While construction has been one of the slower industries to adapt, the digital tech genie is now out of the bottle. According to the World Economic Forum, the construction industry will be almost entirely digitized within 10 years, with an overall potential savings of $1.2 trillion globally due to increased efficiency and productivity. Those kinds of numbers can’t be ignored. So the question becomes, where can firms best maximize new digital solutions?
A process that is ripe for automation is the generation of tickets, or tags, for documenting potential change order work. These tickets capture the resources that are expended on the execution of scope that is not part of the base contract, and which will be incorporated in future change orders. The work is documented on paper, retained by the subcontractor and the general contractor, and eventually finds its way into a contract change order, a payment application and finally, all being well, the subcontractor’s balance sheet.
The problem with this over simplistic representation of the workflow is that current practices for time and material (T&M) tracking are defined by delay, inefficiency, waste and, ultimately, the opportunity for subcontractors to not be fairly compensated for work executed.
What drives these outcomes? The T&M process is mandated by contractors who recognise a need to execute work prior to the time-consuming process of a negotiating and issuing change orders. The process is mandated in contracts, and is completed by subcontractors on the assumption and expectation of a fair and equitable compensation for the costs and resources expended. While there are many reasons why this process is challenging, the most obvious arise from time taken to process and administer the T&M tickets that document the work.
What do I mean? Consider the steps in the following workflow:
- Tickets must be handwritten in the field to document the work.
- Supporting narratives and descriptions must be included to explain what work took place, why it was needed, who instructed it and what resources were involved.
- The ticket must get reviewed and verified in the field.
- The ticket must find its way from the jobsite to the offices of both sub and contractor.
- The contractor must then confirm that the work was in fact not part of the base scope.
- The genesis of the work must be understood and explained to the owner to justify the additional cost.
- Tickets must be priced, with all the necessary back up documentation provided.
- The data must be digitized, entered into logs, systems, workflows, platforms, spreadsheets and all manner of "tools" for documenting the work.
- Eventually, the scope is captured in a change order, a subcontractor can include in a payment application, and be compensated
The myriad data transformations, hand offs, inefficiencies and opportunities for the important data contained within these tags to be misplaced all have the potential to drive delays in payment. This may seem trivial, until you consider that these tickets document work that has been performed, and financed, by subcontractors, with no immediate opportunity for compensation.
While awaiting the data to makes its way through the steps outlined above, subcontractors, not project owners or general contractors, carry the financial risk for the work completed in the field. Subcontractors bear a disproportionately higher cost of working capital than contractors and project owners within the construction system. The T&M process, that exists to assure predictable delivery of work—for the convenience of the contractor, owner and project—can often lead to highly disadvantaged subcontractors – key stakeholders in delivering successful projects.
We all know that construction is a low margin business, and for many subcontractors, carrying the cost of T&M work can place an unbearable strain on the balance sheet. Since the global financial crisis of the last decade and the implementation of the Basel III framework in 2013, which requires improved capitalization of banks - SMBs, representing many small subcontractors, face an increasingly challenging lending environment, with enhanced regulation for banks resulting in a decreasing access to capital. SMBs consequently face a worsening environment for financing their operations.
In their 2017/18 Working Capital Report, PwC confirms that construction is one of the worst performers in terms of working capital performance, and indicates the second worst performance in terms of improvements to capital cycles between 2012 and 2016. Impacts on working capital can have downstream impacts on investment, innovation, the ability to take on new work, or in the worst instance, remain in business.
The construction industry, and society at large, relies on a financially viable and profitable subcontracting community. In response to these industry challenges, technology companies, like Textura, have emerged to streamline payment processes, reduce latency in the payment cycle and drive improvements in the financial position of companies. In addition, some general contractors are promoting accelerated payment programs that look to better manage the risk associated with financing projects, while improving the factors that drive profitability and cash flow for trade partners.
While these macro level trends, and industry solutions represent powerful opportunities for the industry, challenging financial conditions prevail. How therefore, can the construction industry create opportunities for improved profitability and cash flow performance? In part, by utilizing solutions that digitize T&M tickets and provide accurate and timely data to project stakeholders in real-time. The following few points outlines how this happens:
Automating T&M tickets in the field immediately digitizes the data, and makes it accessible to necessary project stakeholders, including owners, architects and construction managers. This visibility assures that T&M work is identified, understood, and any mitigating or validating actions required can be taken.
The susceptibility of the all-important data being lost or delayed is reduced, improving the opportunity and likelihood for timely processing and payment.
Data that is digitized at source drives equitability and transparency in the contracting and payment processes. Better use of the data for metrics, insights, trending and forecasting drives better awareness of project cost and contingency management, which in turns creates optimal conditions for subcontractor compensation.
The industry is defined by subcontractors who fail to recover sizeable amounts for work executed on a T&M basis. The tendency for T&M to be used as a tool to leverage subcontractors is not new. And while a digital tool is unlikely to change the underlying industry factors that drive these behaviors, better use of automation and data can have a positive impact.
Equitable and timely compensation is key to driving improvements in the industry. By digitizing T&M tickets from the field, via easy to use tools and recognizable interfaces, data related to issues, such as change orders and payment applications create a quick and reliable path to increased productivity and cash flow.