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A fully integrated enterprise business system or ERP has not been widely embraced or adopted in the construction industry to date.
With the economic downturn of the last two years and with margins, profit and forecasting under pressure, a broad, enterprise wide, business system, can deliver agility, streamlined operations, and a strong foundation for growth.
The construction industry remains an underdeveloped market in terms of ERP (enterprise resource planning). Historically, construction companies have either bought best-of-breed or industry specific modular software applications to manage very specific business functions. In the case of remote or site workers, it is often the case that business critical data with regards to their construction projects is compiled on manual spreadsheets and stored remotely on laptop/PCs to help keep track of project costs, schedules, and resources.
For all but the largest construction firms, cost and a perception of a negligible return on investment has traditionally been the biggest barrier to ERP adoption, but there are many additional factors at play. Construction company owners and managers are often from non-IT backgrounds and retain the spirit of entrepreneurship and practicality that drives project success on-site, meaning their approaches to risk management and ROI have historically focused on meeting delivery schedules and ensuring margins and profit, as opposed to the wider utilisation of technologies for business analytics/ intelligence and management reporting.
In addition, large enterprise or ERP systems were not specifically built with the workflow and business processes of the construction industry in mind. In particular, they are not designed to capture data in a way that reflects the manual processes and often unpredictable workflows underpinning day-to-day operations and on-site project delivery (e.g. Sub-contractor relationships, cost variations and budget adjustments). Furthermore, it is extremely difficult for management to see past the cost and complexity of integrating such workflows within a single business system, while smaller ERP systems developed and supported locally often struggle to deliver the required level of functionality on a global basis, or a demonstrable ROI.
A diverse supply chain - In the construction industry, almost every project is unique. They can address infrastructure across a broad spectrum of sectors including environmental, transportation and private and commercial property. It also embraces a diverse cross-section of disciplines, material needs and producer and supplier types – including construction materials and products; building services manufacturers, providers and installers; contractors, sub-contractors, professionals, advisors and construction clients; and those organisations concerned with the design, build, operation and refurbishment of buildings.
Putting aside the roles performed by architects and house builders within this diverse supply chain, firms involved with construction-specific functions must follow specific workflows in order to win new business. Typically, they will have a team of estimators bidding for projects and tasked with winning them at an acceptable profit margin will need to combine cost estimates incorporating materials, quantities and labour, and submit a tender based on these factors before waiting to see whether or not they have been successful. These processes are often completed using a “client-based” (laptop/PC-based) estimating tool, or spreadsheets. For bids that are successfully won, the information is then manually transferred (typically in an export file) to the commercial team handling the contract. The commercial team will then often re-invite bids from their sub-contractors for labour and suppliers for materials, to attempt to increase the forecasted profit for that particular contract
Subsequently, the commercial team will have to conduct contract cost management, or ‘CVR’ (cost value reconciliation), which enables it to calculate what has actually been spent in relation to original estimates and revenues. The CVR data is then sent to the financial manager/controller to enable cash flow and profit forecasting.
With each link in the supply chain potentially representing £multi-millions of investment, it is easy to see how errors can become costly. Construction of the new Wembley Stadium in the UK provides a prime example of the dangers. The lead contractor, whilst running multiple projects globally, was unable to complete the stadium on time or within budget. The firm’s brand was damaged irreparably in the UK, which also involved the largest law suit in UK construction history .This underlines the importance of integrated processes, with the visibility, accuracy and timely delivery of business data that enable construction firms to manage projects effectively, forecast profits against completion dates, and thus demonstrate when value will be delivered to stakeholders.
Tying it all together - Enterprise Resource Planning (ERP) is an enterprise-wide information system that integrates and controls all business processes across the organisation. Today’s solutions are based on an effective web-based collaboration platform that can unify the people, processes and knowledge that matter most to a construction firm, creating an accurate up-to-the-moment view of personnel and sub-contractors, finance, workflow, documents and asset information. This enhances decision-making, analysis, scenario planning, and on-going management across the entire business.
Such a platform integrates and consolidates corporate data into a single database, allowing all members of the supply chain to view and modify information based on their access and roles within the system, and providing an active portal into the workplace for employees, sub-contractors, suppliers and customers. Ensuring that the overall organisation and all members of the supply chain work together more effectively has taken on new significance heading into 2011, with research conducted by Cap Gemini revealing that the primary challenge for supply chain managers will be operation of a reliable supply chain in a volatile environment while simultaneously dealing with rising material costs.
A web-based collaboration platform not only unifies all resources within the organisation – people, knowledge, workflow, financials, logistics and projects – in a single database and interface, but also improves business performance by mapping processes to real activities, increasing the efficiency and speed of processes, providing measurement tools for process analysis and accountability, and making these processes more visible to those who require it. Indeed, compliance with regulatory standards can also be achieved by automating the required workflow processes, documents and materials, and ensuring that these components are centralised, integrated, and made visible to the organisation and its stakeholders, as well as suppliers and the customers.
Less margin for error - Although the construction industry is one of the largest contributors to the economy, it is considered to be one of the most highly fragmented, unpredictable and geographically dispersed industries. Historically served by bespoke, or best-of-breed, industry specific, modular software applications acquired separately – e.g. core financials, procurement, CRM, cost management, project management, document management, subcontractor management, land appraisal and E-Commerce systems, – the adoption of integrated business systems such as ERP presents a unique set of challenges to those faced in manufacturing or other service sectors.
However, in today’s tougher economic environment, construction firms, and contactors in particular, are having to bid for projects based on negligible margins, meaning there is much less room for error. During tough times, it is even more imperative to manage profit and cash flow forecasting. ERP delivers not only accurate and timely reporting, but the ability to analyse where projects have not been won, and margins have not been achieved, enabling firms to take remedial or preventative action. For example, the ability to report on conversion rates for bids submitted compared to contracts won, and the accuracy of profit and margin forecasts. Not only is this crucial to improving internal processes, but also in being able to demonstrate the results achieved to stakeholders and shareholders.
In a favourable economic climate, ERP delivers the visibility to identify areas in which the bidding process can be improved, while better CVR reporting helps construction firms to retain and increase market share, and be more dynamic and responsive to evolving market conditions. ERP provides the visibility, accuracy and timely delivery of business intelligence that helps firms streamline operations, reduce costs and manage risk – all of which can increase profitability and transparency with the timely reporting of essential business intelligence.
The key is in selecting an ERP solution that is of the right size, and which delivers the right mix of workflow, financial management, document management, and CRM, together with other capabilities over and above the traditional risk-based approach, and which supports construction firms running projects worldwide.
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