Construction is unique. Standardised accounting practices cannot be applied to this industry. Were carrying costs over, constantly adapting our needs on site, constantly reorganising our build planning which impacts our resource planning. Therefore, costs and accounts must sit together; in real-time. However many in the industry do not think the current practices are broken, or need to be evolved.
Nevertheless, there is a swell of change taking place thanks to specialised software which is making some construction businesses far more competitive than others. Construction companies build strong, long-lasting structures. But they are built with agile, adaptable and constantly changing plans.
Budgeting in construction is developed based on the earned value. That is to say that, only after you’ve measured the work done, can you develop the budget for the remainder of the project. (For most industries this is back-to-front). Not to mention that the process never follows the plan; budgets are built on a set of circumstances that is constantly shifting; soil conditions, labour force availability, resource suitability, and design changes that all add to this dynamic working environment.
There needs to be a paradigm shift within the industry.
What is unilateral is the constantly changing circumstances, the earned value budgeting method, and the low margins. What separates the men from the boys is the use of specialised software to provide meaningful real-time insights into the costs, allowing some companies to pinpoint small cost advantages that can become significant over a multi-year project.
In this vein, timing becomes critical and explains clearly why costing shouldn’t happen on a spreadsheet after the accounting:
- The magnitude of the costs at play in the construction industry are significant
- Real-time is critical
Knowing that your site is running at a loss due to low productivity in a specific work area enables your business managers to make a quick, smart change to the labour force by the very next day: Low productivity addressed instantly.
Construction companies work with an unusually high proportion of variable costs, and extremely low fixed costs. Factors affecting this for instance will include; Is your plant and equipment on site or off-site tomorrow? What size labour force do you need tomorrow vs. yesterday? Is your concrete pump working or has it broken down? Your ability to forecast costs to completion is critical.
Being able to manage your construction site, from ‘cost to complete’ is central to an optimised construction business. If you’ve had a good day, you need to be able to pinpoint where and why that was, and be able to leverage it in the future. Equally, misinterpreting this reason could get you into a whole world of financial trouble in under a week.
For cost to completion to be successful, construction businesses need to have one source of truth that creates integrated analysis between the three levers of construction, Man, Machine, and Money.
But interpretation of this data is key. Volumes of data about your site is not enough. The ability to interpret that data, knowing exactly what happened, where and why is what will deliver meaningful reports that allow your business managers to make smarter business decisions.
Rather than having several effective business departments that are siloed, information of various business units should be integrated on one data platform that allows anyone the same, holistic view of a workplace scenario, at HQ or on site. Namely, One source of truth.
When this happens, HR can understand why the workforce may be smaller, and commercial managers can plan to purchase specific materials exactly when they are required. Equally, procurement know exactly what the commercial managers need and by when. The entire organisation starts to run seamlessly, as one. This is what will make the difference in your margins at the end of the project and take your company from cost to complete, successfully.
By using specialised software to tie together Man, Machine and Money, construction businesses can generate insights into their business that can improve their ability to build earned value budgets; to make minor adjustments to their available resources each day, and workforce requirements.
Altogether, these minor adjustments can ensure businesses run a project from cost to complete and achieve significant profit margins at the end of a multi- year project, thanks to ‘One source of truth’.