Construction can be a thin (or no) margin business if costs are not constantly monitored and controlled. For example, a recent hospital project in the Midwest experienced serious cost overruns, with the original projected final cost of $600 million rising to more than $1.5 billion
The frightening thing about the cost overrun on the hospital project was no one knew for certain how it got so out of control. Poorly trained managers with poor project management had a lot to do with it, but there was also a shortage of clear data about who was responsible and what could have been done to keep the project on course.
The construction industry has a reputation for being a conservative business in which doing things the way they have always been done sometimes takes precedence over creative innovation. And this way of thinking is understandable; large construction projects often are subject to public scrutiny (any project failure can be lambasted by the media). But there is a big difference between being conservative and being blind to reality.
Even on small projects, labor and material costs must be carefully monitored and controlled, and a series of minor cost overruns have put many small businesses on the road to financial ruin. Reports on results achieved during the last period are necessary for compliance and planning, but proactive responsiveness is only possible with real-time alerts and warnings about what is happening right now.
There are new reporting solutions designed to accept input from many sources and provide real-time visibility into operations via easily customized dashboards. These have been successfully deployed to improve performance in a range of industry sectors, including finance, real estate, manufacturing, entertainment and facility management.
The same approach works wonders in the construction industry as long as a company has clearly identified the key performance indicators (KPIs). KPIs should be required by management to keep track of progress in terms of cost and time.
Key Performance Indicators
A really experienced project manager learns to judge instinctively; by spending time on a construction project, they get a nose for likely trouble spots and can take appropriate action. But if the problem is a shortage of “qualified and experienced people in charge,” then KPIs are needed. Many construction mangers still don’t measure KPIs, or are not sure whether they are looking at the right KPIs.
So what should a construction manager look for? Firstly, he or she needs an indicator that is relevant to the business strategy. Next, this indicator must be something that can be measured. Third, it must be something that is actionable and has a clear threshold or target so anyone can immediately judge whether the project is below target, on target or above the goal. If the performance indicator is truly key, a poor result will trigger remedial action.
The most obvious KPIs for completing a construction job on time and budget could include the following.
- Project Schedule Variance (PSV), whether ahead or behind schedule
- Project Cost Variance (PCV), whether or not exceeding budget
- Process Downtime–including hours lost due to bad weather, worker sickness, equipment problems or late delivery of materials
- Capacity Utilisation Rate (CUR)—a measure of how well resources are being used rather than standing idle
Then, there are the less obvious measures of how dedicated the workforce is to completing the project, such as:
- worker satisfaction;
- worker engagement level;
- worker churn rate; and
- training return on investment.
Increasingly, there will be requirements for environmental and social sustainability, including the following measures:
- carbon and water footprint;
- energy consumption; and
- waste reduction and recycling rates.
However, the KPI set should embrace measures from every part of the operation. This includes not only integrating data from ERP and CRM systems, but also getting data from the jobsite. The most advanced reporting solutions make it easy for anyone, not just trained managers, to input data via simple customized windows. When this is possible, the system can integrate truly up-to-date feedback from people on the construction site, data from suppliers of materials and other factors, such as weather predictions that could impact progress.
The important thing is not to try to include every possible measure, but rather to agree on less than a dozen relevant, reliable and focused KPIs that give a true understanding of how the project is going. And don’t leave it at that: Keep comparing your KPIs with actual results, and keep questioning whether they are still the best ones or whether they need refining or discarding.
This is the first article in a two-part series on tracking information to increase project success. Part II is Use KPIs to Enhance Reporting and Track Performance