Most construction companies today are sitting on a gold mine of project data that can be used to improve strategic decisions and enhance their performance and profitability. Within the job cost and financial systems of most construction companies sits the key ingredients for achieving the following:
Identification of which job types are the most profitable and which return the lowest margin
- Understanding of which individual jobs are the most lucrative as well as which project managers are the most profitable
- Identification of potential risk and exposure in the business
- Tracking of financial trends
Using internal data as a strategic asset starts with building a platform that provides consistent report design, includes high-quality data, measures the right metrics and fosters communication.
Good reporting starts with good report design. Avoid the following components of bad reporting to improve your report design standards and reveal previously hidden data.
The kitchen sink approach — Our company has seen many client reports growing in columns over time. This makes the reports difficult to read, as there are hundreds of numbers per page and the font is prohibitively small. Instead, top-level reports should show the high-level information, such as the total current estimate, and drill-through reports should show the original estimate and change order columns.
Missing date and time stamps — When a report lacks date and time stamps, users will be re-running it repeatedly, not knowing whether the data on a printed version of the report is current.
Generic report names — Avoid saving files with titles such as “Job Report.” A more descriptive title will tell the user what the report is for. Look at the purpose of each of your reports, and title them appropriately.
Unwieldy length or complexity — If your report is complex, make sure it runs within a workable time frame. Readers want information on a timely basis.
Data and Metrics
Data quality relies on the accuracy, thoroughness and timeliness of reports. The quality of your data is directly related to your internal processes and systems and can be improved by holding people accountable for missing information. Ask your finance and project teams where they spend time chasing missing information, and hold them accountable for delivering that information.
Also, preventing bad data is easier than catching it. If you want to improve data quality, start reviewing data collection processes with the highest risk of error—those that take place in the field. Ensure that information is entered in a logical order and that the forms are easy to fill out.
The key to gaining a competitive advantage through better use of job cost and financial data is measuring the right metrics. The right metrics will provide the information necessary to understand profitability and loss. The following are examples of metrics that construction companies should be collecting:
Work backlog — How much work does your company have in hand, and how many jobs does it represent? How is work backlog allocated across your divisions and project managers? How many jobs is each project manager managing?
- Job margin erosion — Does expected margin evaporate at the end of your jobs? Does it evaporate for specific project managers?
- Margin by project type — Where does your company make and lose money? Should you invest more in markets where your margin is higher?
- Job cash position — Are your sub-trades pressuring your company to be paid prior to your contract payment?
- Year-to-date budget versus actual net operating income — How is your bottom line trending over time?
- Gross margin percent — Are you making estimating decisions based on this metric?
- Selling, general and administrative percentage of revenue — Is your admin staff right-sized relative to your revenue?
The trends for these metrics tell you how you are performing and where you need to take corrective action.
In many construction companies, there is a disconnect between accounting and project management teams. Accounting teams struggle with getting project managers to update information about their job progress and cost projections. This struggle often makes it difficult for the accounting team to meet deadlines for financial and executive reporting. At the same time, the project managers, who are consistently being asked to provide updates and reporting requirements, feel pulled away from their main objective of delivering a profitable project on time.
By implementing best practices in reporting and by defining key performance indicators with your team, contention and miscommunication is mitigated. Teams will begin thinking and communicating about key drivers of the business in the same way.
One large civil and building contractor, Georgiou Group, undertook a strategic reporting and data initiative. While they originally set out to gain a deeper view into the financial metrics associated with each of their projects, they discovered that this process fostered improved communication and a better working relationship between the company’s accounting and project management groups.
“We now have easy access to key performance indicators, including any variances from plan for each of our projects,” says Chris Laurent, Georgiou’s controller. “The time that our finance team used to spend on spreadsheet-based reporting is now invested in analyzing projects and processes. This has broken down the wall between finance and construction where project managers now come to us looking for help in proactively identifying project issues. We work as a cohesive team with project management and are focused together on project success.”
Construction companies have the opportunity to employ underutilized data in their organization to transform the company into a proactive, strategically run organization with better collaboration. Following the practices of generating and using in-house reports will put your organization on the path to greater efficiency and success.
- There are several actions you can take to foster communication and close the gap between accounting and project management teams:
- Demonstrate how the data is used, and explain who is going to use it. This will reinforce the importance of the data to the teams.
- Personalize the data. Show the project managers and accounting teams how they could use the data from the example to accomplish their core job responsibilities.
- Publicize and recognize examples of successful teamwork.
- Require interaction. Use a standing meeting with deliverables and outcomes that are commonly understood.
- Hold line managers accountable for their teams’ adherence to goals.
- Require the managers of each group to have regularly scheduled meetings to discuss results.