Being successful in the construction business isn’t about luck, not even close. Outsiders looking in might argue that construction companies get lucky but if luck had anything to do with it, the contractor made it him or herself. In my mind, success is a number of things when it comes to running a construction company. One thing I believe is well worth striving for in order to increase one’s luck is to work at recognizing opportunities when they come along and then taking advantage of them in a timely manner. For the most part, this is exactly what construction industry management is all about. It’s not about how good the computer system is. It’s all about how good the computer system makes the contractor.
It took me many years to come to some very basic truths about the construction business as well as the people who own and run them. This formulation of truth began with my formal training in cost accounting. I chose cost accounting as my post graduate training because I figured that four years in cost accounting would provide me an excellent foundation in business management knowledge and prepare me for a wide variety of opportunities, pretty much whatever might emerge befitting my fancy.
As it turned out, It proved to be an excellent choice. I spent the next twenty plus years in construction. Several of those years were as an employee from an inside perspective and then several more as a systems consultant looking in. Systems consulting helped me to develop a mixed bag of skill sets including computer software installations, systems design, user training and thousands of hours in heads down programming. Looking back, there has not been much that I have not had a hand in from time to time as it relates to office information systems. The interesting thing about it all was that almost everything I did throughout my entire career was almost always challenged at, what was at that point in time, the pioneer stage. Some training was available for some of the activities I found myself tackling but whatever there was rarely had any direct relationship with whatever I was trying to achieve at the time because I always seemed to be breaking new ground.
As it turned out, the education I got was nothing short of fantastic. As a result, I learned a lot more about how things are actually done from a practical perspective rather than how things were supposed to take place in textbook fashion. As I was progressing through my career in information technology, I was amazed at how much text book material is written to sell books, how much college and university training is purposely designed to drive revenues and teaching jobs for the universities. To-day, as I have grown older and wiser, I am no longer just amazed. Now I am also horrified. How well the educational system has led the vast majority of people in our society in believing this is all perfectly normal!
The long and the short of all this is, and the point I am trying to make, is that there is frequently tremendous discrepancy between theory and reality, but none more so than what I have seen and experienced in the construction industry.
Through my many years of experience in working within the construction industry I learned far more than this short article is going to have the time or space to tell.
We are repeatedly being informed by our governments and financial leaders that fixing our economy require is going to requires an extensive emphasis and commitment to efficiency and productivity. I agree wholeheartedly and I know few who would disagree with them, save for those who do not understand the true meaning of those two words.
There are three industry sectors we need to bolster up in order to build wealth, in fact, in order to just survive. They are the food industry (farming and fishing), manufacturing and construction. Without food we starve and manufacturing processes our foods as well as prepare goods for export. Goods for export can be almost anything, iron ore, minerals and forestry products all quickly come to mind.
Infrastructure is key to continued use of our hospitals, schools, roads, airports, water and sewer, public buildings, private buildings and national defense. This third sector, construction, is what develops all this infrastructure. Without construction, these essentials cease to survive, If you really want to get a grasp on how important infrastructure is, simply close your eyes for two minutes and try to imagine what it would be like were these things to suddenly disappear?
Now, do you understand the importance of construction?
But, you know what! While many of the general population, at least those who are not involved in construction, think construction people are senseless dumb-wits who have nothing better to do than hold up traffic all summer, I know that construction companies have some of the most brilliant, most aggressive and daring people in our society.
Let’s go back just a bit. Do you remember what commerce really is? In commerce we purchase something, we do something with it and then we sell it. If the purchase cost and the doing something with it cost is less than the selling cost, we have a profit. Mathematically, it is no different than selling shoelaces down on the street corner. Mathematically, it is no different than running a giant retail chain.
But it is different. It is different because in construction, risk is spread out over a very small number of very huge items rather than a large number of very small items. It takes a very special person with a keen ability to assess that risk before taking on the responsibility of taking on a construction job. Construction is where risk management becomes far more important than risk aversion.
Now, I will make a few key personal observations about construction companies and construction information systems, things I have learned which could be important to your construction company.
One of the biggest blunders built into virtually every construction cost accounting system was all those cost codes and sub cost codes. Having worked with close to a hundred companies I learned a lot of things about cost codes. Sometimes there is good reason for them but not very often
Construction is made up of three key cost factors, materials, labor and equipment. The only thing beyond that is the sub-trades.
As for materials, if you don’t know what your material cost is going to be before you bid the job, you better not be bidding it and rarely if ever does an estimator estimate the project cost for bidding purposes based on cost codes. Typically he figures out how much of each material is required for the entire job and this forms the basis for materials in the estimate. Where it is ultimately used, by cost code, is not necessarily all that significant.
Why? Because he knows that rarely will the materials items be properly coded to all the correct job cost codes. Talk about miracles! That may be how your typical ERP construction software system is designed to work but real life does not work that way. Try it and you will find that extras, force accounts and specification changes will get you fouled up every time.
The sad truth is that cost accountants, estimators and engineers spend countless hours analyzing cost codes and not one minute of that time is chargeable back to the client and it contributes absolutely nothing to the performance or productivity of the job. In the end it serves only to confirm the true level or lack of reliability that can be placed on the computer system.
The truth is, once you have the job, it doesn’t matter what it costs or where. You are committed to doing the job regardless of what it cost. As a result, your costing has very little or no significance whatsoever.
One of the things about construction companies that is invariably misunderstood by people who try to sell construction ERP software is the fact that most construction managers don’t need a computer to tell them where they lost money on the job. Most of the time they know something is going astray long before anyone in the accounting department finds out.
The neat thing about construction managers and key construction engineers is that they understand the principles of making decisions and the importance of the timing of events. They know before the job even starts that sending a crew in to do a job is going to cost them X dollars per day for N number of days. That’s how they bid the job in the first place. If the crew has to get larger or the days get longer, or more days are required, they don’t need a fancy costing system to tell them they are losing money in equipment costs and or labor. Their gut will tell them every time.
Another neat thing about construction owners is that, at heart, they are all entrepreneurs. Every job is a new venture. Every job is a new gamble. Good information from previous jobs must be reliable if they are using it as the basis for estimating on a new project. It must be information they can trust and cost coding is rarely accurate. There is no denying it though, knowing the amount spent at supplier xyz for project q in 2006 is important and good information to acquire. Unless someone paid the wrong supplier, which is highly unlikely, that kind of information should be highly reliable.
Construction ERP software should be exceedingly simple. If things are moving right in the right direction in construction, they tend to be moving very fast. There is little or no time to second guess alternatives and most decisions for what they are going to do on the job tomorrow must be made long before most of the rest of the world is out of bed tomorrow morning. In construction, time is always of the essence.
As you can now see, construction is a different world where risk management and entrepreneurialism are essentials, in fact an integral part of construction life. Take it one step forward from traditional accounting to the totally seamless workflow accounting and information system and you have a very powerful contracting tool, one no contractor should be without.