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FMI Quarterly/September 2014/September 1, 2014

Deconstructing Data

Industry4_imageData-driven strategies create competitive advantages.

Do you consider your company to be “data-driven?” Undoubtedly, you and your colleagues collect an enormous amount of data. However, are you collecting the right data? Are you merely monitoring data, or are you leveraging data to make informed decisions about the business?

Empirical analysis can be applied to every aspect of the contracting space: work acquisition, pricing, operations management, personnel development and more. As data platforms become more sophisticated, it is becoming easier for contractors to turn mass amounts of data into information and ultimately into knowledge. Best-in-class firms have recognized the value of data-driven strategy and are using it to derive competitive advantages. So do you consider your company to be “data-driven?”

Why Data?

Quality information is gleaned from quality data. The better the information managers have at their disposal, the more objective they can be in making critical business decisions. Without data, managers must rely on gut instinct, intuition and pure boldness to make pivotal decisions. While we can’t extract the human element from management, and there is no substitute to good ole fashion business savvy, we will drive an argument that a better understanding of relevant data creates clarity in the decision-making process and ultimately improves outcomes.

We’ll start by examining the advantages of data and the functional opportunities that it provides.

Pursuing Work —Strategic Business Development Efforts

There is no business without sales. “Feed the Beast” is the sentiment that many contractors use when it comes to work acquisition. Significant fixed costs and the livelihoods of loyal employees are just a couple of the mentionable drivers that make business development a paramount focus for construction business owners.

Each construction “sale” is unique and presents its own challenges, risks and opportunities. Selecting the right opportunities for your business is extremely important. A business development strategy outlines which customers and markets you will focus your resources towards, and the value proposition(s) you will convey to them. The goal is to target opportunities that will yield the highest returns for the business.

There are several critical questions to be answered prior to developing a comprehensive business development strategy:

  • Who are your best clients (currently and potentially)?
  • What type of work fits best with your core competencies?
  • Geographically, where has your firm enjoyed the most success?
  • Are you more profitable on large projects or small projects? (Define Scale)

Coming up with answers to these questions can be precarious. Sometimes the perception of profitable work can be skewed by revenue volume or relationships with a particular customer, market segment or geographical area. Due diligence through data analysis can help dissolve faulty notions about the work opportunities that you pursue. Start by analyzing profit at the gross margin level.

Final Gross Margin –Original Estimated Gross Margin = Margin Gain/(Fade)

Gross margin gain/(fade) is a metric that objectively measures how the execution of a project stacked up against the contractual promises that were made. This metric is influenced by every component of the construction business: estimating, business development, documentation, execution, customer service… the list goes on. The key is to identify curious trends in gross margin gain/fade, then dive deeper into the data for answers. Consistent margin fade in a particular area may point to inaccurate pricing or inefficient execution, or a combination of the two.

Pricing Work —Strategic Estimating Efforts

Price, estimate, costs, budget, bid. Often these terms are used interchangeably, with shades of gray. But they have completely different meanings.

Rule No. 1 — An estimate is not a price.

An estimate is a reasonable assumption of project costs (direct, indirect and overhead), based on a professional evaluation of contract documents and an intimate understanding of company or divisional overhead. A price is an estimate plus a risk-adjusted margin. The accuracy of a true cost estimate on bid day is fundamentally the single greatest source of financial risk to a contractor. That being said, there is no such thing as a perfect estimate. That’s why it’s called estimating. “Close” counts in horseshoes and hand grenades … and construction estimating. Being close is good. Being closer is better. We want to be as close as possible to the true cost of the job. By analyzing historical cost data, firms can improve their estimating accuracy. Look for projects with shared characteristics that exhibit gross direct cost overruns. You may wish to consider project supervision or project management. Who ran the jobs with cost overruns? Who estimated the jobs with overruns? Further dissect those overruns by direct cost category — i.e., labor, material, equipment, subcontracts and other direct costs. The sources of gross margin fade can be found in your historical cost data. You just have to know where to look.

Performing Work — Cost Tracking and Feedback

It’s 8:30 a.m. on one of your projects. Does your superintendent/foreman know the score on the scoreboard? Said differently, do your leaders in the field understand where the project stands today relative to the budget, and are their actions of the day influenced by that knowledge? If we want managers to care about the budget, we have to share the information with them. Sharing information requires a level of trust that is counterculture in many organizations. The impetus for cultural change must originate from company leadership and be embraced with patience by the collective.

Additionally, the information we share must have integrity. The budget that we share has to be realistic, and the data collected from the field needs to be accurate. Furthermore, the reporting of data must be timely and relevant. All of this requires administrative burden that can be very off-putting for decision-makers in construction firms who consider any incremental increase in overhead to be taboo. However, is the cost of not knowing where you are on a project significant enough to justify marginal increases in overhead? Those who say “nay” may be one catastrophe away from changing their tune. In any event, the risk of cost overruns is real and significant. Diligently tracking project-cost data can greatly improve your firm’s ability to identify risks and mitigate losses.

Other data applications to project execution include:

  • Blend Rates — What is the blend rate on your project relative to the estimate? Does a greater number of less qualified, cheaper labor result in the expectations set forth for fewer, highly skilled, expensive laborers?
  • Change Order Management — Is there an average threshold in the quantity or volume of change orders at which your project margins begin to fade? If so, what changes would you make in your firm’s approach to change order management?

Data 360

Is your estimating department set up to execute your business development strategy? Is operations set up to do the same? Does estimating understand the abilities of operations? Does operations provide quality feedback to estimating? Is business development monitoring project performance against estimated gross margins?

To be a truly data-driven firm, you have to link data collection and analysis across all functional areas of the business. The manner in which one functional group interprets data may be completely different from the conclusions derived by other departments. Sharing information and challenging conventional thought with arguments based on objective data helps firms continuously improve. Collaborative data analysis also drives company integration and can eventually streamline data processing.

How to Collect the Data

Over the last several decades, the proliferation of technology has been a huge catalyst in support of the collection, analysis and understanding of data. There is a multitude of tools, applications and software options to consider, and for functional reasons, one may work better than the next for your organization. Regardless of the tool itself, the behavior and the process have to be a cultural commitment. Without support from the field to the front office, a data strategy will quickly be regarded as a sunken cost in a software “that just didn’t work right.” Yes, technology is constantly changing, and, yes, teaching stubborn employees can be a tedious process, but the clarity gained and the improved performance of precon and operations have been seen as a convincing force throughout organizations with which we have worked. Repeatedly, we have seen the biggest cynic become the biggest advocate.

All this, of course, assumes we are collecting, managing and utilizing the “good” information. For an estimating or business development team, for example, accuracy of information is more critical than up-to-the-second information. For an operations team, however, both accuracy and timeliness are paramount. Accurate and timely cost and production figures can greatly support the management of an operational team, and, likewise, inaccuracy can quickly undermine the process.

Whether your firm uses iPads or carbon paper, you are already collecting vast amounts of data. Investment in new systems and platforms will come with time, as your demand for data horsepower dictates increased sophistication. There is no shame in starting small when it comes to data analysis. In fact, many contractors shoot themselves in the foot by trying to become Google overnight. If change as a whole is hard to swallow, change with a side of technology is even harder to swallow. Start by assessing your current systems and processes for data collection. If your data strategy requires investment in IT, proceed with caution and practicality.

What to Collect

The raw material of data-driven decision-making is none other than data. Without collecting, storing and analyzing data, firms cannot expect to make data-driven decisions. That said, not just any data will do. The data collected, stored and analyzed must inform a key decision of the business — need-to-have data, not just nice-to-have data.

Because construction is a project-based business, many examples of need-to-have data exist at the project level. As previously mentioned, this would include tracking variances between estimated and actual margins on a project right down to the level of direct costs. Project-specific, however, is still too broad a category. In addition to particulars of the actual project (e.g., job type and size, duration, location, delivery method, contract method, etc.), critical data about the project can fall into three other categories:

  • Customer data, such as client name, market sector, nature of relationship
  • Cost data, such as direct cost breakdowns and comparison of estimated direct cost values to actual values
  • Company-specific data, such as members of the project team, business unit, office location

To further complicate the matter, what we track is going to change throughout the project life cycle. What we need to know about the project in each of these categories is not the same during the opportunity phase as during project pursuit, bid, construction or post-construction. As the data requirements change, a decision must be made as to whether the now old data can simply be overwritten, or if it must also be captured and stored for analysis at a later point.

The challenge most organizations face is not finding enough data to collect, but rather collecting the data and determining what to do with that data once it is collected. As is the case in many elements of business planning, the key is to start with the end in mind. What business decision are we trying to solve, and what data do we need to inform that decision? Data efforts should align with addressing the key business decisions across the project life cycle from new opportunity to project pursuit to project performance (See Exhibit 1).

2014q3_deconstructing_data_ex1

To answer these simple business questions, companies should consider tracking the following metrics:

  • Revenue
  • Margin and margin gain(fade)
  • Hit rate and project pursuit cost
  • Variance in cost categories

At a minimum, each of these should be tracked in such a way that supports analysis by customer, project type, market sector and project team member. In addition to the simple list above, unique business decisions will require further definitions.

Multiple Data Examination Methods

Analysis often begets analysis. This is because the analysis that supports one business decision is likely to spur a question regarding another decision that requires further analysis. For example, instead of simply concluding that we are no longer going to pursue health care projects because our hit rate is too low, ask whether the opportunity in health care warrants investments that will improve our hit rate. What is the opportunity available to us in health care? When we win work in health care, are we successful in earning good margins? What do we, as a firm, define as good margins?

Additionally, data has the funny quality of being capable of giving you the answer you want to find if you just look hard enough. Perhaps we are hastily concluding that we do not want to continue to pursue health care projects because the head of operations would rather invest in higher education or purchase new iPads for the field. Analyzing each business decision from different viewpoints within the business (e.g., business development, operations, administration) ensures that senior leaders are able to make well-informed and analyzed decisions.

Looking Forward

Over the next several issues of The FMI Quarterly, the authors will elaborate on industry trends and best practices in data collection:

  • Managing Operations Through Performance Tracking and Feedback — Progressive contractors use real-time data analysis to spot icebergs on the horizon, course-correct and limit margin erosion. Don’t let your project becoming the proverbial Titanic.
  • Data-Driven Business Development Strategy — You are what you eat. Construction firms resemble the projects that they pursue, win and ultimately execute. What do you want your firm to look like in the mirror? Read the “nutrition facts” on the projects you consume.
  • Knowing Your Costs on Bid Day — Buy low, sell high. In construction, it’s buy low, execute lower. Limit exposure to “bad estimates” by understanding performance capabilities.
  • Capstone — The Role of Data in Competitive Strategy

David Madison is a consultant with FMI Corporation. He can be reached at 919.785.9213 or via email at dmadison@fminet.com. Rick Tison is a consultant with FMI Corporation. He can be reached at 919.785.9237 or via email at rtison@fminet.com. Tyler Paré is a consultant with FMI Corporation. He can be reached at 813.636.1266 or via email at tpare@fminet.com.

 

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