We spent some time a few months back to interview construction companies and analyze how they were managing their labor. I’m excited to share our finding with.
First, I wanted to know what percent of total job cost was spent on labor? The answer was 9% to 28%.
I needed to know where labor cost ranked in relation to all of the other job costs. This would tell me the significance of labor cost. It turns out that labor rank among the top 3 cost categories along with material and equipment, so it is pretty significant.
The next question was, what percent of jobs exceeded their revised labor budget and it turns out that 51%-75% of companies were exceeding their labor budget.
Well, one question lead to another. That’s the beauty of analytics, with the right tool, you should be able to answer questions at the speed of thought. So, the next question was, when companies exceed their labor budget, are they barely missing the mark or are they way off? And the answer was between 12%-30%. I had to put his into perspective…
if a company has a labor budget of $300,000, they were losing anywhere from $36,000 to $90,000 on labor alone. I’ve heard that labor is one of the riskiest components in managing construction and now I see it to be true.
I now see the problem, but the numbers were also showing me that something was changing. I began to compare job overruns “Pre-Pronovos” and “Post-Pronovos” and could not believe it. The overrun percentages were shrinking. I’m ashamed to even say this, but I didn’t know why and that’s when I had to sit down and listen to each and every customer and I found this out.
COST TO COMPLETE
Every company was using Pronovos to manage their Cost to Complete (CTC) process. CTC was the kick-off point of managing overruns or what we now call variances. One very smart owner of a mid-size mechanical contracting company told me
you will be right twice when forecasting job cost, 1) before the job begins and 2) when the job ends.
Here are a few questions about the CTC process:
How frequently do they enter cost to complete?
We noticed that every company’s CTC process was a little different and it produced different results. For companies that saw smaller variances, they had their superintendents or PMs enter the Cost to Complete on a weekly basis. Other companies entered the CTC every other week or monthly. We found that there is a direct relationship to the frequency companies entered CTC and the variance percentage. Companies that entered CTC monthly were the worst performers.
Does it matter how superintendents or PMs report cost to complete?
Yes. Organizations that had their superintendents enter the CTC by each cost code were again seeing less variances compared to organizations that reported CTC at the job level. It seems like supers that were specific about each code really knew what was going on and were more accurate.
Does it matter if you report percent complete, hours, quantity or overall cost?
This might seem trivial, but the data shows that when superintendents or PMs enter CTC based on hours and/or quantities, the cost variance is more accurate compared to superintendents that only enter a percent complete.
Considering that CTC is mainly used to report the progress of a job, we wanted to know what our customers were doing with that information. Did they know why the jobs were running over at different phases of the job? What actions were they taking with the data? If there was a variance, were they able to correct it?
This is where I witnessed disciplined and highly effective organizations really excel and own the title best-in-class.
Whenever there’s a variance, superintendents understood that they were accountable to know why and propose an action a plan. Essentially, they were using Pronovos to improve variances each week while fine-tuning their game plan. Consequently, from using the Executive Dashboard, management could see which jobs had variances, why there was a variance and if the superintended had a handle on a resolution .
Lastly, organizations were using the historical Variance Reasons and the most effective action plans to educate the Operations team on lessons learned.
Just about every company moved from projecting manpower in MS Excel to using Pronovos to project manpower. Apparently it is crucial to know how many resources you need per job and how long you need them for. The reason why I’m even pointing this out is because the Manpower Projections is tied to the CTC. The manpower projections is based on the Estimated Cost at Completion (ECAC). So, if you anticipated 30 guys on the job over the life time of the job and the estimated cost changes along with the start date, what does this do to your manpower projections? We have found that companies were able to proactively adjust the workforce and keep the right skill mix on the job to be highly productive.
REMOTE TIME ENTRY
The last of my findings was Remote Time Entry (RTE). Many organizations already had a Remote Time Entry tool in place or were using Pronovos for Remote Time Entry. The important thing to note that it is important to include the RTE data in the labor management process because that data is helping companies make mid-week adjustments to improve productivity and reduce overtime if possible.
I’ve been working in BI and Analytics for over 20 years and one of the most difficult aspects about BI is showing a tangible ROI to customers. Sure, you could go with the time-saving method e.g. Accounting spends x number of hours running reports each week and we can reduce that by x. But construction is different. It is a hard and risky business. Companies want to see a clear ROI without the mystical hypothetical.
So far, I’ve learned that it’s one thing to have a great product that is looking for a problem to solve. It’s something entirely different to know the problem, understand the financial implications and be able to have a quantifiable ROI. Using our Labor Cost Management System, we’ve found a repeatable process to help companies reduce their job variances by 10%.
In closing, I’ve learned a great deal about the industry and yet I feel like I’ve barely scratched the surface. However, I’ve learned that when you combine good construction practices, lots of construction data and analytics, the possibilities are limitless.