Wednesday, December 16, 2009

ERP solutions for the Construction Industry




“This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.” --- Winston S. Churchill.

With the real estate markets shivering in the cold due to economic downturn you may think this is not the right time to talk about ERP solutions for construction industry as most companies will not be even entertain the though of investing in new technology during this trying times. Not to mention when the times were good they were busy constructing and at these bad times they are short of funds to go for top notch ERP solutions in the market. But do construction companies really need the expensive most sort after ERP in the market? Does best ERP necessarily mean best for them? (We will come back to this little later) Paradoxically this may be the best time for construction firms to go in for IT solutions for the simple fact that companies now have time to take stock of the situation, sort out the in efficient past and bring in efficient processes leading to reduced cost, time management and better accountability thereby improving overall quality. This will get them to be ready for the next cycle of good and bad tides.

Let us look into the problems facing construction industry and understand it and later we will see how tailored ERP solutions can go a long way in transforming the construction workers to a force to reckon with.



Problems facing construction industry is not new but probably thousands of years old probably ever since they started building the pyramids. What is so different now are the tools and techniques that can be utilized to get the best usage of its resources and materials and equipments.Construction is a complex array of interdependent activities that some would say is at best organized chaos. The very nature of construction introduces challenges typically not encountered in other industries. For example, construction differs widely from other industries more so as

• Each project is unique
• Often involves remote sites with various access problems
• The process is not as predictable
• Difficulty in applying automation
• There is high potential for encountering unforeseen conditions
• Costs can vary according to conditions
• Difficult to manage and supply utilities and other resources.
• Technical innovations are adopted slower.
• Success is dependent upon the quality of its people.
• Very custom-oriented
• Product can be of mind-boggling size, cost, and complexity
• The work is not performed in controlled conditions, therefore highly impacted by weather and other environmental conditions

All this poses a unique set of challenges as illustrated below.



As seen in the figure it is a herculean task to co-ordinate and integrate all these challenges into one solution. Let’s look into some of the major problems in construction companies who do not have or have partial IT infrastructure.



1. No electronic tracking of tasks. The project manager needs to produce manual daily production report.
2. Budget and controls done using legacy spreadsheets and this is most time consuming task and the employee is overloaded.
3. Each project has its own independent method of encoding.
4. Off-Site locations are not as organized as desired.
5. Material and Equipment usage are hard to track; there is very little writing on site.
6. The project managers do status reports but lack critical information such as
    a. Inventory information
    b. Budgetary information
 
7. Due to disorganization there is little time for follow up.
8. There is no process for
•    Payment follow ups.
•    Reminders of important issues like raising invoices.
•    Beneficial weekly status report.
•    Petty cash request and reporting
•    Evaluating the performance of the project manager.
9. Ineffective system to incorporate fixed assets into the company books.
10. No clear process to accurately track inventory at multiple sites.
11. Invoices are not raised frequently enough thus contributing to a cash flow problem.


All these issues make the construction projects highly complex and cumbersome to track and control. If we have to successfully manage these complex projects its all the more important the work progress and the resources utilized are measurable. The success of a project will be judged by meeting the criteria of cost, time, safety, resource allocation, and quality as defined during the planning and budgeting of the project.

The purpose of the ERP will be to measure the progress continually at every step of the project so as to achieve goals and objectives through the planned usage of resources that meet the project’s quality, cost, time, scope, and safety requirements. Through the ERP the Project Manager must be in a position to control, deflect, or mitigate the effects of any occurrence or situation that could affect project success.


Tailored ERP solution can lead to

1.    Maximum utilization of company resources
2.    Attain maximum productivity
3.    Effective communication between all departments
4.    Ability to track and analyze each task and operation





What these construction companies could typically expect from a tailor made ERP solution is

1. Effective Processes
•    That show the progress, the amount of raised invoices, cash-flow, and inventory by projects.
•    Track project budgets. To track at an individual project level and at a summary level.
2. To be able record major project tasks over the duration of the project.
3. Accountability at each level of project progress
4. A system with the least amount of human intervention this is not limited to:
a. Tracking the project progress
b. Tracking the production and utilization of resources
c. To send alerts for delay or problems halting the project progress.
5. Each Project phase must be divided into segments for the aiding accountability at every stage. (More on this later in finance)
6. Dashboards and metrics to monitor each level of project progress.
7. Alerts to indicate and to remind the project manager if the project is not on schedule
8. Maintain log on project issues for record keeping and resolution.
9. To have a built in work flow so that it is easy for the user to know what is to be
done next for each task required.





Another corner stone of tailored ERP solution will be the measuring the financials of the project. Any typical construction project is planned and budgeted. Using the ERP it will be possible to compare the planned vs actual value analysis and reporting. To illustrate with an example. Let us assume a hypothetical construction project where the planned project budget is Plan A. This plan will be the bench mark which needs to be followed to attain operational efficiency and completing the project on time within budget. Any deviation from plan A can be tracked through ERP reporting. For instance on delay of any of the tasks will be reported by the respective project managers in the ERP system. The Plan A will be compared with the changed plan as per the changes that had been made and its variance generated in the system. Tasks inter dependencies will be reflected in the system based on the input. For instance Task number 3 cannot start without completion of Task 1 or 45 % of Task 2 etc,. So system will compare generate reports on the start and end dates of each task and compared with the actual work that has been completed. If any task is out of schedule time, the system will generate alarm to remind for its respective teams as well as higher management.

Similarly the system also tracks the planned budget and actual utilization of resources as per budget. This will represent a practical approach to measuring the progress of a project against the plans and this approach is based on variance analysis. This reporting will have numerous advantages as described below.





As shown in the figure above, a project manager may have a budget of $500k to spend on his or her project for the Phase I. At the management meeting, the project manager reports that he or she has spent $490k, or just under the budget. At first glance this appears to be good news as the project is under budget. However, the missing piece of this information is whether the project is on time, or has completed the forecasted work for that phase I.
This is where the ERP can make a difference. The system will measure three dimensions of data to associate project expenditures with project progress. These dimensions provide a complete status, including:

•    Planned value of the work that has been scheduled
•    The actual value of the work that has been accomplished
•    The actual costs incurred in accomplishing the work that has been scheduled

As this reporting takes into account the budgeted value of the work planned, as well as the actual value of the work that has been completed, in addition to the costs incurred. If the project is behind schedule, for instance, it may also be over budget even though only $490k of the budgeted $500k has been spent. This may be the case if individual tasks cost more than has been budgeted. In other words, the project may still be over budget because the $490k that has been spent has not achieved the work that the money was budgeted for.

By calculating the cost of the work actually performed, the expected cost of the work that was performed, and the actual value of the work performed, project managers, will have the means of linking schedule and cost performance. This will tell the full story of project progress as measured against project budgets in turn monitored and controlled by the top management. This gives a complete method of measuring and controlling project performance, as well as a means of predicting future performance based on progress to date, making it well worth of the ERP implementation.


 


Now is that it is clear that implementation of ERP solution can have huge benefits for the construction industry. How do the companies make sure they choose the right ERP vendor?

The major problem many construction companies face after choosing the best ERP solution in the market is it is not flexible enough to meet their needs. No two companies are the same and by forcing them to utilize software which is not engineered for their environment there is a high potential for loss of profit and failure of the ERP solution. Companies need to maintain their competitive edge and to due so they are lead to believe a best practices application will lead them in the right direction. Possibly after a few hundred of thousands of dollars in changes they will have the ability to innovate and outsmart their competition. However, there are better choices which do not cause the software companies to loose their valuable time and money hassling with the pre-packaged software.





Now sigh a breath of relief because there are ERP vendors who understand each company needs and have been pioneering the art of tailored ERP solutions. They offer light weight, flexible, affordable and easily installable solutions. These are tailored software solutions according to each industry needs. Tailored solutions are made for the requirements of each organization without the lengthy development periods and difficulty of upgrading. These solutions are agile software solutions for they are highly configurable and offer all of the advantages of a custom software solution along with the best characteristics of a canned software solution. These tailored solutions will have the most success for your organisation, additionally, they will have the capability of growing and changing as your organization continues to do so in an affordable budget compared to pre-packaged expensive ERP solutions.

The author is the Director of Qualian Technologies Pvt Ltd, a leading software consultancy firm providing tailored ERP solutions for construction industries in India and Middle East. He can be contacted at manavalan@qualiantech.com for further queries and comments.