For a Firmer Grip on Project Cost and Profit, Try These Three Tools

Lucas Hayden
Posted on: 08/13/20
Written by: Lucas Hayden

In highly pressurized times, this trio of ERP capabilities is providing firms with critical insight into job overhead.

As the Covid-19 crisis approaches its sixth month, the damage continues to mount. In a June survey by Appleseed Strategy of principals and owners at more than 30 architecture, engineering and construction (AEC) firms across the U.S., about two-thirds said they had experienced a drop-off in billings, and a similar share were forecasting a decrease in pipeline. A large portion of surveyed firms — more than 40% — expect the action in their pipelines to dwindle by 20% or more. What’s more, in excess of 90% indicated they were experiencing project shut-downs or holds.

These findings help to explain what we are currently observing among the AEC businesses we serve, many of which are looking internally to relieve some of the financial pressures they face. As timely and helpful as government aid has been for some firms, more AEC businesses are realizing they can’t rely on stopgap government programs forever, and thus must find sustainable ways to manage their businesses and their resources more efficiently to counter the unprecedented level of disruption and uncertainty they face.

One of the most important internal steps AEC firms can take to run more efficiently is to get a clearer, real-time picture of project cost and profitability. In particular, the right ERP and analytic tools can help firms gain a better handle on key factors like overhead and job costing so they can more accurately track and predict the profitability/financial performance of specific projects. That, in turn, enables firms to more efficiently manage their resources and plan for the future.

How to gain this level of firm-wide insight into project profitability and job cost/overhead? Here are several ERP and analytics capabilities that, in our experience working closely with AEC firms during (and prior to) the crisis, are proving particularly valuable:

Integrated ERP tools that give firms flexibility in how to capture job cost. During “normal” times, AEC firms need the ability to capture overhead cost to calculate project profitability. And today, when business conditions are anything but normal, the ability to quickly and accurately track overhead by project becomes even more critical.

There are two main methodologies for doing this: the job cost rate/burdened pay approach and the overhead allocation approach. Either can provide a firm with a tighter representation of project cost and profit. Depending on the approach it uses, a firm also can gain a more detailed view of costing for reporting purposes, which can be helpful in evaluating job cost data at the project and/or employee levels.

Ultimately, choosing between the two methodologies comes down to which is best-suited to the firm’s accounting approach, the level of simplicity or granularity it seeks in its reporting, and the prevailing business environment. In the current volatile and hyper-cost-conscious environment, measuring the total cost of a project inclusive of overhead is more important than ever.

Having an ERP system that supports both methodologies gives a firm flexibility in the approach it uses. Why would they choose one approach over the other? If the priority is a greater level of granularity of reporting, the job cost approach usually is appropriate. This method gives a firm a more transactional view of project cost, enabling a firm to report out at the employee and project levels. It also makes estimating a project's profit much more accurate since it accounts for both direct and indirect expenses.

Firms for which simplicity is the priority may prefer an overhead allocation approach, whereby overhead is proportionately spread across projects and/or organizational structure (such as for reporting out on segmented financial statements). It's about measuring project profitability based on a fair representation of overhead. Overhead is calculated separately based either on a multiplier or a proportional allocation of actual periodic overhead.

Analytics to glean deeper data insight. As important as it is for firms to have flexibility in how they capture cost data, for maximum efficiency they also need the ability to analyze that data in meaningful ways. Advanced analytics capabilities can elevate the depth and timeliness of the insight a firm gains from its data. Essentially, data becomes as real-time as their timesheets.

Instead of basing decisions on outdated information and only using analytics to look at the past, the latest breed of analytics tools give firms a clearer picture of the future for forecasting, planning and the like. These tools enable a firm to seamlessly access all its data, whether it lives inside or outside the ERP system. That data becomes a single source of truth and insight across the organization and its technologies.

Interactive dashboards to make analytics insight more digestible and actionable. Traditional analytics tools deliver great data, but all too often that data is isolated, static, outdated and difficult or impossible for users to interact with. When a firm can package data from across the organization in interactive analytics dashboards, they gain the power to see key project costing information and other important data from various perspectives to uncover insights, anomalies and nuances they may not otherwise find. Interactivity within those dashboards is critical to maximizing the insight gained from the overhead data — i.e., the ability to quickly filter based on any significant data point and drill through summary information to the key details. F

or the heightened visibility and efficiency that they bring, capabilities such as these can be as valuable to AEC firms during the normal course of business as they are in turbulent conditions like those that prevail today. Lucas Hayden’s background is in development, data & analytics, education and client services, with a focus helping organizations solve problems, innovate and refine their business processes. He is director of product marketing for Unanet A/E powered by Clearview.

lucas_haydenLucas is an experienced executive who brings with him over 10 years’ experience with a background in development, data & analytics, education, project accounting and management, and client solutions. Lucas loves helping organizations solve problems, innovate and refine their business processes. He is Director of Product Marketing for Unanet A/E, Powered by Clearview.

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