Intensifying economic pressures to drive change within construction and engineering companies

IFS experts analyse key market data and make three predictions that construction and engineering firms can use to navigate the turbulent market dynamic

In the wake of the turbulent COVID-19 pandemic, the construction and engineering industry will need to continue its fight to become more resilient and agile. As the global market continues to be pressured from new events including recessions, increased supply chain complexity brought by geopolitical conflicts, material price increases and labor shortages, a new layer of uncertainty is making its way throughout the industry. Thankfully, there is huge potential for those looking to adapt and become more resilient.

In this year’s construction and engineering trends and predictions, IFS’ Kenny Ingram, VP of Construction & Engineering and Chris Knight, Global Industry Director of Construction & Engineering have applied their combined 60+ years of industry expertise, to analyse key market data and make three predictions that will navigate the turbulent market dynamic.

Prediction 1: 20% of companies will execute plans within the next four years to have more robust, timely and accurate financial control and governance processes and systems

A recent article from ENR (Engineering News Record) stated that new construction projects will be flat in 2023 so growth is going to be a challenge. In addition, there is a headwind of challenges facing most global economies with high inflation and a recession predicted to hit many countries. With this backdrop companies are recognising they will have to improve their company and project financial control processes and systems. The need to report on a project’s financial status and accurately predict the outcome of a project has never been more vital.

Yet many companies fail to realise that their current mix of disparate processes and systems with poor or no integration are compounding the reliance on an excessive use of Excel spreadsheets to produce financial project control information. Running project and financials on Excel has been proven to hinder performance and prevent companies from meeting their key objective of delivering projects on time, on budget and at high standard.

In the process of determining a prediction that will tackle this issue, we had to first review the current situation (the next two sections will analyse a typical scenario– and highlight some key findings).

At present the most typical situation is one where financial accounting systems exists but have limited integration with the systems that process the cost and revenue transactions that impact the project. These are procurement (materials, services, equipment rental and plant hire), sub-contract packages, labor costs from payroll, time recording and expenses and occasionally manufacturing costs as companies transition to more industrialised construction methods. Without an integrated approach the actual costs and revenue transactions are processed through manual journals, and also manually entered into the finance system and very slow, error prone process that does not allow for any meaningful or real time drill down analysis.

Compounding this, is that commercial and project budgeting and forecasting processes are often managed using a combination of non-integrated point solutions and Excel spreadsheets. Impacted by the lack of suitable technology are activities such as  bidding and estimating, project budget creation, risk and opportunity management, sales and sub contract management, application for payment and certification, project and contract change management (variations), insurances and indemnities, accruals, project and company cash management and forecasting, periodic project cost control, progress and earned value management and project financial forecasting; all of which can in isolation as well as in group negative impact a project outcome.

With this backdrop, we are seeing a strong trend emerging. Companies now want all the above processes and associated data to come from one complete project financial control solution that provides reliable, accurate, timely, trusted project financial status and reporting and more accurate project outcome forecasting. Companies now more than ever understand that they must make this transition to improve their project financial performance, reduce project and business risk and make more informed business decisions.

Prediction 2: 30% of companies will change their construction processes to an industrialised construction model by 2025

How do construction companies evolve from a traditional model and become the next generation construction company? Increasingly, we are seeing the industrialisation of construction processes but we also see that the long-standing challenges of improving productivity, while reducing cost and waste, still remain. There are plenty of examples of companies that have struggled to successfully evolve their operating model using for example, modular construction; we ask how can they transition more successfully?

A recent McKinsey report commented on low productivity in the industry and produced a comparison to show that if the construction industry were able to keep pace with other industries like manufacturing, it could reach a value of $1.6tn per year. The industry’s traditional challenges have been amplified by the global financial pressures and disruptions cause by inflation, parts and material availability and transport challenges, as well as prices increases for materials, and equipment;  all of which are heightened by labor costs and shortages brought on by an aging workforce that is retiring and behind and every widening skills gap, currently estimated to exceed a million workers by 2025.

But, the construction industry is evolving to a new model of working by carefully watching other industries, and their experiences, for example:

  • Standardisation and platforms – assemblies of parts/components are being gathered together off-site, which can increase quality when then brought on-site, and as such reducing time and wastage that would otherwise require people on-site to work and pay
  • Design for manufacturing and site assembly – this approach looks to find the commonality between the systems within buildings across many different sectors and to then design standard kits of parts that can be put together to form the structure of just about any building
  • Digital Design (BIM becomes critical) – being able to take a design, cross discipline, as a model and ensure that ‘getting it right first time’ is possible by identifying where there are clashes of components or design issues
  • More emphasis on structured supply chain process (e.g. part numbering and inventory management) – taking a more ‘work package structure’ approach enables greater control and management of many aspects of material, sub-contract, labor and equipment

Companies will have to transition to industrialised construction processes to drive performance improvements and succeed in the future. In simple terms, companies must be able to execute a hybrid model combining traditional business processes with additional processes such as integrating BIM model data into all stages of the asset lifecycle, supporting construction site based structured work packages, kitting and assembly, standardisation, part numbering and more disciplined supply chain, logistics and inventory control and for some, manufacturing.

It is likely that the first step for many will be to review their business system landscape, simplify and consider whether they need to replace, renew or reuse some of their existing systems with solutions that can support this new hybrid model.

Prediction 3: 25% of companies will move to simplify and standardise their project processes with a single operational platform

We have established there is increased urgency for companies to improve business performance. For construction and engineering companies this starts with improving project performance, meaning project margins, reduction in financial risk, driving up productivity, quality and sustainability, while at the same time reduce the total asset lifecycle cost.

Embedded in this performance goal is the need to deliver projects using standard repeatable processes and achieve predictable, repeatable results.

To achieve this there is an increasing recognition that the business processes and systems that support these processes need to be challenged, reviewed and improved to shift to a lean construction model. These process shortcomings are made worse by complex and ineffective business systems landscape, where data does not flow, and users rely on with Excel to close the gap in data analysis and functionality (something we already established in prediction one).

Addressing this must be seen as the first step for companies if they are contemplating the roll out of world class best practices at the heart of which sit repeatable and standardised processes, and reliable and output focused data structures, which have longevity across multiple projects.

Having the right technology is now acknowledged as a vital foundation to achieving improved project and business performance.

ERP has been hailed as the solution for many years but for most companies it has failed to deliver. There are many reasons for this, but one stands out: too often ERP is seen as an accounting software solution and that for anything else you need a specialised system.

This trend is thankfully starting to change, as the need for end-to-end integration and visibility increases. Construction and industry specific ERP solutions will allow back-office finance and human capital management solutions to be satisfied, as well as the owners of more operational process such as estimating, contract management, project management, risk management and construction site execution processes. One integrated ERP platform is now accepted as the basis to allow companies to adopt standard repeatable processes that positively impact improve project performance.

This realisation for the need to join up processes and data across front and back office in large construction companies does not mean rip and replace with lengthy and costly investment. ERP comes as a composable technology or what is termed a common OSP (Operational Solution Platform), which can co-exist with existing back-office solution. This will also allow operational standardisation and improved project delivery performance to be realized at speed.

Resilience is key in this new reality

Whether you are a general contractor or specialty contractor, EPC or perform a specialised function – the long-running challenges of an aging workforce, increasing skills gap, poor profit margins and low productivity have been ‘manageable’ until now.

In an industry so adverse to change, for those that haven’t incorporated the latest technology innovations such as BIM, drones, IoT, robotics and automated machinery into their transformation journey simply must evolve their thinking into action. Equally, for those that still haven’t added operating methods such as modular manufacturing or offsite construction, why not?

Resilience is what has kept the industry moving and it is what will evolve companies into industry leaders with a more lean, profitable and technological operating model that will not only weather the uncertain times ahead but provide a more reliable platform for success.

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