruns and maintenance delays.