How construction companies can use business analytics to boost margins


Originally published in American City Business Journals

By Shane Brown and Bob Tinglestad

Using data analytics and business intelligence to improve business outcomes is among the hottest trends in technology. Particularly in the world of construction, the results of using business intelligence, predictive analytics and benchmarking tools can be significant.

Whether a construction company is deciding to lease or purchase capital equipment, figuring out what wage will boost staff retention or weighing how best to improve overall profit margins, data analytics can help. Heavy highway firms with so many moving parts can benefit greatly by implementing business intelligence practices to monitor bid/hit ratios, bid spread, revenue/margin per employee or daily materials put in place per job. Those are just a small sample of what is possible.

For example, one firm that had a long-standing policy of buying used heavy equipment found — through the use of analytics — that it would be better off buying new equipment. While the capital outlay for new machines was larger, the decreased cost of maintenance and the higher worker productivity that would come as a result of less equipment downtime justified the upfront expense.

Similarly, another firm that was struggling to retain construction site staff at $12 an hour discovered that by hiking their hourly rate to $20, the firm would be better off. Since the cost of hiring and training new staff is so high in a tight labor market, the firm’s profits were nearly unchanged even though it had almost doubled its hourly wage bill.

This is a good time for construction companies to think more deeply about how to become more efficient. This is especially true because the new generation of workers is comfortable with technology, and because of the strong economy, there is money to invest in new technology.

Simply put, integrating data analytics and business intelligence practices into the culture of a company allows decision-makers to analyze key relationships using real-time, reliable data in a way that enables agile optimization and competitive advantages.

As Forbes writes, construction is an industry “where 35 percent of costs are accounted for by material waste and remedial work. So, counting the cost of every screw could be the difference between delivering on budget and bankrupting an organization (or several organizations) financing a build.”

Using data to squeeze out waste can make a meaningful impact on profits. Take for illustrative purposes the case of a general contractor with a typical gross margin of 5 percent that invests a few hundred thousand dollars in business intelligence and analytics software.

If the firm had $500 million in annual revenues, every 0.25 percentage point increase in gross margins would add $1.25 million to the bottom line. Shifting gross margins from 5 percent to 6 percent would add $5 million to profits — a 20 percent increase. Whether a firm has $50 million or $1 billion in revenue, similar results can be achieved by leveraging data to produce best-in-class ratios. Those benefits can be realized as a result of giving the firm’s talent the knowledge they need to make better decisions.

In the complex world of construction, many firms have embraced such tools as enterprise resource planning (ERP) systems and business intelligence software, but these are not silver bullets, especially without the right process. Getting the most from these tools does require specific steps — but they can lead to remarkable results.

Amazingly, more than 60 percent of general contractors are still using Excel spreadsheets for forecasting and analytics — essentially getting a snapshot of one moment in time that often is built on poor quality data.

While construction companies have long embraced technology, to truly have an impact data analytics requires change management. Firms need to break down silos among different departments, which often run with separate cultures that use different key software. Having tackled those change management issues, using data the right way can really make a difference.

Four steps, in particular, are helpful:

Build a foundation on good data. To produce a steady, reliable stream of good data, firms need to standardize their key data across divisions and internal silos. That effort should include moving from snapshot data to producing real-time information.

Create a data warehouse. There must be a central repository of information pulled from ERP (enterprise resource planning) systems, covering project productivity, payroll reporting, and all other operations. Then, applying business intelligence and analytics, that information can be made transparently accessible to a wide range of executives through visualization tools. Visualizations can show such things as spending discrepancies against averages or overtime running above regular rates.

Operate together. Getting everyone to work in the same way using one set of data requires a blend of technologists, data specialists and engaged management to ensure the effort mitigates downside risks and maximizes upside potential. Making sure the fruit of this technology is available on mobile devices is also vital in construction.

Celebrate the wins. Make sure the team learns about the impact this new program and focus is having on decisions at all levels within the organization.

Countless executives at middle-market construction companies can tell stories about their firm losing millions on a project when they had expected a healthy profit. By using data effectively, those stories of evaporating profits won’t entirely become a thing of the past, but there should be fewer of them to tell.

Shane Brown is a leader in Plante Moran’s construction practice and is based in Fort Collins, Colorado. Bob Tinglestad is a leader in Plante Moran’s technology consulting practice and is based in Denver.