Creating a Technology Budget

One measure of success (there are many measures both financial and non-financial) is how well you do relative to others. 

If you are in the top 5 percent of the field being measured in a positive statistic, by any metric, then you are considered best of class.  In order for contractors to be considered best of class, they must put the right technology to work in their business.

When should you consider creating a technology budget?  You should be creating a technology budget each and every year.  Whether we work in the construction business, the manufacturing business, professional services, etc., is irrelevant.  The fact is, we all are in “business.” All business operates on a foundation of many base systems that bridge all sectors.  One of those base systems is the technology used in our operations.  A strong business will invest significantly each and every year in technology.  The real challenge is first identifying which technologies our business needs, which specific software packages are best for those processes and at what point we need to incorporate that technology into our company’s operations.

Determine What the Business Needs

When we think of budgeting, we think of determining the dollars and cents of the matter in question.  Before we can determine the financial considerations, we need to first identify what the business needs.  Start with a management team meeting.  Get everyone around a table and share different perspectives regarding the needs of all users within the organization.  In addition to knowing what they each personally need, your management team may, often times, be aware of what your peers and competitors are successfully using.  It’s also good to know what your peers and competitors are using with little to no success and avoid those solutions.

Interacting with your team members will also serve you well when your company executes any plans, since they will have been part of the process from the very beginning.  In addition to staff meetings, attend industry conferences (occasionally there are technology specific construction industry conferences), and poll other contractors regarding the systems they are using.  Most every construction industry conference is well attended by vendors selling a variety of applications to meet the various needs of your business.  If you cannot attend, consider sending your next in charge on either the operations or financial side of your business.  In addition to being able to quickly gain a general understanding of what is available in the marketplace, it’s a great opportunity to network with other contractors and learn what is working for them.

Plan Appropriately

Once you’ve identified a specific need, remember with systems implementations, time is your friend.  These undertakings are significant, usually requiring your in-house personnel to take on important roles, tasks and responsibilities in addition to their normal day-to-day responsibilities.  Planning, as with many initiatives, is critical to the success of any technology implementation.  In order to effectively plan, sufficient time must be allowed and timelines created to ensure proper execution and allow for contingencies.  I would suggest you begin the process of investigation solutions to meet your various needs at least a year before you want to go “live” with a system.

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.

Construction Business Owner, February 2008