If money makes the world go round, then that’s doubly so for the construction industry. Construction projects ebb and flow on a day-to-day basis. Unpredictability — in everything from the weather to the financial fortunes of clients and changes in scope of work — is a constant feature and headache of the industry. Relentless unpredictability can be detrimental to even the largest construction company’s finances.
Add clients, principal contractors, sub-contractors, vendors, and other parties in a construction project into the mix, and the financial unpredictability ratchets up. It’s little wonder that construction is an industry in which payment schedules, process billing and cash flow are primary, often all-consuming concerns. Solutions to these issues are always welcomed by construction professionals.
This article will provide insight into how enterprise resource planning (ERP) and a computerized maintenance management system (CMMS) can be a winning combination in ensuring timely and predictable payments.
What are ERP and CMMS?
Enterprise resource planning, or ER, is a system (or systems) used by businesses to plan and manage a supply chain, manufacturing, services, finance, and other processes. ERP software can be used to automate and simplify several key activities across a business or organization. QAD describes the key objective of ERP as being “to increase the efficiency of an organization by managing and improving how company resources are utilized.”
SAP defines enterprise resource planning (ERP) as encompassing “the core processes needed to run a company,” including its finances, manufacturing, supply chain (including logistics and procurement), and HR functions.
A computerized maintenance management system, or CMMS, is software that centralizes maintenance information and operations. The heart of a CMMS is its database. This data model “organizes information about the assets a maintenance organization is charged with maintaining, as well as the equipment, materials, and other resources to do so,” as IBM describes.
Almost every 21st-century business can benefit from ERP — but CMMS is especially helpful to select industries where physical infrastructure is crucial, such as oil and gas, transportation — and construction.
Cash flow: The bane of construction
Cash flow management is a central and contentious issue in the construction industry. It can even be the deciding factor for staying in business altogether.
However, cash flow management is particularly tricky for construction companies. Multiple projects at the same time (each with their own unique work scope), project demands, budget and schedule, can lead to bottlenecks in cash flow at any time. The ever-rising cost of raw materials, equipment/machinery, and intense competition create greater pressures on available cash.
Construction payments take an average of 83 days, putting them among the most delayed of all industries in the world. That’s tough on any business.
With most construction projects, one thing is guaranteed: The client is king. As such, changes to the original scope of work can arise for an array of different reasons, usually at the behest of the client. These unexpected change orders can wreak havoc on payment expectations for all companies working on the project, as well as incur unforeseen expenses.
Progress billing can help in enabling work to be paid on an ongoing basis, as it takes approved change orders into due account as the project proceeds. There are other practical steps a construction company can take to ensure fewer cash flow problems.
But what systemic and software-related solutions might ensure less cash flow setbacks for a construction company? The key concepts are immediacy and real-time data. Enter ERP and CMMS.
The beauty of ERP in construction
Modern ERP systems are essentially business management software suites that use the latest technologies, enhanced by artificial intelligence (AI) and machine learning (ML). ERP systems track all the business resources that impact a construction company’s daily cash flow, including cash reserves, available raw materials, current production capacity, existing purchase orders, and payroll.
ERP software provides instant access to different “pressure points” on the finances of any company, including:
- Financial accounting, including general ledger, budgeting, costing, and cash management
- HR, including payroll and training
- Manufacturing, including materials, work orders, transportation, and equipment
- Project management, including project costing, and resource planning
This software, essentially a cloud-based SaaS solution, can be deployed on-site, providing in-depth, real-time insight into every aspect of a business, whenever required. Maximized visibility into all systems means that issues within a construction company, such as the need to repair or test a specific type of machinery on site, can be controlled and managed better.
An ERP allows you to assign work, check inventory, and invoice clients from the field, upon the completion of the job. It also means that a site superintendent can do a walk-through with a client at any given stage of a project, and then provide an invoice just moments after a successful walk-through.
Critical for any construction company, an ERP system can also be used to great advantage should change orders occur. This is achieved by allowing a company to accurately allocate resources and manage any adjustments or disruptions that invariably arise due to change orders.
A change in project scope need not be a life-or-death battle in resource and capital management for a construction company.
Maintaining construction machinery prevents downtime
Change orders aside, any construction professional will tell you that one of the biggest factors that can impede progress (which means impeding reaching deadlines and getting paid) on a construction site is the breakdown of machinery and equipment. The losses due to breakdowns can be immense.
However, unlike so much else on a construction project, effective maintenance and upkeep of machinery and equipment are within the control of a construction company, even if said machinery is leased. The importance of routine and preventive maintenance for any construction project cannot be underestimated.
A well-managed, project-appropriate maintenance schedule will ensure that breakdowns or under-performing machinery are eliminated. This will mean less risk of project delays, contractual penalties, and lost revenue — and a computerized maintenance management system (CMMS) can greatly assist in achieving that.
The very things that an ERP does for your overall management system, CMMS software will do for your machinery and equipment maintenance needs: provide clarity, insight, and enable proper, effective planning. Smart preventive maintenance, using a dedicated CMMS, is the best solution.
Use software in your construction payment strategy
To conclude, construction companies need to invest in systems such as ERP in order to ensure more intelligent, efficient, and viable payment schemes are in place. It should form an integral part of a company’s payments strategy. This should ensure that a company is able to minimize cash flow problems and provide a buffer against curveballs that are a given in the construction industry.
This should be combined with the use of a CMMS, which ensures that all machinery and equipment in use is being properly maintained, tested, and repaired in a timely, time-saving, and cost-saving manner. “An ounce of prevention is worth a pound of cure” is especially relevant to expensive and vital machinery.
Ultimately, these forms of software-enabled project management should result in your construction company being more adept at weathering the many challenges of the industry, consequently making your company more profitable.
Talmage Wagstaff is the co-founder and CEO of Redlist. Raised in a construction environment, Talmage has been involved in heavy equipment since he was a toddler. He has degrees and extensive experience in civil, mechanical, and industrial engineering. Talmage worked for several years as a field engineer with ExxonMobil, servicing many of the largest industrial production facilities in the US.