Special Blog Series: Great Ideas from the DCW Labs
Part 2 of 4
Author: Steven DeVoll, M.Eng., M.Sc.
This is the second of a 4-part series written by Digital Construction Works’ Solutions Integration Lab subject matter experts. In this month-long series, we are examining common industry problems and exploring the ways a digital integrator can improve construction processes and optimize project construction. Today, DCW’s senior data scientist Steven DeVoll discusses the importance of construction project cost analytics in successful projects.
The financial health of a construction project is paramount to its success. Projects going well over budget run the risk of being shut down. Or, if return on investment (ROI) is low, investors will take their funding elsewhere. Accordingly, monitoring costs is extremely important to ensure project success.
The mantra, “I don’t care, just get it done,” may often be said out of frustration when schedules, budgets, and other commitments are difficult to achieve. Dealing with overruns later may seem easier in the shadow of a completed project. While the shiny new project looks great, eventually someone does have to write the checks to pay for labor, materials, and design (and in some cases, design may have eaten up some of the construction budget before ground was broken!).
How can analytics help control costs in construction projects?
Keeping Costs on Track
In accounting, costs come in two flavors, fixed and variable. Fixed costs are those that do not change, such as insurance, depreciation, or the amortization of an asset. Variable costs are those that change over time, such as materials, piece rate labor, or supplies. Fixed costs are very easy to predict, and variable costs can be predictable depending on the variation cause.
Monitoring actual construction project costs to plan is the first step in making sure projects stay on budget. Cost turbulence will typically occur in variable costs. Thus, as long as these costs are staying within reason, there is no need to show concern.
Consider how the price of gas changes weekly at the pump. “Staying within reason” is in the eye of the beholder, but when we know ahead of time which costs are variable, some cushion should be built into the budget to account for fluctuation. Thus, “within reason” is defined by the cushion built into the budget.
However, sudden supply chain interruptions can inflate both fixed and variable costs. While these cannot be controlled, they can be monitored and potentially predicted.
For example, if a major weather event such as a hurricane hits the southeast coast, the supply chain may be disrupted and demand for construction materials will suddenly increase. Or, if a storm is brewing off the African coast and there will be a large order for materials forthcoming, it may be financially beneficial to order supplies before demand escalates the price. However, the storage cost of the material may be more than the rise in material cost, so both must be considered. Finally, if the storm is severe enough to sever the supply chain for a lengthy amount of time, the storage cost may be minimal compared to the lost time cost waiting for supplies.
Those scenarios may be difficult to follow (and hopefully will never occur simultaneously!). But they establish the point that, since there are so many considerations when dealing with an issue, having analytics in place to monitor, forecast, and make recommendations can efficiently help control construction project costs.
Analytics + Knowledge
This is also a perfect time to point out an often-overlooked caveat with analytics. Analytics is a tool that is built for a specific purpose. Whoever is using the tool should have the proper skillset and ability to both take in the suggestions made by analytics, and apply their industry knowledge and experience to make the best decision. Relying solely on analytics without any other consideration will not end well.
That is not to suggest analytics cannot be trusted; they are a tool built to provide the best outcome based on the data provided. While the models used to provide analytics are optimized, it is not feasible to consider every input. Therefore, coupling analytics with industry knowledge and experience will yield the best result. Think of hammering a nail into a stud, there are two hammers: a 16oz work hammer, and a 20lb sledgehammer. Both are hammers, but industry knowledge (and common sense) will tell you the 16oz work hammer is the correct choice. It’s a silly example, but it establishes the point that analytics, when coupled with industry knowledge, will help managers decide quickly and efficiently.
Costs, Investors, and Project ROI
Monitoring variable costs are typically accomplished by looking at how the actual cost differed from the planned cost. A variance chart can be configured to show actual versus budget and highlight the variance should it exceed a configured amount. This allows monitoring of construction project costs and alerting when costs are not in alignment with budget.
Return on investment is a common figure tracked by investors. Its purpose is to simply track, by percentage, how much money is being made (or lost) from the funds given. This is typically compared to the discount rate (3-5%). A discount rate is the minimum interest an investor should expect from an investment. The discount rate may be thought of as a CD rate one could get at a bank. CDs are safe, low risk, termed investments that yield little interest. Thus, for a project to be worthwhile to an investor, the ROI should far exceed that of the discount rate. As the project proceeds, ROI typically increases as the project gets closer to completion. Adhering to or surpassing this expected increase is critical to keeping investors content.
However, other variable costs specific to construction, rework and change orders come into play and adversely affect cost variance and ROI. The statistical likelihood of having a construction project that never has an issue, where everything is done perfectly the first time, while possible, is unlikely. All the analytics and digital twinning in the world will not provide a perfect site. However, they will mitigate rework and change orders by monitoring and predicting where problems will occur and suggesting alternatives before project costs escalate. Accordingly, in order to ensure minimal cost variance and maximize ROI, we need to mitigate rework and change orders.
Mitigating cost is all about timing. As stated in a previous blog post, the sooner a problem is found, the less cost and time are needed to fix it. Digital Construction Works Labs have developed analytics to monitor planned versus as-built and highlight inconsistencies in near-real-time. While these types of reports are not specific to cost, their result has a direct effect on project cost mitigation. Digital Construction Works views cost, time, and safety as a three-vector continuum where each node affects the other two. Accordingly, thinking of the project as a whole is the key to mitigating cost, time, and safety.
Monitoring and controlling costs are critical elements of a project’s success or failure, and analytics can deliver vital insights. Next week, in part 3 of this series, we’ll take a look at the all-important element of time.
An optimized construction process benefits everybody. Contact us today to discover what that can mean for you.