The worldwide construction market is back in growth mode after climbing out of the recessionary times of just a few years ago. That growth is a welcome return to past experience, but don’t expect to see a flash back to another industry norm of the past: a reliance on document-driven processes. To capture the opportunities of today, companies involved in construction, engineering, and infrastructure projects must become more data-driven and adept at working in a digitized, model-based environment.
The evidence of industry resurgence is firm. Worldwide, the construction market is expected to grow by 3.8 percent in 2015 to reach U.S. $8.5 trillion in value, up from 3.1 percent growth in 2014, according to Timetric. Meanwhile, for the U.S. market, construction starts for 2015 will rise 9 percent to a value of $612 billion, up from 5 percent growth in 2014, according to Dodge Construction Outlook.
Construction, of course, spans multiple verticals and project types, including commercial buildings, residential housing, infrastructure projects such as railways and airports, and industry-specific projects such oil rigs or electric power plants. There may be many participants involved, including global engineering, procurement & construction (EPC) companies, pure-play construction companies, and subcontractors who specialize in areas such as electrical services, mechanical services, fabrication, or architecture. Another way of describing this broad market is the term architecture, engineering, and construction (AEC). While depending on the country, region or AEC niche, there may be relatively slower growth foreseen, overall, the industry outlook is strong. Worldwide, from 2015 through 2025, the volume of construction output will grow by more than 70 percent, according to a PwC report.
This growth does not come without challenges, however. Construction projects are growing bigger, more complex, and increasingly requiring that participants be able to work within data-driven environments and interoperate with 3D digital representations of assets. This shift to data-driven methods is seen in the rapid adoption of Building Information Modeling (BIM), a collaborative approach to design and construction that leverages 3D design models and associated data as a way to better manage asset information over the entire asset lifecycle.
BIM has steadily become more mainstream among AEC companies, and in some markets, notably in the United Kingdom (U.K.) under the Government Construction Strategy, and in the European Union (EU), where procurement rules for projects may be revised, there has been movement toward making minimum levels of BIM mandatory to take part in government-funded projects. This pressure to move to a higher level of compliance is only going to intensify in the future.
In summary, the construction market has two main trends underway:
- The return to strong growth, with some regional or vertical niche exceptions.
- A greater reliance on digital approaches such as BIM and data-driven processes for asset lifecycle management.
Put these two overarching trends together, and they elevate the need for an integrated approach to enterprise systems in the AEC market. By integrated systems, this means not only further adoption of 3D design and product lifecycle management tools, but also ensuring that enterprise-class systems such as enterprise resource planning (ERP), enterprise asset management (EAM) and project management are better integrated with each other and better capable of supporting data-driven business processes.
For companies in the AEC market examining ERP and/or EAM and project management choices, these trends elevate the importance of an integrated approach. As this white paper explains, an integrated approach need not sacrifice support for unique construction business processes such as estimating based on a bill of quantity (BoQ), contract and subcontract management, and project cost control. Such industry-critical capabilities should be sought after when making an ERP choice because otherwise the user company lacks a truly integrated platform for becoming data-driven.
Thus an ERP platform for the AEC market should be project-centric, asset-centric, and support industry-specific functions. As is the case across all industries, it’s also preferable that the ERP solution be flexible and scalable in the way it can be licensed and deployed, allowing users to scale into the desired solution at their own pace.
ERP systems have been widely adopted in industries such as manufacturing because they give a company an integrated platform for taking orders, procuring parts, managing production, and controlling inventory, financials, and distribution. ERP solutions generally are effective at supporting supply chain processes in which a manufacturing company takes an order for product, and uses that product’s bill of material (BOM) structure within ERP to trigger the needed materials required to manufacture the product.
This closed-loop supply chain process within ERP works well for many manufacturing companies, and has even been enhanced with product configurator capabilities for make-to-order manufacturers. The trouble is, engineering, construction and infrastructure projects aren’t based on ordering products, and subsequently, don’t use pre-established BOM structures. The construction market is focused on estimating and controlling scopes of work for one-off projects, often using a BoQ structure in regions that have ties to the U.K. construction industry where BoQ concepts first developed.
Take the example of a football or soccer stadium. Cities, sports franchises, or other buyers of a new stadium don’t buy a stadium off the shelf, so to speak. The stadium is designed and engineered to fit a specific site, its expected capacity, and other considerations such as parking, public transit, or road access. Nearly everything about a new stadium is scoped and designed in a custom manner, from the number of seats it will have, to the number of bathrooms and sinks in those bathrooms.
When it becomes time to start building a new stadium, one doesn’t order from a list of stock parts or options. Instead, the challenge revolves around establishing and bidding out many scopes of work. These scopes of work need be estimated, reviewed, approved, and revised as needed. There are often hundreds of changes to scopes of work during a construction project, ranging from significant design changes like expanding a parking lot, to a simpler change such as a substitute material a subcontractor needs to use.
As a result, instead of needing an ERP system geared to materials requirements planning, the AEC industry needs an ERP system that is project- and asset-centric, and geared to estimating scopes of work, managing subcontracts, and exerting control of project costs, timescales, quality and risk. In short, construction projects don’t revolve around the typical “order to cash” process that most ERP systems support quite well. Rather, here are some of key processes involved:
- EPCs or architectural firms develop a design that will meet the owner’s/ operator’s needs, typically using 3D computer-aided design (3D) tools that create a digital model of the asset. The model, which serves as the foundation for BIM processes, has associated data which can be added to the model as the construction project progresses.
- Using specifications, increasingly taken from a BIM environment, bids are tendered to EPCs and other firms seeking to be the lead general contractor for the building of an asset. The project is bid out by breaking down major areas of construction according to the scopes of work involved.
- Companies involved in the bidding process develop their estimates based on various estimating approaches which have historically been based on quantities in the scopes of work, often using BoQs as the basis for the estimate. There is a trend to consider the BIM model as the basis of the estimate, which is starting to change the estimating approach. Many factors go into developing a successful bid, including knowing the subcontract work needed, the equipment and plant rental requirements, the material requirements, and the internal and subcontract labor resources that will need to be allocated and charged to the project.
- When a main contractor is bidding for a project, it typically will start subbidding out portions of the project to subcontractors. There may be some material procurement to perform, but in essence, subcontract management is as important to the construction industry as component sourcing is to a discrete manufacturer.
- As the project is being built, it needs to be coordinated using project management tools, costs need to be tracked, and milestones managed. Importantly, as the asset gets built, any “as constructed” or “as installed” changes to the asset master data need to be tracked and, increasingly, cycled back into a BIM environment.
- Once construction is complete and the asset is commissioned and handed over to the owner/operator, the construction firm or EPC needs to ensure a smooth handover of data into whatever EAM or maintenance system the owner/operator will use. In practice today, this step is an ongoing collaborative process leveraging BIM and asset data repositories. The transfer occurs in stages often referred to as data drops, rather than as one abrupt “handover” of documents or data at the final completion gate.
These common phases in the construction project lifecycle are distinctly different from the “plan, source, make, deliver” processes typical of manufacturing. This is why project- and asset-management-centric ERP is needed in the construction industry.
Industry “Must Haves”
Consider the procurement capabilities in a typical ERP system. Mainly, ERP procurement is for components, assemblies or other “parts” that have a standard lead time held in the system. When a customer orders a product, the procurement logic of the ERP system is able to look at the BOM for that product and stagger the ordering of materials so it is all on hand in plenty of time to manufacture the product, but without building up excess inventory. This process works fine for most discrete manufacturing verticals, but just doesn’t fit the construction industry, where procurement is more about finding the right subcontractor for a scope of the project, or renting specialized equipment such as cranes, rather than procuring standard materials. Let’s take a further look at some construction industry priorities and how they tie back to capabilities needed within an integrated ERP, EAM, and project management solution:
- CRM and estimating. Nearly every ERP vendor can offer a customer relationship management (CRM) module, but for engineering, construction and infrastructure projects, the CRM should be geared toward managing opportunities and subcontractor contacts, rather than managing customers and product sales. Estimating should be built around breaking down and analyzing scopes of work, including what might be needed in terms of subcontracting, equipment rental, labor such as site, project management and engineering labor and materials.
- Sales contract management. ERP order management might be good at taking orders for stock products, doing some product configuration, and tracking factors like sales order history, but that doesn’t do much for construction projects, where the real challenge is managing the changing scope of work for a complex asset. The fundamental challenge with sales contract management is breaking down and managing every change in the project, which, for some large assets, can involve hundreds of changes and greater than 100 percent change versus the initial design. So sales contract management needs to be able to manage approval workflows, and provide revision control and manage contract changes.
- Valuations as part of contract management. Another unique construction requirement is the way the industry measures work done, or “valuations” as it is often called. These valuations are usually done on a cumulative monthly basis and act as the foundation for getting paid or paying subcontractors. Often, these valuations are done by making physical measurements against the BoQ using a commercial function called Quantity Surveying. These valuations are then used to produce an Application for Payment, which is then submitted to the client or received from the subcontractor.
A certification process is then used to agree the month-end valuation numbers and invoices, or, a self-billing process is used to manage payments. The process also involves managing retentions. This whole process is complex and is rarely handled in general ERP software. It cannot be handled using a sales order processing module.
- Subcontract management and purchasing. The inverse of Sales Contract Management is subcontracting. All the complexities mentioned in the previous section also apply to the subcontract process. In essence, the lead construction company puts forth scopes of work for subcontractors to bid on, assesses their bids, and sets up the foundation for cost control and change management over subcontracts. Unlike procurement modules in ERP systems with a manufacturing heritage, construction industry ERP solutions must have a subcontract management capability to be effective. Another critical area is managing the purchasing of equipment on a hire and rental basis. This is also a complex requirement, which, if not built into the core software, will require heavy amounts of software customization. As with most construction functions, there is a strong need for revision control and change management within industry procurement processes as often the items being procured are complex, unique equipment which have long lead times.
- EAM, equipment/plant hire and rental. Most construction companies own some of the plant and equipment they need to execute the construction process. It is therefore essential that the solution can provide the ability to maintain these assets making sure they are safe, reliable and available when they are needed. An EAM system is required to be able to schedule maintenance and repairs, manage the time of service technicians, and procure spares and materials for maintenance, repair and overhaul. By having EAM integrated with ERP and project cost accounting, the allocation of MRO activity to projects and corporate financials is simplified.
It is beneficial to have one solution for both EAM and Construction Project Management as they can then share the same common back office solutions such as finance, procurement and human resources. This eliminates the need for complex, expensive integrations and also makes the solution far more user-friendly by having one common user interface. Additionally, the ability to rent, charge and track these assets when they are used on projects is a key requirement rarely found in standard ERP or EAM solutions.
- Project cost control. Once a bid is won and the project is underway, it’s crucial that the company running the project be able to exert cost control over all activities. This goes well beyond what a normal ERP system’s financial modules can do, because it spans into areas such as subcontractor costs and milestone payments, equipment rental costs, and allocation of internal and external resources to projects. The project cost control function must be able to set a budget for the overall project, facilitate periodic and real-time project reporting and analysis for review meetings, keep track of what has been spent against the budget, and revise the project forecast.
Forecasting the outcome of the project on a regular basis is a critical activity if construction companies are to keep control of the costs and margin. This process is usually done using many Microsoft® Excel® spreadsheets, so finding an ERP solution that can manage this process inside the business application is a huge benefit.
- Facilities and service management. Many construction companies increasingly are offering the service to maintain and sometimes operate the asset and facility once it is handed over. This means they need a facilities or service management solution, but ideally, one that is integrated with the rest of the enterprise software solution. In most organizations, they have one set of business software solutions for the construction stage of the asset’s life, another set of solutions for the operations and maintenance phase, and often another set of back-office solutions such as Human Resources, Finance, Procurement and Supply Chain. This is far from ideal, as not only is it very expensive to buy, maintain and integrate these solutions, there is a need for users to master multiple user interfaces to work well across these applications. Within facilities/service management, the solution needs many of the same capabilities as are found in EAM, but in addition, it needs the ability to manage a service contract, with flexible pricing and invoicing rules.
- Mobile workforce. The other critical requirement in field service is to manage a mobile workforce. This calls for functionality such as mobile job management for service technicians equipped with mobile phones or tablets. With a mobile solution in place, most companies also are looking to optimize their mobile workforce while meeting the contractual service level agreement. To achieve this, an automated scheduling capability needs to be provided which is fully integrated with the job management system, supply chain and elements of human resources such and employee availability, skills, licenses etc.
- Interoperability with 3D design and project management tools. Companies involved in construction, engineering and infrastructure projects should have an ERP platform that has interfaces to CAD data and models to automate information exchange. Likewise, subcontractors or owners/operators may use best of breed project management software, so pre-built integration to those tools is desirable within ERP to understand the timetables and work breakdown structures of partners.
- Offsite Manufacturing. The industry is increasingly using offsite manufacturing facilities to build construction modules such as hotel bedrooms. So if a construction company is operating an offsite manufacturing division, or wants to be in the position where it can easily start operating such a facility, then it is critical that the software solution can support an engineer-to-order or project-based manufacturing capability. Whereas this business requirement needs many of the functions that a traditional ERP solution offers, there is also usually a need to support construction industry-specific requirements such as Sales and Subcontract Management and Hire and Rental. So a hybrid between an ERP solution and a construction industry specialist solution is needed. Again, this is something that is rarely found in generic ERP solutions or specialist construction solutions.
Achieving an Integrated Whole
The above functions are critical capabilities for companies involved in construction, engineering and infrastructure projects, but the trick is to get the processes to work in concert. That comes from an integrated approach to applications. Whereas a company could have a separate solution for CRM, a separate solution for estimating, spreadsheets for project cost control, and a standalone EAM system, there would always be an integration hurdle with that approach. Workflows might hit a dead end, or documents might get lost in the handoff between systems. That would not be the case with an integrated applications platform that spans ERP, EAM, and project management, and has integrated modules to handle specific needs like equipment rental. IFS has spent decades adapting its modular solution suite for the construction, engineering and infrastructure market, and is able to put ERP, EAM, and project management under one roof, complete with industry-specific functions such as equipment rental and subcontract management. So yes, an integrated ERP approach is possible in construction today, without having to work around the shortcomings of ERP systems geared to manufacturing industry processes.
With the AEC market back in growth mode, and optimism levels for construction reaching levels not seen since the mid-2000s, now is the time for industry participants to move to an integrated foundation for enterprise, project, and asset management. The quickening pace of growth, combined with the rapid adoption of digital, model-based collaboration, is simply going to require an integrated enterprise systems approach if companies want to maximize their opportunities.