How to Protect Your Profit From Project Changes
Originally aired on 8/7/2019
Hello, I’m John Klobucar with InEight, and I’d like to welcome you to our latest webinar in our Project Cost Management Series. Today’s webinar is titled “How to Protect Your Profit From Project Changes.” Our presenter today is Rick Deans, who is the Executive Vice President of Industry Engagement at InEight. In his role, Rick works with InEight’s largest and most strategic customers to ensure they’re continuously getting value from the use of our tools. This includes working with clients during the pre and post implementation phase.
He also heads up InEight’s industry advisory group, which provides valuable feedback to the company around industry best practices and product roadmap validation. Rick was part of the original Hard Dollar team, and has been working with InEight customers for over 20 yrs.
Now, if you have any questions as you watch today’s webinar, please submit them to webinars@InEight.com. Also, today’s webinar is being recorded and we’ll be sending out a link to the video within the next week. Once again, we’re glad you have joined us, and now let me introduce Rick Deans, who will take it from here. Rick?
Well, thanks, John, and hello, everyone, it’s great to be back doing another webinar for our 2019 webinar series. Today’s title is “Make a Profit Despite Project Changes By Better Leveraging Technology.” So, that’s what we’re going to talk about today. As is the case with many of our webinars, we’ve distilled this down to a few major themes. There are four major themes we’ll explore during today’s webinar, and we’ll come back to this list of four key elements for success as we touch on each of these in detail.
Just really quickly, to run through the list, we’re going to be thinking about project details as data, and we’re also going to encourage audience members to see project changes as data transfers. We’re going to talk about the importance of integrating our cost, budget, schedule, and field data systems together, and we’re hoping you will draw the conclusion that there will be real time and money savings by tying these tools together and by synchronizing the work effort.
“Change is the only constant in life,” we’ve all heard that, I actually typed it into Google and it actually comes from a Greek philosopher, named Heraclitus, from Ephesus, around 500 BC, so that’s an interesting thing, from my perspective, that I really am interested to know if he knew how true that saying would hold 2,500 years later, and I’m also wondering if the “dark philosopher,” as he was known, worked construction as a day job. The Parthenon was built around that time, so is that a coincidence? We don’t know. But change is something that we can expect.
Here’s another, more contemporary, quote, notice this is from a 40-year veteran of the industry, not a 40-year-old industry veteran. But this individual is the director of an organization’s regional construction operations, including the camp where I stayed when we were in Saudi Arabia. He told me this when I asked his team if they’ve ever worked on a project where there were no changes, so you can imagine the room, I’m asking the question, “Anyone worked on a project without any changes?” He’s in the back of the room, he raises his hand and he says, “InEight, still have the schedule on my wall. It was the only project I ever worked on where there were no changes. None,” he said.
So, in my 20+ years of doing this, that’s the first time that someone answered that question in this manner; usually, “There’s changes on every project,” so it does happen, it can happen, and we’ve got proof, apparently he’s still got the schedule and the plan and the budget tacked to his wall. But, in all likelihood, every project that we work on is going to have some element of change, and the better equipped we are to manage through these changes, the better off we’ll be able to mitigate the risk of any cost or schedule exposure to these changes, and certainly keep those changes from eating into our profit. And even though the title of this webinar focuses on profit, which is certainly in the domain of a contractor, I would argue that project owners and owners’ reps can and do greatly benefit from some of the tools and processes we’re going to be talking about today.
So, let’s take a look at some different types of changes we can expect to see on a project. By no means is this an all-encompassing, comprehensive list, but I believe it would be typical on one of today’s capital or maintenance projects. So, let’s talk a little bit about scope growth. We see this all the time as plans and engineering progress from 30 to 60 to 90% complete. Another thing we’re seeing is that clients are becoming much more savvy and seem to be super focused on value engineering or managing the bidding process so they have visibility into what is their optimal spend to value ratio, or what we’d call back home, “the best bang for their buck”.
Net new scope, this can be pretty straightforward and easy to recoup costs on. As it was clearly understood by both parties that this work was not included in the original contract, it was clearly understood, right? We’ll discuss the importance of a detailed scope document in a bit. But when pricing these type of changes, a couple things to look out after, do we have a good idea of the value these changes bring to the project? If we’re using the same resources as the base project that we’re there executing against, does it make sense to negotiate for some schedule relief, in addition to some net new revenue? So, those are some of the things we want to think about when there’s net new scope being added to a project.
Field changes, these can actually be the hardest to recover, since much of this work is going to be done during the normal course of operation. And if not properly captured and documented, it can be easy to lose track of all of the additional extras that are being done. We’ll talk later in the webinar about field enablement, of strategy for arming the folks in the field with the tools, and the processes to better equip themselves to capture these types of changes.
So, let’s go back and look at some of these field changes: plan to maintenance, plan to shut down, plan to outage. We haven’t really done any maintenance on a particular piece of equipment in a number of years, we’re going to be doing some work on it during some planned outage time. We pull the cover off it and it’s really a mess, it’s not just a quick inspection and cleaning, it really needs some major repairs done to it, that’s certainly a type of field change that happens during the discovery phase of the project.
One that we talk about a lot in this industry is underground utilities, where we’re going to put in a new pipeline, we’re going to put in a new sewer system, we start digging into the earth, and we realize there’s an old storage tank or something there that wasn’t documented, wasn’t part of our plans, didn’t show up as we were doing our takeoff, so something like that represents an opportunity for change.
This third one happens a lot, we’re out working on the job site and the client comes over and says, “Hey, we had a storm last night, can you grab a couple of guys and a truck and some pumps, we got to de-water part of this project?” Everyone wants to help, everyone’s eager to help, but if that wasn’t part of our original scope, if we didn’t make any provision for dewatering services when we put the original estimate together, maybe there’s an opportunity there to call that out as a separate change. And we’ll talk about not only the tools, which are important, but the processes that support these changes, as well.
And I know, for those of you who are regular attendees of our webinar series, that last bullet point won’t apply to you, but there are organizations out there that might have missed something during the estimate, and as we’re putting the estimate together, we think there’s going to be four widgets that we need to install, and we get out to the job site and it looks like there’s going to be 14 widgets that we need to install.
So, I’ve got that listed here as a field change because we typically don’t know about that stuff until we’re out in the field, and what are the best ways to handle those changes? Maybe it was something that was included in the scope, but we just missed it, but does it make sense to hold our field personnel to account, based on the four widgets that we had originally taken off, or do we want to measure their performance against installing 14 of them? So, we’ll discuss strategies for that as well.
Here’s our list of 4 Steps to Success. Let’s take a look at the first one, Viewing Project Details as Data. So, if we take a project and break it down into its component parts and pieces, we can begin to get our arms around what all of those pieces are and, more importantly, we can begin to quantify those parts and pieces, and then we can roll them up in a variety of ways.
This information, or data, depending on how it makes its way through the organization, can really have a huge impact on a project’s success. So, let’s talk about that for a moment. As we’re talking about project data, we want to really make sure that we’re aligned, in terms of all of the different people and folks and positions that are going to be working on a project.
So, anecdotally, one of our customers, a large owner in the oil and gas market, commented to me that it was interesting to see how planners, schedulers, and cost engineers all sort of came together and started talking the same language because our tools tied these previously disparate functions together, and they were all starting to learn a little bit more about what the other areas of responsibility were, and we had a set of tools that really supported them working much more collaboratively across cost, schedule, and execution.
So, let’s take a look at three areas where project details can become data, and see what this might look like. So, in the estimating phase, this information really does become the nuts and bolts of building a project’s budget. Now, usually, estimates are far more detailed, not always, but usually the estimates go down into a level of detail that includes each box of nuts and bolts, so we understand what the costs are going to be, but because they’re so detailed, a lot of times we end up summarizing rolling this data up, and this is always easier, if you have that amount of detail, to get to that summary level than it is to start from a summary level and try to force yourself down into a greater level of detail.
So, again, the three bullet points that we’ve got there, we’ve hopefully done a good job of quantifying the estimate, we’ve got units of measure that make sense, not everything is a lump sum, on each, we’ve got things measured, perhaps by area, square feet, square meters, we’ve got things measured by volume, cubic yards, cubic meters, we’ve got things measured by length, maybe linear meters, linear feet.
Additional attributes can be associated with these estimate line items to facilitate aggregating estimates, maybe by area, by system, by cost code, or type, and what that allows us to do is to really dismantle the estimate, break it into its component pieces, and as we talked about earlier, roll them up in different ways. And in the estimate, we also want to make sure that we’re keeping track of any assumptions or impacts of changes that we’ll be making as well.
So, an estimate is really the best guess of what the project’s going to cost, based on what we know about it. Now, that’s where the assumptions come into play.
Now, a lot of times, and we’ll see some live examples of this in the actual tools, but if we’re estimating a project, we haven’t yet submitted a bid to a client, and we hear of some changes, “Oh, by the way, we’re going to be doing carbon steel instead of stainless steel,” that kind of change. We haven’t submitted an estimate yet, so we can incorporate that kind of change into the estimate we’re working on. Now, clearly, if we’ve submitted a proposal and we’ve got an award, and something happens that’s going to affect our costs or our productivity, we want to be able to call that out separately. So, when those changes occur is going to be of great interest to us.
Field data, we’re going to see how one entry of data in the field can populate multiple downstream systems without any redundant data entry or lost time. And the type of information that we’re talking about coming from the field can include things like timesheets, who worked on which activities, and how many hours did they work for; we also want to make sure we’re capturing equipment, run and idle time, maybe there’s material delivery tickets that we’re running into in the field, as well; all of this stuff, again, is data.
Daily diary information, what did we talk about, from a safety perspective, today, what was the weather like, what was the interaction with the client like today, anything like that. Then, finally, then you got HSE, or health, safety, environmental, even quality logging, all of that stuff is data, even if it’s written down in a little notepad that someone keeps in their shirt pocket, that is data; now, obviously, we want to make sure that the data is collected electronically, it has a means of migrating or transferring to other systems, but, again, at the end of the day, it’s all data. And then the third element that I’ve put into the outline here revolves around contract data. So, from that perspective, do we have a clear definition of scope? Do we understand the terms and conditions? Is there a defined change management strategy?
Anecdotally, I was working with a plant owner/operator who really felt that the level of detail of their bid packages really helped their contractors to provide the best pricing they could because the scope was so well-defined, and it really helped; in this case, the plant owner reviewed and aligned the contractor’s bids because everything was spelled out in great detail. So, in that particular case, nothing was left to chance, everything was very clearly understood, everything was very well-defined, as people went on to execute against these plans and projects.
All right, so let’s take a look at some screenshots, and then we can jump into the live tool as well. But, in this first screenshot, we can see an estimate has been created for a project. Now, in addition to having a working, what we would call “current estimate,” this project also contains an original budget, as well as a current budget. So, we’re going to talk about all of that stuff.
Now, every column heading up here that begins with the letters OB, these all reference the original budgets, so I can see what the quantity was in the original
budget at the time the original budget was created, I can see what the man hours were, I can see what the costs were, and this was all part of the original budget.
And then the column headings that begin with the letters CB, these are our current budget. So, in a nutshell, approved changes basically update the current budget. So, if you want to think of the current budget of being the original budget for a line item plus or minus any approved changes, that’s one of the ways we can track this in the field, is against our current budget values.
So, as changes occur, again, we’ll explore this in the live tool, as well, we can see a running tally of all of the project changes, and many of these occurred while the project was still in the estimating phase. And then, finally, as changes occur, once we’ve locked in that original budget, we have a way of processing those changes to see the impact on costs and revenue, and making sure those approved changes are included in the project’s current budget.
Now, as we’re out in the field executing against our plan, a lot of times I get asked, “Hey, if a quantity increases, as the result of a change, so, instead of putting in 200 feet of pipe, we realize we’d estimated 200 feet of pipe, we planned around 200 feet of pipe, we get out to the job site and we realize this is really going to be 250 feet of pipe, does it make sense to just up the quantity from 200 to 250? Or does it make sense to create a separate line item for the remaining 50 feet of pipe?”
Now, if you have attended some of this webinar series in the past, then you probably know the answer: it depends. Let’s take a look at the two scenarios that I just outlined. So, by increasing the quantity of an existing line item, our tools will still be able to isolate the change in man hours, in costs, since the increase in quantity comes after we’ve created that original budget. This makes it easy for the folks in the field to continue to book their time against this work. They don’t have to worry, “Oh, gee, that 25 feet that we installed today, was that part of the original 200 feet, or was this part of the added 50 feet?” They can just go ahead and continue to attack their work and they don’t have to determine on a specific day if that work was part of the original work or a part of the newly added work.
But, sometimes, creating a net new line item has its advantages as well. So, this can be helpful in cases where the additional work might come at a later phase, so it might make sense to want to view it as a separate activity on the schedule. There might be other considerations, as well; for instance, are we going to be able to do the work with the same resources, or are we going to need to bring in additional resources to do that work? If we’re bringing in additional resources with potentially different costs associated with them, it might make sense to handle the changes, the separate line item in those cases, and that way it can be estimated from the ground up.
So, again, the answer to that question: does it make sense to just up the quantity, in our example, from 200 to 250 feet, or does it make sense to create a separate line item for the 50 feet? I would argue if you’re going to track it separately, maybe this is a connecting piece that’s going to connect two pieces of equipment as a result of a design change, maybe I want to break it out separately and I want to have visibility into that. If it was just a missed takeoff, “Hey, you big dummy, there’s not 200 feet in this module, there’s 250 feet,” then maybe what I want to do is just include it in and have the tools strip out the deltas, the differences. So, a lot of different ways the tools can handle this, a lot of it is going to boil down to what’s really the best practice, based on what we know about that change.
So, let’s do this, this might be a good time to jump into the live software tool. And what I want to do now is I want to basically create a change within my project estimate here. So, again, I’m merrily estimating away, and I want to make a change to something. So, here’s a good example. This ties into one of the examples we talked about earlier, we’re going to be excavating a trench for some reinforced concrete pipe. Now, this is 36-inch pipe, we’ve got 1800 cubic yards of material that we’re going to be excavating out of this trench. And, right now, based on the soil conditions and what we know about this work, we’ve got a productivity rate in there of 75 cubic yards per day. So, again, using this crew, and based on the soil conditions, I think the best we’re going to be able to do is 75 yards a day.
Now, we start digging, and we realize there’s an old fuel storage tank underground, smack in the middle of where our pipe’s going to go. So, we’re going to have to do some additional work, we’re maybe going to have to be out there a couple days longer, and we can do a few things. So, notice I’m working about 25 days on this activity, let’s add another five days because we have to understand what this thing is, we’ve got to do some research, we got to get some tests done on it, and we’ve got to pull it out of the ground. So, I’m just going to change the duration here from 24.78 days to 30 days, and you’ll notice the whole set of productivity values is going to update. Now I’m only going to be working an average about 62 cubic yards per day.
But what also happened was our costs changed, the hours that these resources are going to be out there changed as well. So, now that I’ve made this change, what I want to do is I want to take a look at my project’s “changes” register. So, there’s a few different things I can do. First off, I can come in here and take a look at what we call our “PBS changes log”. Now, this PBS changes log is really wired, once this box is checked, to log those changes, to pick up any changes that are going to affect either the cost or the price of the project. So, if I bring up the PBS changes log, I can see there’s a whole running list of changes that I’ve made, and here’s the change that I just made: the duration went from 25 days to 30 days.
And then within this record, I can see what did that do to the overall price of the project, what did it do in terms of my costs, and what did it do to my costs if I’m using my billing rates on my resources? So, that’s an important concept as well; all of our resources, our labor, our equipment, our materials can have internal cost rates associated with them, but they can also have external billing rates associated with them as well. I can see what the cost difference is for my labor, for my equipment, any materials or subcontract work that might have been affected, I can see the impact on this specific item as well as the impact on hours. So, what did that do to my equipment hours, what did that do to my man hours?
I also have ways of tagging or labeling this change record, even putting in some freeform notes here so that if I’m looking for a specific change and I’ve got a list of 1,300 individual changes, it’s very easy to group those together, or isolate the ones that I’m interested in. So, again, during the estimating phase, maybe my boss wanted to know, after his vacation, “Hey, why did the estimate change?” “Well, we made a change in productivity,” and I can see here’s the net impact of that.
Now, of course, our example was, in real time, we’re excavating out there, we find this abandoned fuel tank and we have to pull it out of the ground, it’s going to take us a few extra days, what would that look like, from a process and procedure standpoint? So, let’s come in and take a look at what we call our “budget contract changes.” So, this is usually used once we’ve created that original estimate, this is going to capture changes that really occur out in the field, and what we’re going to do here is we’re going to create a new change record.
And we have some options, we can create a cost item change, we can create an account change, I can create a change record from scratch, or, in this case, I want to create change records automatically, I want the tool to do the heavy lifting for me, and I want it to look for any changes made to quantities, man hours, or cost changes, and, in that way, I’ve sort of cast my net pretty wide here, and anything where the current estimate and the current budget are not lined up is going to be presented to me on this next screen.
So, right here, I can see here’s our “excavate trench” item, and it’s one of a few items that is in that state. And when I bring this up, again, I’ve got a header row, I can put a description in here, “underground fuel tank.” I’ve got different ways of tagging and labeling these, and then if I click on the “Details” tab, the tool does a pretty good job for me of stripping out what the delta was in labor, what the delta was in equipment, great detail down here, what the quantity change is, what the man-hour change is. And you’ll notice that this particular change record, when it’s created initially, has a status of pending.
Now, if I come into the “Actions” section of the ribbon, this is where I can disposition this change record. So, initially, when we create the record, it’s in a
pending state, maybe I’ve gone to the customer and the customer says, “Well, you know, that was clearly labeled in the project plans and specs we gave you, you just never got to that page in the plans, I’m going to reject that change.” In this case though, that was something that was completely unexpected, we weren’t counting on that, it interfered with our productivity, we’re going to get this change approved. So, notice the status is currently pending; once I approve this change, it’s now part of my current budget.
You’ll also see there’s an option to add a new pay item; so, in this case, maybe there was a net new scope of work that the client said, “Hey, just spin up a new item and charge against that.” I could have done that, and then this bottom part of the screen actually allows me to affect any established pay item prices or quantities as well. So, pretty comprehensive set of tools to help us manage changes, and as we saw, we’ve managed a change that happened in the estimating phase, and we also ran through an example of a change that happened during execution as well.
Let’s take a look at what project details might look like as it relates to data. So, how do project details in the field relate to what we just talked about in terms of estimate data? In this first screen capture, what we’re looking at here is a list of activities that we’re going to go out and execute, and each of these activities has a claiming scheme, or some sort of rules of credit, which can really help us with consistently measuring our percent complete. Our percent complete metrics will ultimately help us calculate our earned value, which we can then compare against our actual spend, with hours and dollars, to really help us identify, early on, any areas where we need some additional planning or resources.
Next up, timesheet details are a source of data that can feed downstream systems, as we discussed earlier. In this case, a foreman is populating a timesheet that an engineer created for him as a daily plan. The foreman can focus on managing the crew and getting the work done, and just simply needs to record the final hours of quantities complete. So, again, those quantities complete are going to help us with our earned value metrics, they’re going to help us with those rules of credit. And, of course, the foreman can also enter in equipment hours, so if we were adding information, data, about how many hours an excavator ran or sat idle, or was on site on standby, etc., we’ve got that information.
And any sort of daily diary information, like the subject of the toolbox talk, as well as any issues that occurred during the shift. Now, because all of this data is captured electronically at the source, it’s now immediately available for others in the organization to review and to consume. Finally, any other information captured, regarding HSE, health, safety, environmental issues can be passed to compliance tools to facilitate reporting there.
So, again, all of this stuff that used to be solely in the domain of the field, how are we going to get this information back into the office? We’ve solved that, and it’s all happening electronically, even in areas that don’t have strong internet connectivity, the information can be collected offline and then ultimately synced to the system when you get back in range of a Wi-Fi, router, etc.
So, again, all of this great information can now be easily seen in the dashboard or report that someone back in the office can be looking at, without having to try to get somebody on the phone, or drive out to the job site, or wait for someone to come into the office from the job site.
So, let’s take a look at viewing these project changes more along the lines of data transfers. So, if project details can be broken down into bite-sized bits of data, then project changes are really just transfers of that data. So, think about an estimate going through stages. Typically, we learn about a project, we’ve got a very conceptual understanding of the facility that’s going to be built, the throughput, etc., but we don’t have a lot of detailed engineering, and we don’t have PIDs, we don’t have a lot of stuff that really helps us form a good estimate.
So, it’s typical that in the concept stage, because we don’t have a lot of those underlying details, that we’re going to make some assumptions, we’re going to document those assumptions, and we’re going to include contingency for those known unknowns, but as the project vision becomes clearer, as the engineering of the design progresses, more definition is available, and we rely less and less on contingency, and now that we’ve got defined tasks and activities and components, we can now put a better reliance, more reliance, on our historic benchmarks; so, again, less reliance on contingency, more reliance on what does it cost us to do this type of work in the past?
So, this is really just a transfer of data, isn’t it? Alternate scenarios, and, again, this is a model that includes a base bid plus different pricing options for additional work, just different ways of managing data. So, again, by turning on and off these selections, our costs, our man hours, and even our schedule durations are instantly added or pulled from the project’s estimate. So, those are different types of changes or data transfers that we’d see during the estimating phase.
And then during execution, these data transfers take shape in the way of booking time against the right activities, or the right tracking codes. Now, there’s a bullet item in there for field enablement. So, field enablement, we want to make sure the people in the field have the right equipment to do the job, we’re not going to send them out there with shovels when they need excavators and backhoes. The same thing goes with the tools they’re going to use to collect and manage this data. So, again, do we want them scribbling things in a notebook, or do we want them entering things electronically in an iPad or a
It’s imperative that the folks in the field are aware of scope inclusions and exclusions, so that helps us with what we discussed earlier, where everyone wants to help, the customer runs over and says, “Hey, I need three guys and an excavator, come on over here,” there’s a natural tendency to want to help and do what’s necessary, but we also need to make sure that people in the field are aware of what’s in scope, what’s out of scope, and we need to have a process by which if someone asks us to do some work that isn’t explicitly included in the scope that we’re working on, we don’t want to make it very bureaucratic, or maybe we want the extra work, but we have to have a way in which the client understands, “Hey, this is extra work and we’re going to bill you for it, in addition to all of the other stuff that we’re doing out here.”
So, we need to make sure that the field people have a mechanism or a place to book time against unexpected work, sort of the known unknowns. We know we’re going to get asked to do some extra work, we need to be able to have a sign-off mechanism in place, where we can instantly begin executing on that work once we receive authorization, so we need to have some codes opened up.
And then, likewise, we don’t want to give the guys in the field a thousand different codes against which they can enter their time, they’ll never get it right, no fault of theirs, it’s just they’re going to be overwhelmed. So, maybe we need to manage those codes a little bit more intelligently. So, if we’ve mobilized everyone to the job site, we’re not expecting any more mobilization activities to occur, maybe we go ahead and close out that code for mobilization.
And, likewise, maybe we don’t open up codes that are going to take place in a later phase of the project. So, let’s give the guys a half a dozen codes that they can work on that, are specific to the work they’re responsible for, and your odds of getting good data in from the field are going to increase tremendously.
Another thing that we want to be able to do to really enable the folks in the field is give them the ability to see how they’re doing or what they’re going to do when they put a daily plan together. So, if I have this crew and this set of equipment, this spread of equipment, and I can install 100 feet of pipe today, what does that do, what does that mean, relative to my budget? Am I going to make budget, am I going to gain, am I going to lose? What is it going to do for my man hours?
It’s amazing, the commonly accepted way of doing this is month after month, right? So a month closes, I’ll use July as an example, July closed, and now it might take a week or two to process all of the data that happened in July, and by the time people in the field get reports, it’s now middle of August. So, I’m working, I’m in the second/third week of August, doing work, and I’m just now finding out how I did in July.
And with our tools, we really want folks to see how they’re doing today; if I put a daily plan together in the morning, I know, “Hey, if I can meet this plan, I’m going to make my budget. If I don’t meet the plan, and if I don’t get those extra units installed, I’m going to lose some money or I’m going to lose some man hours.” But, boy, that’s much more effective, in terms of shaping behavior, to be able to give somebody that instant feedback, even pre-planning, “I can minimize distractions, I can keep these guys working, we can install 150 feet today, then I’ll make my budget,” that’s huge. So, again, the ability to have budget gain/loss analysis available for daily planning, and then ultimately for execution, I think is one of the real benefits of these tools.
So, let’s take a look at what this is going to look like in the tool; as project changes occur, we can really look at these as data transfers. And, in this case, I’ve just highlighted, this is part of the toolbar ribbon out of InEight Estimate, and I’ve highlighted the alternate scenario that we’re working on. So, again, as we’re dealing with these changes, we can turn on and off different elements of work, but let’s take a look and see what that does.
Now, if we’re going to include construction of not only the base bid, but we’re going to throw this tollbooth in, well, what does that impact later? Well, if we’re going to throw the tollbooth in, maybe some of my staffing and my staff-related costs, like timekeeping and support services, maybe these are tied into the schedule as levels of effort; so, these tasks don’t have their own start and end dates. They’re dependent on other things that are happening on the project, so it’s going to make these activities push out further into the future.
And, because there are resources associated with those tasks that have durations associated with them, that’s going to come back and impact my cost estimate now. So, for the line item that I’ve got here for project services that’s nested underneath my staff, that activity has now changed to 594 days. So, by turning on that tollbooth, it’s not just a question of the direct work associated with that, it’s going to change the schedule, and then now I’ve got things in the schedule that are dependent on the duration of the project. So, now my indirect staff costs have gone up, proportionally, as well, based on that one change. So, because this data now updates the schedule, the level of effort activities change, and then the change comes back, full circle, when the estimate costs of the project staff are now updated, as a result of that schedule changing.
All right, so, we’ve looked at the first two bullet points, let’s take a look at the importance of integrating cost, budget, schedule, and the field data systems. Well, as we just saw the relationship between scope, schedule, and costs, something PMI calls “the project triangle,” is very closely linked; good luck changing one of those without affecting the other two. And we can see how this tight integration between cost, budget, and schedule, and the field, helps us not only in the estimating phase, but as the project is nearing execution, as well as throughout execution.
So, let’s look at some of the examples on this particular slide. In the estimating stage, every activity is linked or assigned to an account code, and what that really means, it’s just a cost code that typically means the same thing from job to job, these account codes become extremely important during execution, as each of these account codes now has a budget, in terms of how many dollars, man hours, and equipment hours are required to complete one unit worth of work. So, when the project is being planned in the pre-construction phase, components can be created that reference these account codes, and these components then inherit those budgets.
So, let’s take a look at that quote that I’ve got there in the transition phase, “We don’t estimate a project the way we’re going to go out and execute and build a project.” Well, why not? Well, we have different sets of information; as we talked about earlier, we might break out estimates down into a level of detail that’s so great that we can get our arms around the resources and the materials we’re going to need, but when we get out to the field, maybe we’re going to package this work up separately, maybe we’re going to work it by area or, ultimately, by system, as the job gets nearer to completion. So, it allows us to estimate the project one way and then execute in a different manner, without losing sight of those individual cost codes, “account codes” as we call them, and what those budgets are for those particular components.
As we saw earlier, during execution, field data is now being captured on a regular, ideally, daily basis, and that data is then being fed to other downstream systems. So, for instance, one of the modules in an ERP system could be the payroll system. So, we’re collecting all of the data necessary to feed a payroll system, we know who’s working, so we have an employee ID for that individual, we know which pieces of equipment are working, we know the tasks or the codes they’re working on, we know the hours that they’re working on.
So, the payroll system is now able to process payroll, and once the payroll is processed, based on that data collected in the field, InEight Control, one of our modules, one of our applications, can then be updated with the actual costs and hours from the ERP. So, we’re not just sending data to other systems, we’re also receiving data by directional flow of data.
And, while the tools play a major role in this digital transformation, they really work best when they’re supported by a set of business processes that is well communicated throughout the organization, people understand what the next steps are, no one’s waiting around for someone to figure out what to do, because they’ve already got the process laid out and, frankly, leaders in the organization that have the discipline to support these processes. So, during execution, one entry at the source is going to be able to feed multiple downstream systems. As changes occur in the field, we’ll be able to instantly identify and understand the impact of the changes on the critical path, and we’ll be able to rely on a documented and a well-communicated, well-understood work process for pending and approved changes, as they occur.
So, finally, our fourth bullet point, time and money savings from data synchronization. Well, we’ve reviewed many ways in which integrated systems provide a measure of efficiency, and “time is money,” we’ve all heard that, and these efficiency improvements certainly help to preserve profit margin. But let’s take a look at some real hard dollar savings that can be achieved by the integration of cost, budget, schedule, and field data systems.
For long-term projects, escalation can be accounted for and set up based on date ranges. So, for instance, we know that labor rates are expected to rise 5% in July, when we get a new union agreement. As schedule activities move in and out of these escalation ranges, the cost of escalation can be automatically recalculated for us, a huge time-saver. We talked earlier about how these kinds of changes can be modeled and understood in minutes, rather than hours.
In terms of payment terms and the effect upon cash flow, many of our customers will tell us, “Well, we’ve already agreed to sort of a hard bid price, we don’t have any wiggle room or negotiating room there, but maybe we’ve modeled the effect of different payment terms, and we can find ourselves in a better cash position, for instance, by being able to negotiate to bill the client twice a month, or every two weeks, rather than once a month.”
Another anecdotal situation, we had a client tell us, on a big industrial project in the Houston area, that they didn’t need payroll clerks on site at their projects anymore when they replaced their paper-based timesheet system with iPads. So, not only was the data captured in a more timely manner, because there wasn’t this stack building up on someone’s desk of these paper timesheets that were coming into the office at the end of the day, they were just being recorded electronically on their tablet. But they also found that once the data was in the tool, there were far less changes to the data once it got entered because it was more accurate. It was coming in at the source, it was coming in from the people that really understood what was being worked on and what those hours were.
So, as changes occur, not all of them need to be kicked back to the office to estimate a change order. So, for example, the resources needed to complete daily T&M work, time and materials work, are available for field folks to enter as part of their daily routine. The tools know, “Hey, this is a T&M item, it’s got a payment term, and it’s set up to use our billing rates. These other items are unit rate or lump sum, we’re going to be able to bill for those, based on rules of credit and our earned values and the actual quantities we’ve completed.”
So, the tool is going to sort all that stuff out, but the people in the field just need to be able to understand that Joe and Bob, Steve and Susan all worked on these particular activities. So, again, the man hours and equipment hours are captured on the field changes, and then the tools will sort all of that out, in terms of what gets billed and how.
Finally, another quote, we started with a quote, we’ll conclude here with a quote, and this was a Canadian colleague, was president of a firm in Alberta that provided oil field services, and when we first met, he explained to me, he says, “We got to find a way to stop the leakage,” and he wasn’t talking about piping and valves. He was aware that projects were being estimated with a great level of detail by a dedicated staff. He sat in on a lot of those reviews where they had a good amount of profit accounted for in the project. He knew the folks in the field were putting in long hours and were really proud of the quality of their work and their safety records. But he was frustrated because despite this dynamic, profit margins were getting eroded on just about every job because they were being eaten up by changes that weren’t being recovered.
So, again, it wasn’t these huge swings that were going to cause them to go out of business, but we all go under this project in agreement that we’re going to make some money on it, and all of that money gets eaten up on these changes. So, he did a few things. He put in place some new procedures and processes, and we came in and provided his organization with the tools and the training to do a better job of capturing, managing, and reporting on those changes. So, now, he’s sort of stopped the leakage and he’s focused on other ways that his company continued to improve.
So, again, there’s a very anecdotal success story of how these tools, in concert with an efficient process, can really help our customers preserve their profit margins and not see those eroded as changes occur in the field, which I believe we’re all in agreement that we’re going to see changes on just about every project.
So, I’d like to thank you for your time today, and if you’re interested in this webinar series and you have any questions at all about the upcoming schedule, or if there’s a topic that you would like to see us cover in this webinar series, or even if it’s just a link to maybe a previous webinar that we’ve delivered, you can reach us at Webinars@InEight.com. And, likewise, if you would like to request a demo, you want to learn more about our products and services and how we can help you, by all means you can reach us at Sales@InEight.com, or pick up the phone and call us, toll-free, 800-637-7496. And, again, my name is Rick Deans, and it’s been a pleasure to spend time with you today, and we hope to see you on the next one, real soon. Thank you.
Thank you, Rick. To learn more about InEight, as well as our project cost management solutions, visit InEight.com and click on the “Request A Demo” button. Thank you for watching, this concludes our webinar.
Since 1998, Rick Deans has worked with InEight customers in more than 35 countries to help identify innovative solutions that address their biggest project management pain points. As executive vice president of industry engagement, Rick leads InEight’s efforts to engage with its most strategic customers through the Industry Advisory Group (IAG). Rick works with IAG member companies to evaluate InEight solutions before they are put to work on projects and also to identify industry best practices.