Finally, Proper Project Financial Control and Governance
Every construction enterprise will run accounting software, but unfortunately, the project operational activities that determine whether you are making or losing money usually resides outside of that system. After all, a construction company is not really a single business, but rather is a collection of projects that operate as their own profit and loss centers. If your projects are successful, your construction business is successful. But most contractors house project information in Microsoft Excel or other grey IT systems that lack proper visibility, governance and control. IFS Applications provides true enterprise resource planning (ERP) software for construction companies that provides real-time visibility and control of project operational and financial performance.
If you are like most construction companies, you have a monthly project control report—probably in Microsoft Excel. Your spreadsheet probably has multiple tabs and is designed to track the project from estimate into a project budget and then track performance against baseline. Perhaps the most important tab in that spreadsheet is the project forecast that should give management visibility of estimate to complete (ETC) and estimate at completion (EAC) for an end position of revenue, cost and margin.
What is wrong with running construction projects in Microsoft Excel or other grey IT disconnected from the system or record? Plenty. First, Excel and other systems outside of an enterprise software application like ERP do not include preventive and detective controls against manipulation. It is easy and too tempting for a project or commercial manager to “massage” the data to make their project look profitable, hiding landmines that will blow up in the controller’s face in later project phases. This is a real risk because lacking a single ERP system, there is no way to reconcile the contents of the project forecast against any authoritative source.
On a project that can last anywhere from one to 10 years, the project can span multiple fiscal planning periods. Problems can spin out of control and potentially sink a project or even a construction company if cost and timeline overruns are severe enough. At the very least, these issues damage relationships with project owners and are a drain against margins.
BUSINESS AT RISK
With IFS Applications, you are finally in control of your projects, the project plan and financial forecast, in an auditable, reliable, secure ERP application. IFS Applications includes integrated functionality to manage all the project cost drivers:
- External and Internal Equipment rental
This means you can produce a forecast based on trusted data rather than on spreadsheets that can easily be massaged to serve the interests of individual contract or project managers or internal teams. IFS has developed this project control functionality in close partnership with a number of enterprise-sized construction customers. IFS customers may run multi-year projects with hundreds of subcontractors including the management of project variations that impact the client contract and linked subcontracts.
Each project change revises the profit and loss forecast through the end of the project life. In IFS Applications, you can handle changes efficiently while preserving margin and avoiding surprises. As change orders are issued, it will be impossible to miss or obscure the financial impact, which lets you engineer risk out of your construction operation.
CASH IS KING
While cost, revenue and margin are important, you must also ensure that you have sufficient cash on hand to support project operations between liquidity events. A good deal of the risk involved in your project may result from imbalance between the inflow of cash resulting from payment milestones or progress claims and the outlay of cash for subcontractors, materials, equipment and labor.
IFS Applications will enable you to forecast your cash position over the project lifecycle. During estimating and in the initial negotiations with the project owner, you will be able to establish tie-ins between risk and opportunity. As the project definition changes, you can quickly place a value against risk in terms of cost, cash and impact on the expense and cash flow timeline. IFS Applications includes treasury management tools that let you control and hedge your cash position in multiple currencies.
PROACTIVELY MANAGE RISK
IFS Applications provides tools to manage other project risk with an embedded risk management module. Just like the project forecast, contractors often handle risk management in Excel, and that spreadsheet is often not consulted or altered once the project is underway. Managing risk continuously lets you identify the necessary contingencies in the forecasting process and ensure that risks are consistent with the forecast. Most importantly it allows actions to be assigned and tracked to mitigate the risks.
If there are project delays, are there penalties that result? Do your subcontractors have insurance? Do they have the right insurance amount required by the contract? When does it expire? Are you confirming it has not lapsed at that expiration date? IFS Applications includes specialized tools for indemnities and insurance that tracks the expiration and documentation around bank guarantees and insurance.
COST BREAKDOWN STRUCTURE VERSUS WORK BREAKDOWN STRUCTURE
Most contractors think about cost in terms of cost code structures tied to account numbers in a general ledger. A cost breakdown structure (CBS) in IFS Applications lets you break cost (labor, equipment, materials, sub contract) in a granular fashion without resulting in an overly complex general ledger. You can also opt to create a consistent CBS across projects so you can more easily template costs from one project to the next and most importantly get a consistent management view and cost reporting coding structure to rollup project performance across the entire enterprise.
A work breakdown structure (WBS) meanwhile can be unique for each project according to the project owner’s requirements. IFS Applications WBS and CBS lets you meet unique customer expectations while preserving a consistent approach across multiple projects. The WBS is integrated with the project plan (e.g. Primavera or MS Project) so this means that the official project timeline can now be used to drive the financial forecasting as well.
IFS offers the flexibility to manage the project budgeting and monthly project forecasting process at any level of the cost or work breakdown structure. This means that large projects can be run using a top down cost control methodology driven from a Cost Breakdown Structure while smaller projects might be run using a bottom up WBS methodology.