In the construction and engineering industry having effective financial control is much more than producing a set of monthly accounts. It is also more than simply summing up the costs and resources of a project when it comes to an end. It requires dedicated governance that not only tracks costs in real time, but forecasts what might happen in the future – good or bad. Accurate project cost control is critical. With an industry constantly facing new challenges here are 4 tips for ensuring financial success.
Integrated Project Cost Control & One Version of the Truth
In any project-based business the profit centers are the projects. If the projects are in control and profitable the business will make a profit and be successful. Every company has an accounting system however financial control of projects is not a traditional accounting problem.
We need real time and periodic project control processes that allow us to control all aspects of a project’s performance including cost, revenue, variations, risk and opportunity, cash, quality, planned deliverables, progress, safety and compliance. All these dimensions financial and others can impact whether the project is delivered on time and at a high enough quality so that it meets the client’s expectations and delivers an acceptable profit.
Effective project control is not just about measuring what has happened at each period end but more importantly it is being able to forecast where the project is heading so we can accurately predict the final cost, revenue and project margin, future cash requirements and take early actions to mitigate project risk.
Most companies try to solve this challenge by producing a complex spreadsheet at the end of each month which is a very manual, time-consuming and non-value added process. It is therefore open to human error, errors in formulas and creates a heightened risk of inaccuracies; delays in completions and begs the question: can the data be trusted?
Can you reconcile these project numbers with your accounting system?
Say No to Excel
In truth, this topic could be a blog on its own right, but for the purpose of today: Microsoft Excel is turning 40 this year, its capabilities have been significantly enhanced, but they are neither aligned to the construction and engineering industry nor to financial reporting and risk mitigation. In a recent survey it was found that 90% of spreadsheets used by construction companies contain clinical errors. With so many formulas, data entry points and people using the sheets – the chances of a spreadsheet not having an error are non-existent.
However, inaccuracy and limited functionality are compelling reason why construction companies should move away from using excel spreadsheets as a project control tool; but there are more: lack of project visibility, increased risk of financial failure and delays in completing tasks because excel is not a dedicated construction software. Ultimately, spreadsheets were never designed to be used in this way. For years the industry has been pushing them beyond their suitability and in doing so, at the expense of the organization.
Gaining true financial control requires tracking the full lifecycle of a project, starting at the inception of a project in the estimate/bidding phase and continuing through the construction and handover process and increasingly all the way through to the operations and maintenance of the asset that has been built. Successfully monitoring this cannot be achieved by using multiple disconnected excel spreadsheets; accuracy, visibility, control all it depends on using dedicated industry specific software.
Good Repeatable Project Practices
A typical project involves the coordination of many business functions, suppliers and sub-contractors. All the resources need to come together at the right time to keep the project on track so if you don’t have a joined-up view, the result will be resource shortages and reactive firefighting changes become the norm, not the exception. The inevitable outcome is that projects are delivered late, costs escalate, your company’s reputation is damaged and project margins decline.
To avoid this, we need a more joined up approach where the project plan is the glue that joins all the functions and their deliverables into a synchronized set of work. The resource requirements (materials, plant and equipment, labor and sub-contractors) are planned accurately so that shortages can be anticipated and avoided. In short, we need a more integrated approach where everyone is working to one plan using the same shared data with one view of the truth. With these new processes in place, we can create predictable project delivery outcomes and deliver high project performance and ultimately profitable projects.
So good project financial control is about making all elements of a project delivery process as effective and efficient as possible so they can have a positive impact on the financial outcome of the project and on the business overall. This concerns every process and function including business development, bidding and estimating, engineering, procurement, manufacturing where we have offsite manufacturing facilities, shipping and logistics, material control, plant and equipment, installation, erection and construction, quality, health and safety, cost control, project and commercial management.
A Simple System Architecture
Anyone who works in the construction industry will know how it is, as companies grow so too does the complexity of their system architecture. What started off as basic business or ERP system that covered Accounting and Human Resources capabilities, soon finds itself unable to meet the demands of the business. As a result, companies then start to bolt on additional software through patchy API integrations to fill the functional gaps. Business Development, Bid Management, BIM, Estimating, Offsite/Modular Construction, Project Management, Variation Control, Contract Management and so on… Before you know it, you have an architecture comprising over 30 different systems from multiple vendors and hundreds of Excel spreadsheets all requiring a specialist resource to manage them and a constant battle to train new users.
It does not have to be this way – The answer is to adopt a simpler, more integrated system architecture that is not only designed for the industry but will evolve with it. As the adoption of new methods and techniques become necessary your business, functions and process can evolve with this simplified approach.
Is this it?
Unfortunately, not, these four points are just the tip of the iceberg as gaining true financial control requires more than adopting best practice processes and updating your system architecture. It takes a complete change in mindset and optimizing your entire business to focus on delivering project on time, on budget and at high quality.
When IFS Cloud was launched last year, one of the main requirements for our construction and engineering customers was around enhancing our financial control capabilities – which saw the introduction of new functionality and the new Cash Planning module.
Whilst I’m not suggesting you do this all at once, quite the opposite, identifying key areas for improvement based on their impact on the project outcome is a good place to start and build upon the construction industry is more dynamic that it has ever been and there will always be room to improve.
However, the above 4 tips are a good place to start as they will provide a platform that will enable you to continually evolve and improve your business in line with market demands.