Archive for October, 2010
As I mentioned in a previous post, there are many benefits in using construction software. Because the benefits are all interrelated, it’s difficult to start at one point and go from there. For example, creating a good estimate allows you to do better job costing, and better job cost information allows you to create better estimates.
So, rather than try to find the beginning of any sort of cost benefit tree and start there, I’ll just start with the beginning of the construction project management cycle: the estimate.
In the end of the day, the bottom line is whether you make or loose money. That’s why they call it “the bottom line”. Because it’s the bottom line of a ledger in which you record your income and expenses. If your income is more than your expenses, then you make money; if your expenses are more than your income, then you loose money. That’s the bottom line.
Some contractors operate like this:
1. Make a bid.
2. Do the work.
3. Invoice the customer and deposit the payment.
4. Check the bank balance. If I lost money, ask for more.
This is may be the best you can do if you don’t have a way to accurately anticipate and track your construction costs. The disadvantage of this approach is a difficult customer relationship, and more important, you don’t know where you are making or losing money, so you can’t do any better estimating the next job. So the cycle continues.
Construction estimating software allows you to:
• Create detailed, itemized job estimates,
• Track the actual costs and labor hours,
• Report the difference between estimated and actual costs – by item or summarized by job phases or cost categories – for one job or for all jobs.
This is the only way you can know whether you are making or losing money, and, more importantly, why you are making or losing money. But you can only do this if you itemize your job estimates.
Q: How detailed do you need to make your job estimates?
A: How detailed do you want to be able to track your costs?
The level of detail you need in your job estimate depends on the level of detail you need in tracking your job costs. For example, if you’re a general contractor, and you subcontract construction of the foundation, you will be OK estimating a lump sum for the whole thing based on your subcontractor’s estimate. Your subcontractor’s bill will be for a lump sum, so you’re not going to be able to track your cost for the foundation at any lower level of detail.
On the other hand, if you’re a foundation subcontractor, and a GC asks for a bid on a foundation, you could say (like a lot of people do), “I know what it costs to put up that foundation”, and give the GC a lump sum estimate based on what you know it costs for x number of lineal feet of foundation.
The problem with that approach is, what do you do after the job is done and you have less in the bank than when the job started? Just add something to your next estimate? OK, then what do you do when your competitor turns in a lower bid on the next estimate?
There was a time not so long ago when you could get away with that approach, because there was more work to go around than there were people to do it. But those days are over, my friend, so it’s time to sharpen our pencils.
This means you need to come up with a detailed estimate. Again, how detailed? The answer is, your estimate needs to broken down to the same level of detail as your materials or subcontract purchasing and costs. And, if you have employees, your labor estimates needs to be broken down to the number of hours it will take for each type of work that has a different labor cost associated with it.
“Why do I need to create estimates with that level of detail? What good will it do?”
The reason is so that when you record your construction costs, you are able to compare the construction costs to your estimate. That is the only way you will be able to know exactly where you are making or loosing money on an individual job, or as a trend on all of your jobs.
“What about using construction a cost database like RSMeans cost data, or National Estimator?”
You can create estimates based on costs from construction cost databases like RSMeans cost data, or National Estimator, and good construction estimating software will allow you to either integrate with construction cost databases, or import costs from them. That’s a good place to start, but what many construction contractors find is that the costs in off-the-shelf construction cost databases are not very accurate. You can start there, but be warned that you may end up double checking all of the costs. Many construction contractors find that, in the long run, construction cost databases are not worth the expense.
“But how could I possibly take the time to create estimates with that level of detail? That would take forever!”
Yes, it would take forever, if you had to create an estimate with that level of detail from scratch every time. But that’s not how construction estimating software works. Good construction estimating software allows you to create job estimate templates and assemblies that you will use again and again.
Construction estimating software is designed based on the idea that there are a lot of similarities in the work that you do from one job to another. You may build completely different types of projects, use different materials, purchase from different vendors, use different subcontractors, and you may even use different employees. But even with that much variability, there is a lot of detail that is common from one job to the next. And the more specialized the type of construction you do, the more overlap there is from one job to the next.
All you need to do is get started estimating your first job. Yes, the first estimate may take a bit of a time investment. But once you have that estimate, there will be parts of it that you can use in your next job, by just changing the unit costs and counts. Each job you do results in another template that you can use on another job. After running a job, if you find that part of the estimate was not detailed enough, the next time you do similar work you will know to break that part down to a lower level of detail. But once you do that for one job, that assembly will be available as a template for other jobs with similar elements.
And, in addition to being able to copy estimate templates or assemblies from previous jobs to create new estimates, using construction software that integrates estimating with construction cost accounting gives you a huge bonus: you can use actual unit costs from previous jobs as your new estimated costs.
“What? You mean I can create new job estimates based on the actual costs from previous jobs?”
That’s right. Good construction software integrates your estimate data with your construction cost data. The result is that every job you do is adding to and updating your own job cost database. You can’t get construction cost estimates more accurate than that.
I know estimating construction costs on that level of detail seems like a lot of work just so you can have accurate cost accounting and guaranteed profitability. And it would be, if accurate cost accounting and guaranteed profitability was all that you got out of detailed estimating. But as you’ll see, there are so many more benefits to using detailed job cost estimates that by the time you realize them all, you will agree that it doesn’t make sense to operate any other way. Especially when you use integrated construction management software that allows you to reuse your estimate data for other important construction business functions, such as when you:
• create construction proposals, bids, and contracts
• create construction schedules
• request construction materials price quotes
• request construction subcontract RFP’s or bids
• create construction materials purchase orders
• create subcontractor contracts
• track construction costs
• create construction invoices and AIA payment applications
I’ll be talking about how you can use construction software to do each of these things in future posts.
The Chicken And The Egg
The chicken and the egg parable comes in handy in describing a lot of the problems we deal with in operating and growing (or attempting to grow) a construction business.
To make more money, I need to turn more business. But in order to turn more business, I need more people to get all the work done. But in order to hire more people, I need to make more money.
The image of a treadmill also comes to mind. But that’s a bit pessimistic. At least with a chicken and egg, you could get somewhere if you had a chicken. Or an egg.
So how do you come up with a chicken, or an egg? Don’t get discouraged. The answer is simpler than you think! It’s the same reason why humans no longer live in caves. It’s called tools!
Humans have always lived in a chicken and egg situation, but we have progressed from one level of existence to the next because, at each step of the way, we came up with a tool that broke the chicken and egg cycle by dramatically reducing or eliminating one of the hurdles in the cycle.
Funny we should mention tools in reference to construction! Can we think of any tools that have made construction work more efficient over time? Well, let’s see… there are electric hand tools like the skil saw, reciprocating saw, and drill. And then battery powered hand tools. And pneumatic nailers, there’s a big one… And laser levels, and…
OK, you get my point.
So the idea is that the right tool disrupts the chicken and egg cycle by making one of the required elements of the cycle so much more efficient that it no longer limits you from getting to the next level of productivity. As construction people, we are very familiar with the idea with using tools to become more efficient.
Well, ladies and gentlemen, I give you… construction software!
OK, construction software… what does it do? And why do I need it? How is it going to help me get more work done so I can turn more business so I can make more money so I can hire more people so I can get more work done so I can make more money?
There is a lot to discuss in describing how construction software will improve your construction business. But to begin with, it is important to note that making your business operate more efficiently so you can get more work done is only half (or one third?) of what using construction management software can do for you. There are two other crucial aspects of your business that will benefit from using construction software: 1) job cost accounting, and 2) customer relationship management.
Job Cost Accounting
Job cost accounting allows you to accurately track and compare your estimated job costs to your actual job costs, and report this information so you can see where you’re making or losing money; where you’re estimating less than you should be, or where your costs are higher than you estimated.
Job cost accounting is your roadmap to your bottom line. Accurate job cost accounting is absolutely essential for the most important thing in your business: whether you make or lose money.
Customer Relationship Management
This is a difficult issue that many contractors would rather not have to deal with, and so it tends to get ignored. But like it or not, the quality of your relationship with your customers is as important as any other part of running your construction business. Why?
Let me count the ways…
1) Your customers are human.
Psychology research reveals that a new home construction or major remodeling project is one of the most stressful and anxiety producing experiences that people might encounter in life. Most people who have been through it say they would never do a custom home construction or remodel project again. Why?
Major purchases are stressful for everyone. Even when you can see and touch what you are buying – like a car. But a major purchase – the largest purchase of your life – is much more stressful when it is for something that does not even exist yet. Your customer is signing their life away, and putting all of their trust in you… their contractor.
People get anxious when they are out of control and don’t trust the people who are in control.
Yes, hiring a contractor to do a custom construction or remodel project means the customer is not in control – you, their contractor, is in control. But why do your customers loose trust in their contractor?
People fear (don’t trust) what they don’t know.
Your customers loose confidence and trust if they don’t know what’s going on. They reasonably assume that if they don’t know what’s going on, then you may not know what’s going on. How do you build and maintain your customer’s confidence? I will discuss this in detail in later posts, but it can be summed up in two words: Documentation and Communication.
You can build and maintain your customer’s confidence and trust by maintaining complete and accurate documentation of their entire job, end to end, and making that documentation readily available to your customer 24 hours a day, 7 days a week.
How do you do that? With construction management software. Just by using the construction software, you will by default create and maintain complete documentation of the job project. Good construction management software will make it easy to present that information in a personalized and professional manner to your customer, either on paper, by email, or on the web.
2) Your customers talk.
People like to talk to their friends and family about their major acquisitions, right? And they don’t just talk about the good parts… they also talk about what they didn’t like. This is what’s known as “word of mouth advertising”.
Guess what? Your customers talk to their friends and family about their experience with you, their contractor. Do you think your relationship with your customer is going to make a difference in how many referrals you get? You better believe it! Successful construction contractors don’t need to do any advertising or job prospecting because they get a steady stream of new clients from their past clients’ referrals.
So here I have brought up three key areas of your business that can benefit from the use of construction software:
- More efficient, organized, and accurate estimating, scheduling, bookkeeping and office management.
- Accurate and detailed job cost accounting.
- Improved customer relationships.
I’m here to tell you that these benefits can be achieved without having to hire an army of clerical staff. All you need is one good clerical staff and a good construction software system.
Now, I know you didn’t go into construction because you wanted to use a computer. Well, you don’t need to actually run the computer yourself. In fact, after purchasing construction software, my other most important recommendation is to get someone to run it for you! If you’re reading this, you most likely already have someone doing your bookkeeping, office management, and paying bills. Even if it’s “just your wife”, you know it’s a very important job, and you know you’re glad you’re not doing it alone. But you also know that the system you have in place is not good enough. So you’re looking for something better. Good for you! You’re on the right track.
What is “construction software ” or “construction management software”? And why do I need it?
Construction software is software that is designed and developed for the needs of construction businesses. Non-specific (or general) business software includes things like Microsoft Office (Excel, Word, Project, Access, etc.), and QuickBooks. Those programs are designed to be used by all businesses, regardless of what industry they are in.
General business software is good at serving common needs of many businesses, and, because so many people buy them, they can be priced very low. The down side is that, because they have to be flexible enough to be used in every kind of business, they cannot be designed for the needs in any specific type of business. The result is software that is effectively “electronic paper”; all the program does is provide you with a means of entering and storing information in a computer (rather than on paper). Sure, Excel can do formulas, and Word can format and print text nicely, and that’s better than paper. But not a whole lot better when you compare that to what you can do with software that is designed specifically for construction businesses.
So what is construction management software? Construction software is software that has been specifically designed for use in construction businesses. Construction software doesn’t just provide a means of entering and storing data in a computer, it also automates the business logic and procedures used in operating your business. In other words, construction software automates the “business system” that you use to operate the business.
What is a “business system”? A business system is the set of procedures that you follow in the daily operation of your business. In the construction business, you follow a set of procedures like:
Find a customer
- Estimate the job
- Submit a proposal
- Sign a contract
- Create a job schedule
- Request quotes for materials and subcontracts
- Purchase materials
- Schedule subcontractors
- Schedule employees
- Do the work:
- Customer requests change
- Request quotes for materials and subcontracts required for change
- Generate change estimate, issue change order
- Reschedule subcontractors
- Reschedule employees
- Receive bills from vendors and subcontractors
- Pay the bills
- Enter time sheets from employees
- Pay employees
- Submit invoices to customers
- Receive payments from customers
Well designed construction management software provides you with a system that automates the tasks required to operate your business, and integrates the data that those tasks use.
What does it mean to “automate a task”?
Let’s look at an example: Create an invoice to bill your customer for work completed. Using a manual system (paper, or general business software), you would have to make a list of all of the work items that have been completed. If you’re working on a cost plus or time and materials contract, you would have to then go and find the actual costs paid, or hours worked, for each item. Even if you are working on a fixed sum job, you would still have to do that for all of the allowance items. Then you would need to add the invoice to your customer’s job accounting, and the amount invoiced to your accounts receivable balance.
In a system that automates that task, all you would need to do is select a menu option to generate an invoice. The program would already know which items are completed (because you marked them as completed in the integrated scheduling system), which items are allowance items (because you marked them as allowance items when you created the estimate), and what type of contract the job is working under (because you indicated that when you created the job) and whether to bill estimated or actual costs. And once the invoice is generated, it would be automatically added to your accounts receivable balance, and to the customer’s job accounting.
So there are many advantages to automating business procedures:
- Everything you do in the regular operation of your business in a day, a week, a month, or a year, can be “systematized”. That means that, once you figure out how you want to do something, you can established a procedure so you don’t have to think about how to do it the next time.
- Because you don’t have to think about how to do everything each time you do it, using established procedures makes routine tasks go much quicker, and produces much more consistent and accurate results.
- Using established procedures allows you to hand off routine tasks to clerical staff and free yourself to do what the owner/manager of a business needs to do, which is to deal with things that come up that aren’t covered by your existing procedures. Hint: come up with another procedure to deal with it so you don’t have to take the time to think it through the next time it happens.
Using this approach of systematizing your business is the only way your operation can become more efficient. Since there are a limited number of hours in the day, the only way to make your business grow or become more profitable is to become more efficient.
One of the main features of construction management software is that it automates routine tasks, so the software provides you with pre-defined procedures. So, another way of looking at this is that when you purchase construction management software, you are not just purchasing software, you are purchasing a system of pre-defined procedures.
The other main feature of construction management software is that it integrates the data used in all parts of the construction business. In other words, rather than storing the same data multiple times, all data is stored in a central repository that is shared by all parts of the system.
There are many advantages to using a system in which the data is integrated:
- You only enter each piece of information once.
- The data entered can be validated by the program using business logic to improve accuracy and assure the integrity and coherence of interrelated data.
- Because data is only entered once, there is no discrepancies between data used in various parts of the system.
- When data is changed in one part of the system, the changes are reflected in other parts of the system that may be affected.
Now that we’ve covered the reasons for using construction management software, in future entries, I’d like to talk about specific aspects of a construction business operation, and how those are served by well designed construction software.