1.What are the characteristics of construction projects?
A general definition of projects
A project is a general process consisting of a range of coordinated and regulated activities with designated starting and finishing times, which are performed in order to realize an objective that meets specific requirements, taking into account constraints of time, costs, and resources (Hungarian Standards Institution, 2001).
On the basis of the above definition, a project is fundamentally defined by the following factors:
- The objective and other requirements – What is it that we are implementing with the project? Exact definition of the target through quality, quantity and other requirements.
- Cost Plan and Resource Plan – What are the resources to be used in implementing the project? What are the required quantities and at what cost will they be obtained?
- Schedule – How much time will it take to implement either the entire project or an individual part of it?
The specific features of the construction industry
Due to the unique features of the industry, construction projects have a number of special characteristics:
- The value of the final product, in contrast to mass-produced goods worth a few to a few hundred dollars, is large, ranging from tens of thousands to tens of millions of dollars.
- The method of production is always unique, so components from other projects can only be used to a limited extent.
- The time required for production is long, ranging from a few days to several years.
- Production usually doesn’t occur at a central site but at a site specified by the customer.
- Production is continuous but usually not linear. In general, all projects follow S-curves.
- Sales revenue is generated in phases, usually for large parts of individual projects (in most cases, individual sales invoices range between 10-30% of the price of the entire project).
- Resources are consumed continuously, but invoices related to the project are received in cycles (usually monthly).
- Project management is highly autonomous due to the spatial layout and variable conditions (weather, modifications requested by customer or designer, etc.).
- Projects may undergo significant modifications during production (change orders, additional work, etc).
Construction projects are always unique and continuously changing. In most cases they cover a long period of time and have a large budget. As a result of these characteristics, project managers have significantly greater autonomy than say a senior engineer of a factory in a similar position. Accordingly, the controlling processes of construction projects must be organized in a manner that is different than the way “classical” manufacturing processes are controlled.
2.What makes construction project controlling unique?
In many sectors of the economy, a controlling system that relies mainly on financial and accounting information is sufficient. However, due to the unique characteristics of the construction industry, it is important to have the controlling system as an economic and technical “front-end” to the general ledger. This means that on account of an unpredictable operating environment, continuous changes, and special decision mechanisms in use, an independent, closed, and transparent controlling system needs to be in place ahead of the accounting system, which in a certain sense cooperates with the general ledger. However, its fundamental function is to support production processes.
In the case of construction industry projects, the decisions of project managers carry great weight. This is partly due to the magnitude of construction projects, and partly because the decisions of the project manager carry a high level of financial and legal risk. This is true even if a senior executive of the company signs the contract in question. Projects change continuously, and often times planning is still in process while implementation has already started. Decisions relating to a project must be made quickly, often on a daily basis. The ledger tracks production with a significant lag, and detailed technical information is not available in the accounting system. Under these conditions, project managers and senior management cannot reasonably base their everyday decisions on accounting data.
Nevertheless, the cradle of the controlling system is often the accounting system. Companies are required by law to maintain their accounts. When management realizes that the data in the general ledger is insufficient for decision-making and forecasting, they begin to rethink the purpose of the accounting system and assess the benefits of establishing a controlling system built on a technical basis.
The primary objective of the controlling system is to ensure that the company operates in a transparent and efficient manner. The primary task of controlling is to provide predictions about the future in order to support the work of project managers and executive management. These are fundamental expectations, but it is also important that the system be able to furnish technical information, in addition to financial data. It is also important that the controlling system, while generally independent, provide certain kinds of information to accounting. The posting of expected invoices and unfinished production to the general ledger may be an important point of connection.
3.What is a controlling system?
A controlling system – only different
The controlling system is a complex architecture. It is a combination of processes, competencies, and tools. That is to say, it is much more than an IT application, a group of spreadsheets, or the holding of monthly meetings.
Processes provide the framework for the operation of controlling, defining the tasks and responsibilities of the participants of the controlling system as well as the sequence in which tasks are completed.
Controlling systems are always defined, operated, and adjusted by people. The smooth operation of the system requires the availability of human capital of a suitable quality. Professional competencies are indispensable, but for a controlling system to operate effectively, it is necessary that the personalities and work habits of the participants be well suited.
The tools are required to ensure that the operation of the controlling system is supported by an appropriate infrastructure. The tools assist the work of the stakeholders working in the controlling system.
4.What makes a controlling system work in practice?
The three components of controlling systems - processes, competencies, and tools - are present in all companies. But their presence is no guarantee that the company’s controlling system operates to the satisfaction of all concerned. It will only be viable if the three components are on approximately the same level, and if they complement and support each other. Controlling doesn’t work in certain situation - for example, in companies where planning methodology and project monitoring is professionally suitable and controlling processes are simple and transparent, but there is no IT application providing appropriate support, or human capital is lacking. On the other hand, no matter what IT applications a company uses, if the controlling process is not clear and responsibilities and scopes of authority are not defined explicitly, the potential of the entire system is limited.
Making a controlling system effective in practice is a difficult task. It requires dancing on thin ice between all the stakeholders while continuously keeping the objective of the operational controlling in mind. All three components must be dealt with while ensuring that balance is maintained. If one component lags behind or gets ahead of the others, the system will no longer operate smoothly.
What are the most typical obstacles, in relation to the individual components, to the effective establishment and operation of a controlling system? How can these obstacles be avoided? What are a well-organized process and an effective methodology like? What are the indispensable competencies? What factors should be kept in mind when choosing an IT system?
In the case of processes, the most frequent error is that everyday tasks and the logical links between them don’t all work toward a single goal. Often, in relation to a particular task, colleagues expend a great deal of effort and time trying to achieve something that does not further the overall objectives at hand, or only does so marginally. Another frequently occurring error is when the three factors of task, responsibility, and scope of authority do not coincide. For example, the controlling manager has the task of compiling a report, but he does not receive sufficient authorization to obtain the data required for it.
In many instances, we see that the company’s controlling regulations have very little to do with the company’s everyday work. It is also frequently the case that necessary regulations are missing, making it difficult for employees to understand their responsibilities.
In our experience, solving these problems is not all that difficult. It is important that all the colleagues involved in operating the controlling system have a clear understanding of who does what and why. This requires a comprehensible controlling strategy as well as regulations. A strategy is appropriate if it clearly indicates the direction of the controlling system. With regard to regulations, the most critical requirement is that they support everyday work. They must contain clear definitions of tasks, users, scopes of responsibility and authority, logical connections, and deadlines. Easily understandable timetables and workflows are required.
Regarding methodology, one typical error is not making the controlling system an independent, autonomous architecture built on a technical basis, and instead producing a mere copy of the general ledger. Additionally, companies often only monitor costs, when it is also important to ensure that production value and coverage are continuously monitored as well. Entering data in the controlling system that is as up-to-date as possible is a very important part of the methodology. Every “move” of resource should be tracked. If the controlling system only tracks invoices, it will not be possible for users to make decisions in a timely manner.
Competency, human capital
Controlling systems are always run by people. Strange as it may seem, many organizations do not have a single person responsible for controlling, or a controlling manager, appointed on paper. The controlling area must be an autonomous, independent unit within the company. This unit needs to have a leader who is responsible for creating and implementing operational strategy, in addition to fundamental management tasks.
Working as a controlling manager or a controller is not a simple task. It requires continuously balancing project-related tasks and managerial tasks while keeping the prime purpose of controlling in mind. The difficulty of balancing these two functions is dependent upon the company culture. If the project manager views controlling primarily as supervision and external review – and not as a supporting function – the controller is not the most popular person within the organization, to say the least. Assertiveness, critical thinking, an optimistic attitude, and excellent written and verbal communication skills are all equally important. If the “central controlling” function is still strong, and the project managers have not yet realized the advantages of operating the controlling system, or if they are simply antagonistic, the controller faces an almost impossible task without the above competencies.
If the company does not have suitable human capital in the area of controlling, the system is doomed to failure, as the controller is not able to achieve progress in the areas of processes and tools. It is clearly a catalyst function. Nevertheless, it is important that human capital should not be placed higher than the other two areas, as in that case the lack of balance may cause dysfunctions.
Finding an IT tool or tools that are suitable for the specific objective and which operate to the satisfaction of the stakeholders in everyday practice is not an easy task. The most frequent problem is that companies operate so-called “islands” (budgeting, scheduling, bidding, contract registration, financial functions, inventory management, document management, cash flow, business planning, risk assessment, etc.). These islands correspond to individual functions within the company. In many cases, functions that are isolated but which play an important role in the operation of the company are not even supported by the IT tool, or if they are, the connections between the island and other islands is not adequate. Often, basic tasks are performed repeatedly, even in parallel.
The Excel spreadsheet, which is still very popular today, represents an IT tool. It has the clear advantages of flexibility and the fact that everyone knows its basic functions. Its flexibility makes it easy to tailor it to the processes of a particular company because in its own way, “it can do everything.” On the other hand, it has the disadvantage that it is not a closed and transparent system and is not a uniform database at the level of the entire company. The spreadsheet software is acceptable up to a certain level, but beyond a certain size and complexity, using it becomes risky.
In the case of more complex systems it is a frequent problem that, although the system supports a few functions representing islands well, communication with other systems is not implemented to such an extent that the entire business process suffers frequent problems. The company may have a scheduling application, but it is going to be of limited use if the application does not participate in an integrated manner in the business planning and the cash flow processes, because it is operating in isolation.
In many cases, companies attempt to support specialized professional functions using general ERP or complete business management applications. Naturally, that doesn’t work in practice, as those general-purpose systems are not built with the characteristics of a specialized profession in mind. In the case of specialized fields, even if not all the islands are integrated in a single system, it is much more effective to connect as many specialized systems to the general-purpose system as necessary.
Establishing suitable IT support is an art in itself, but the key requirement is that it should support the business functions of the company in practice. If it is necessary to operate several systems in parallel, it is extremely important to implement smooth communication between those systems.
5.What types of project controlling approaches and applications are available in the market?
Each company applies its own interpretation on its controlling system. In our experience, the most frequent conflict within companies is the one between the financial and the technical approach. The people in finance often swear by general ledger data and do not really identify with the technical aspects of the project. Technical staff, on the other hand, put implementation first and they find it a little hard to take on accounting and financial issues. Some view project controlling from the perspective of accounting, others from that of documents and contracts, while many approach it from the perspective of budgeting and scheduling. Naturally, the approach that characterizes the executive and the management of the company will determine the functionality and the purpose of the company’s controlling system.
In what follows, we shall categorize the various approaches in accordance with the three main areas. Naturally, we do not wish to name any IT applications, as we do not wish to promote or criticize any of them. We trust that the categorization below, along with the presentation of advantages and disadvantages, will provide sufficient support for the decision-makers.
The accounting approach – project monitoring systems based on accounts
The general ledger approach is based on the observation that the company is already required by law to keep accounts of its revenues and costs. If this work is sorted by job number, in effect we already have a project monitoring system. Systems based on the accounting approach contain a complete accounting system and their primary objective is to generate reports that are customary in general ledger systems. Those systems are usually “transformed” into project controlling systems by putting a greater emphasis on the accounting of projects. Developments are aimed at allowing project-related information to be registered and recovered in several different ways. In order to obtain an accurate result, it is necessary to set up a moment at which the value produced is commensurable with costs. In the case of projects in progress, this requires a “closing” in order to establish production, production under construction and the processing of invoices about to be received.
The main advantage of the accounting approach is that as all companies need accounting systems in order to comply with legal obligations, it is only necessary to “augment” a system that is already in operation.
However, it is clearly a disadvantage that those systems lack the technical information that is very important in the construction industry, and that the data, in most cases, is available in a “report-centered” fashion. There is little opportunity for the flexible handling and analysis of the data. It is also a disadvantage that factual data cannot be monitored on a daily level, which is extremely important in the industry due to projects changing continuously. Under the classic accounting methodology, an invoice appears in the accounting system 15 to 45 days after goods and services have been received, which is a significant loss of time for critical decision-making. Modern-day developments, such as the use of mobile equipment, are directed at accounting for economic events daily through “quasi pre-posting.”
Approaching the issue from the direction of documents – systems based on document management
Under this approach, the motive is primarily to keep records. At the least, its objective is to register documents in a suitable retrieval system. Systems that began with document management developed from registration towards workflow management. They provide increasingly complex authorization management, document completion and uploading, internal messaging, and communication between staff. In many systems registering, querying, and organizing construction drawings works well. The grouping of documents, and the use of multi-dimensional search functions, aims to support a systemic approach in the spirit of the modern age, usually through the use of mobile equipment.
One thing we often encounter with companies is the notion that if all the company’s documents are in one place, “there can’t be any serious trouble,” as all contracts, performance certificates and invoices can be seen together. There is no arguing with that point. However, it is important that these systems primarily focus on the sharing and accessibility of documents, and not on their consistency. Their disadvantage is that they are rarely capable of registering master data and producing technical reports in themselves. They are usually accompanied by a heap of Excel spreadsheets that serve as unique databases for the project participants. This is a powerful obstacle to the transparent monitoring of projects in practice.
The technical approach – systems based on the schedule
The technical approach is based on the scheduling of activities. This approach, with a focus on timing, is primarily embodied in scheduling applications. In addition to the scheduling of technical units, these systems usually also facilitate the planning of resources and costs. In many cases, the schedule is connected to the project’s budget through the quantities and unit prices of budget items and resources. In the course of developing these systems, increasing emphasis was placed on updating the schedules, which required determining the current level of completion of individual activities. Once that was in place, the monitoring of projects also came to the forefront along with planning.
The controlling applications that developed from schedulers usually apply the EVM (Earned Value Management) scientific methodology to project monitoring, which implies that “earned value” is derived as the product of estimated costs and degree of completion. In these systems it is usually not possible to record costs in detail, and planned and actual coverage is also difficult to establish, as costs are only monitored in summary while the revenue side is missing entirely. The other disadvantage of systems of this type is that many accountants are reluctant to accept data coming from them. As a result, there is a lot of duplicated data entry, as the general ledger operates in isolation.
The custom approach
Many companies choose to develop their scheduling application in house. In most cases, this is done by programming excel spreadsheets the company already uses. A simple Excel macro may be used as a custom piece of software, which may be sufficient for a smaller company. In many cases we come across MS Access applications. We have seen many good tools at various companies, their advantage being that they are tailored to the company’s needs. It may be a disadvantage that such pieces of software are unable to utilize the best-practice knowledge components in the market. Unfortunately, these customized tools eventually fade away, as the development becomes a never-ending story. New ideas are raised continuously, but they never work perfectly in the eyes of the staff.
There are many different approaches to controlling systems. The actual system selected for use is in most cases determined by the person who wishes to be the “champion” of change. That is to say, the area in which the demand for the establishment of a new system originates will be influential in making this decision. When planning to implement a controlling system, there are many important criteria to consider - for example, the system’s ability to enhance cooperation between divisions of the company and to promote transparency within the organization.
6.What are the most critical obstacles to the development and introduction of project control systems?
An increasing number of companies are using project controlling systems and solutions. Their primary objective is to keep production, costs and coverage under control. An additional requirement of senior management is having a closed system with an acceptable level of transparency throughout the organization.
A system is considered to be in use when decision-makers throughout the organization base their decisions on the information from the controlling system. Yet in many cases, despite the massive expenditure of money and time on building and introducing a system, managers don’t use the system for decision-making. There may be several reasons for this, the most important ones probably being waiting for miracles, employee resistance, and a lack of confidence in the data.
Waiting for miracles
In our experience, one obstacle to successfully implementing a controlling system is that the company’s employees have exaggerated expectations of the new tools and processes from the outset. They believe it will be a sort of miraculous tool that will solve all of the company’s problems in one fell swoop, from the problems of document management, through accounting and financial issues, all the way to customer relations. Naturally, no such system exists in reality. Omniscient systems would be extremely complex, as everything would affect everything else within a single system. General-purpose corporate management systems fail to treat certain problems and areas in a specialized fashion, but doing so is necessary. And among those waiting for a miracle, the voices of discontent soon appear when people realize that they did not get a complex, omniscient system. Both the company and the specialist supplying the controlling solution can do a great deal to prevent the atmosphere of waiting for a miracle during the introductory phase. The requirements that the new system will meet and the ways it will meet them must be made clear to everyone. The specialist supplying the system should not promise functions that he will not be able to deliver in the hope of attracting business, while the company’s management should not “sell” the system in-house by claiming that it would be the all-knowing, perfect application.
The resistance of employees
Often times the systems are defeated by the users themselves. In certain corporate cultures, employees believe that change is necessary. At that time, the management, often in response to a grass-roots demand, begins the implementation project, and in many cases, the new system works well. There are also cases in which the employees do not support change, but the determined and categorical attitude of management makes the new system succeed. However, in many cases the system fails to work smoothly after it is introduced and built up. The data is not entered in it, or if it is, it is late and inaccurate. As a result, the information that can be obtained from the system is useless and employees sooner or later return to using the accounting system or the old “tried and proven” Excel tables. In most cases, the reason for this is that employees do not see the benefits of the new system. They believe it requires too much administration, or they simply boycott the system because transparency is against their interests. With the Excel tables, they are the sole holders of the information. Overcoming the resistance of employees requires management to consider only the information in the new system to be authentic and valid. It is also important that employees experience the benefits of their work. They should feel like their work is becoming more efficient because, after all, they are still using the same basic data, only now they don’t enter the information in a notebook and then an Excel table, but immediately into a closed and secure system.
Lack of confidence in the data provided by the system
Frequently, managers are mistrustful towards the data in the new system. They maintain the old systems, consisting of squared-paper notebooks and Excel tables, because they believe that only the old tools hold reliable information. In this case, the managers do not take the data obtained from the system seriously, but hold separate, confidential conversations in which they ask about the “real” information, thereby ignoring the operation of the new system. In these cases, the newly introduced system dies off completely sooner or later, or even worse, it becomes a “ghost” system on which people expend useless effort here and there. The suspicion factor can only be parried in one way. The company’s senior management must commit fully, and with complete certainty, to making decisions exclusively based on information in the new system.
The introduction of project controlling systems is subject to a particularly high rate of failure. In our experience, the complexity and interconnectedness of these systems make simply purchasing the tool, training people to use it, setting it up, and possibly customizing it, not sufficient for success. Implementing a new system also requires a sort of a change of attitude, through which the users, including the company’s higher management, understand the necessity of transparency and the advantages of using the system, and make a conscious commitment to the system.