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Create a Budget
As with any business decision, management must go through a cost/benefit analysis to determine if the initiative in question makes sound business sense. In order to properly determine the costs, a complete financial budget must be created. This is no different when considering various technology systems for your company. We tend to focus on the end user needs in terms of technology, (i.e., the software that your team will use to either estimate, perform accounting and reporting functions including tracking job costs and manage documents/contracts, etc.) It is important to also consider any hardware you’ll need to either purchase or upgrade in order to effectively operate the systems you will be purchasing to enhance your company’s productivity. In the early mid-1990s, I was involved in a software implementation that hit a roadblock because we didn’t have it running on the proper hardware. Once we upgraded our hardware specifications, the software performed as we had hoped it would.
There are at least a few main components of a budget. The most basic element is the “hard” dollar costs of the software, hardware and training required to successfully implement technology in your business. The software costs are usually delivered to you in a proposal provided by the software dealer. You may also need a proposal for any hardware you may need to acquire as well.
Be sure that the scope and pricing of any proposals are appropriate. It is very difficult for a contractor to know whether he or she is being provided the proper scope and pricing. Most vendors are knowledgeable and fair dealing, however, they may not be aware of your limitations with regard to in-house personnel and/or if you are properly structured in terms of your back office organization chart. Use a trusted consultant who can help provide insight and perspective in this area. I’ve seen systems implementations go wrong for a variety of reasons, including lack of appropriate personnel inside of the construction company to drive the project, as well as lack of proper support resources provided by the seller of the software package. Also, it always makes good sense to get competitive bids to ensure pricing is market and reasonable.
Once you’ve identified the hard costs, the costs that will appear on invoices coming into your company, you need to understand what the “soft” costs will be. Soft costs include items such as the cost of the employee’s payroll who will be charged with implementing the hardware and software you’ve selected. The time they spend on implementation and training/learning the new software are significant. Beyond the labor costs of your employees are the opportunity costs associated with those same employees. Not only are you paying them to implement and learn a new software package, but there is also lost opportunity and productivity with the very same time they are spending on the implementation/training. The tasks they normally perform will not get done timely or in some cases may not get done at all. These opportunity costs are almost impossible to precisely identify, let alone quantify. The idea is that the new software systems will significantly enhance productivity and efficiency, thus outweighing these costs.
Once you have the hard and soft costs identified, you should summarize the hard costs and incorporate them into your annual financial budget. You will only include the hard costs in this budget, as the soft costs will not cost the “hard dollars,” rather, they are a drain on resources and other opportunities as discussed above. With respect to a specific software package, it is often said that your total hard dollar costs of implementing that software should be multiplied by two or possibly three, which includes training and in some cases, additional hardware requirements. When one considers the soft costs discussed above, the multiplier can grow to as much as four of even five times the cost of the software itself. As you can see, a software purchase and implementation is no small undertaking which is why it is so important to go through the process diligently.
There are no silver bullet guidelines with respect to how much of your annual revenues, for example, should be spent on technology. Technology is a broad category, one which is usually not quantified on a single line item in a contractor’s financial statements. That being said, I’d suggest that technology related expenditures should approximate between 5 percent and 8 percent annually. Some years will be more, some less depending on software and hardware cycles within your particular business. I base my suggested technology investment on my own experience in our business as well as general observations in the overall marketplace.
Technology is a critical part of your company’s success, and investing annually with a regular technology budget is necessary. Technology should be an aid to effectively and efficiently executing your business operations. It is often said that it is better to be on the leading edge rather than on the bleeding edge. Not all upgrades are worthwhile and not all of the latest and greatest applications should be incorporated in your business. It is your job to lead the discussion within your management team and determine which process requires technology and which software package is the correct solution. Then develop a plan to properly implement the application in your business. If this sounds like a difficult proposition, remember to use all the resources you have, both inside and outside your company. Creating a technology budget requires much more thought and is a more comprehensive process than simply putting dollars and cents on a spreadsheet.
Glenn Carniello is a Certified Public Accountant and Certified Construction Industry Financial Professional. He is the Partner-in-Charge of the Orange County office of Singer Lewak Greenbaum & Goldstein LLP and also heads up his firm's Construction Industry Practice Group. He can be reached at 949.261.8600.
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