Performance Measures for the Assessment of Construction Projects - Essay Example

Performance Measures for the Assessment of Construction Projects Introduction The increase trend towards globalisation and the accompanying competition that has characterised business since the 1980s has forced companies and business to re-evaluate their performances through quantifiable metrics. As a result of this, a new field of study has emerged which aims to identify the right number and type of performance measures, which is relevant to different organisations (Kagioglou et al, 2001). In the light of this fact, several industries, especially manufacturing, have witnessed the introduction of new methods and techniques to shift traditional paradigms, in order to improve their performance (Kagioglou et al, 2001 p85). And as identified by Bititci et al. (1997), this trend has led to the creation of new philosophies in performance assessment, such as concurrent engineering/construction, lean production/construction and many others such as JIT, TQM, TPM etc.; and the construction industry has continually saw the adoption of these new principles and techniques to better improve the quality of construction projects The major driving factor behind these new principles is the optimisation of an organisation's performance, internally and externally, to enable it compete favourably well within its market (Kagioglou et al, 2001). This is because performance measurement enables an organisation, construction organisation in this sense, to understand how decision making processes or practices led to success and failures in the past, and how that understanding can drive the organisation towards future improvements (Hatry, 1999). The purpose of this essay, therefore, is to elaborate the set of performance measures that are vital to assess the finances, customer satisfaction and product management in the construction industry, and to identify the right time and application for these performance measurements. The rest of this essay will be organised thus: The next section will briefly discus performance measurement and its importance for continuous product improvement. The subsequent sections will identify the set of performance measures relevant to a construction project, the discussion of these measures and then conclusion. Kagioglou et al rightly defines the concept of 'performance measurement', quoting Evangelidisz (1992); he differentiated performance measurement from a similar term, 'performance management. He defined performance management as a closed loop control system which deploys policy and strategy, and obtains feedback from various levels in order to manage the performance of the system; and Performance measurement as the information system which is at the heart of the performance management process and it is of critical importance to the effective and efficient functioning of the performance management system. Thus, one can conclude that performance measurement is the processes of determining how successful organisations or individuals have been in attaining their objectives and strategies (Evangelidisz, 1992 cited in Kagioglou et al., 2001). However, to achieve this BICE (2005) contend that for a set of performance measures to be effective, it must possess the following vital components. These are: Clearly defined, actionable, and measurable goals that cascade from organisational mission to management and program levels; Cascading performance measures that can be used to measure how well mission, management, and program goals are being met; Established baselines from which progress toward the attainment of goals can be measured; Accurate, repeatable, and verifiable data; and Feedback systems to support continuous improvement of an organisation's processes, practices, and results. The importance of using the right performance measures to measure/assess the right 'things' is indisputably evident throughout the construction market today. The results of such appropriate measurement of performance would include attraction of future investment, increase in customer satisfaction, increase in share value and influx of high calibre employees (Ghalayini and Noble, 1996). Kagioglou et al notes that the rationale and basis for formulating performance indicators have started since early in the century and has developed consistently through the decades, although they note that these early/traditional performance indicators have been mainly concentrated on finances, such as return on investment (ROI), sales per employee, profit per production etc. While Sanger (1998) argues that modern performance measures should be all-encompassing, Trimble, (2001) identifies the following important characteristics of effective performance measures: Measurable (objectively or subjectively), Reliable and consistent; Simple, unambiguous, and understandable; Verifiable; Timely; Minimally affected by external influence; Cost-effective; Meaningful to users; Relate to mission outcome; and Drive effective decisions and process improvement. To streamline these characteristics, Trimble, (2001) coins the acronym SMART to describe effective performance measures, representing, Specific, Measurable, Actionable, Relevant, and Timely (Trimble, 2001). Hatry (1999) opine that performance measures for a project or product can usually be classified as inputs, process, output and outcome. He defined inputs as a measure of the resources (money, people, and time) provided for the project/product being assessed; process as assessing the activities by comparing what is done with what should be done according to standard procedures or the number of process cycles in a period of time; Output measures assess the quantity and quality of the end product; while outcome measures assess the degree to which the end product achieves the product or project objectives. Following this paradigm, the author argued that the design of performance measurement is a process, with the understanding that, the input measures include the resources available and the quality of project management plans; process measures look at how well the plans are executed. Project output measures include cost and schedule variables; while the outcome measures will include scope, budget, and schedule and safety performance (Hatry 1999). Explaining how a typical model based on this principle works, Trimble (2001) propose that management processes should be applied to inputs such as project resources, to generate project plans or strategies Letza (1996) argues that such strategy development in an organisational project is one of the most fundamental management activities, since it provides a clear vision of what the project seeks to achieve in the short or long term. It also serves as point of reference at the end of the project, for the company to assess how well or bad, it has met its targets. The plans/strategy and resources then becomes the inputs for project execution. Each project is assessed against its targets and the performance of other similar projects. Output measures are compared with performance targets to identify performance gaps. These gaps are analysed to identify corrective actions and improve the project as it proceeds. Once a project is completed, an assessment can be made of what worked well and where improvements in processes and project teams are needed for future projects. Finally, the project outcomes are assessed to develop lessons learned, which can be used as a feedback mechanism to improve policies and procedures and may drive changes in decision making and other processes (Trimble, 2001; Letza, 1996). Neely et al. (1997) supports this contention that performance measurement should be viewed as a process. However, the authors added that for the design of performance measurement, they suggested the use of what they termed 'performance record sheet'. The various elements of this performance record sheet includes, title, purpose, relates to, target, formula, frequency of measurement, frequency of review, who measures Source of data; who owns the measure What do they do Who acts on the data What do they do Notes and comments. They contend that this record sheet provides a solid framework for designing performance measures for a project or product. Narrowing the argument down to the construction industry, Mohsini and Davidson (1992) explains that, especially in the UK, when evaluating the success/failure of a construction project, the common procedure is usually to evaluate performance on the extent to which client objectives, such as cost, time and quality were achieved. They further contend that though these measures provide a clear indication of the success or failure of a project, they do not provide an objective and balanced assessment of the project performance. Buttressing this line of argument, Kagioglou et al. (2001) posit that a holistic approach to performance measurement for the construction project should subsume three major categories out of the four categories of the Balanced Scorecard; a performance management system which incorporates four main measurement categories or perspectives, each comprising of a wide range of potential sub measures. The three measures for effective performance measurement in construction projects include: 1. Financial perspective: how do the project's financial stakeholders view the project For example, use of cash flow forecasting and cost benefit analysis. 2. The internal business process perspective: how is the project performing in the key process activities For example, use of critical path analysis. 3. The customer perspective: how do the existing and potential customers see it And this is this is the format that will be adopted in this essay to produce a set of performance measures for the construction industry. Before we go further into identifying the performance measures for a construction project, it is worth stating that, though performance measurement is an effective tool for both effective management and process improvement, the selection of the right measures to use largely depends on a number of factors, such as, who will use them and what decision the measurement supports, are vital (BICE, 2005). Letza (1996) also warns against measuring the wrong things 'right'. A typical example here is the case of the airline industry, according to BICE (2005), the industry has used on-time arrivals and lost bags per 1,000 as output measures, but to improve efficiency, procedures and processes are measured and analyzed in more detail by the airport ramp manager. Measures such as the time from arrival and chock in place to cargo door opening, the number of employees required and present for the type of aircraft, and whether the runner at the bottom of the conveyer is in place when the door is opened, provide the information needed to improve efficiency and effectiveness. Despite the two factors mentioned above, performance measures are also affected by how well they are integrated into a benchmarking system; the process of measuring one's performance against recognised leaders for the purpose of determining best practices that lead to superior performance when adapted and utilised (BICE, 2005). For the purpose of this essay, the performance measures for a major bridge construction will be analysed in the subsequent pages. As a form of preamble, the measures identified below, when taken individually might lack the necessary robustness, however, when analysed as a group their strength in adequately measuring performance in the project becomes readily discernable. Also, the adequacy of each of the performance measure, taken individually is limited, but when viewed as a complete set of performance indicators, they provide the necessary evaluation of the construction project management. On a general note, the performance measures will be broadly divided into two: the input/process measures and the output/outcome measures. The input/process performance measures identified for the bridge construction project includes: implementation of the project execution plan; implementation of project management plan; implementation of project risk management plan; project management staffing; reliability of cost schedules and estimates; accuracy and stability of scope; effectiveness of project communication. While the output/outcome measures include; cost growth; cost variance; cost performance index and Mission effectiveness (BICE, 2005). Implementation of Project Execution Plan: The purpose of this performance measure is to assess if the original execution plan - critical path, phase circles etc, of the construction project is been duly followed. This measure is often the responsibility of the project manager, and the measure assumes that appropriate plan has been developed and approved, as per related regulations, for this construction project. This performance measure is assessed on a numerical scale; from 1-5. Where 1 (poor) indicates that few elements of the project execution plan has been followed, and 5 (excellent) indicates that all the elements for the construction work, to date has been implemented. This measure is usually evaluated on a regular scale - at the end of every phase or periodically, like weekly or monthly. For example, if the bridge construction execution plan outlines that the bridge will be constructed in phases, ranging from 1 through 20. This performance measurement assess if each phase is being completed before moving to the next phase or if the phases are running concurrently. Implementation of Project Management Plan: Besides the execution plan, a project must have a management plan that indicates the direction and directive that the project manager ought to pass at every point in time. This performance measure evaluates if the project manager has been effective in this regard. If the direction of the project is following what was spelt out in the management plan. This measure is based on the assumption that an appropriate management plan has been established for the construction work, as per regulations, from the onset. The management plan is almost as important as the project execution plan, as it provides the direction for the project execution. Also, this measurement is evaluated on a numerical scale, from 1 through 5. Where 1 (poor) indicates that few elements of the project management plan has been followed, and 5 (excellent) indicates that all the elements for the management plan, to date, has been implemented. This assessment is carried out on a monthly basis Implementation of Project Risk Management Plan: Every project has its risk, and this is especially the case with construction projects like bride construction. Therefore, from the beginning of the project, the risks associated with the project are evaluated and an effective risk management plan is put in place to forestall any unexpected occurrences. However, as work progresses on the project, more lights become shed on the possible risks associated with the project not conceived at the beginning. This necessitates an ongoing evaluation of the risk management plan for validity. This performance measure, therefore, assess if the risk management are reviewed and updated, if necessary. Obviously, it is based on the assumption that an appropriate risk management plan has been put in place for the construction project. This performance measure is evaluated on a scale from 1 (poor) to 5 (excellent); where 1 (poor) indicates that plan has not been reviewed since approved, or just a few elements implemented and 5 (excellent) indicates that plan has been constantly reviewed and updated periodically and all elements required, to date, have been implemented. The frequency of this measure is usually monthly. Project Management and Staffing: The number and qualifications of staff involved in a bridge construction project can greatly make the difference between the success and failure of the project. Therefore, assessing the adequacy of staff working on a project at every period in time is greatly important for the success of the project. This performance measure, usually the responsibility of the HRM evaluates if the people (staff) working on a construction project are adequate, not only in numbers, but also in qualifications. This evaluation can be carried out quarterly, and is ranked on a scale of 1 (poor) through 5 (excellent). Effectiveness of Project Communication: Communication is a vital part of any organisation venture, as a result, a breakdown, or barrier to communication can often mean failure, even for a well planned project. This measurement, therefore, aims to evaluate the quality of communication within the project team, as this is crucial for the success of the project. This evaluation can be carried out quarterly and it evaluates seven key factors of project communication on a scale from 1 (poor) through 5 (excellent). The key factors includes; overall effectiveness of project communications, accuracy of information, timeliness of information, completeness of information, understanding of information, barriers to communication measured from 1 (significant) to 5 (none), communication procedures. Assessment of the overall project communication is therefore, the sum of individual factors, resulting in 7 (poor) to 35 (excellent). The measures identified above, when taken together, are useful for evaluating project/product management. The identified performance measures related to finances of the construction project includes; reliability of cost schedules and estimates; cost growth; cost variance and cost performance index. Reliability of Cost and Schedule Estimates: The planning and execution of a project is based on a set of estimates, especially as it concerns finances (cost) and time (schedules) for the completion of the project. Effective performance measures should be able to adequately rationalise the difference between the cost estimates of a project and the actual cost of the project, as a measure of the reliability of the estimates, and by extension, the success of the project. The measure is, thus, collected for each baseline change and should include current and all previous changes to the initial estimates. This measure is evaluated quarterly and reflects the number of baseline changes to the initial estimates. Cost Variance: This measure provides an ongoing measure of the accuracy of cost estimates done for every phase of the project. At the end of each phase, the estimated time and cost are compared with the actual cost and time, and from the knowledge gained, especially if something is going wrong, adjustments can be quickly done to put the projects on the right track. This measure is evaluated monthly or at the end of each project phase and is calculated by the budgeted cost of work performed less actual cost of work performed. Cost Performance Index: This measure evaluates the performance index of the cost estimates for the project. It represents how well the cost estimates of the project have been. It is done monthly and is calculated by dividing the budgeted cost of work performed by the actual cost of work performed to derive at a value that measures the cost performance index of the project. Cost Growth: This is a measure of the difference in the estimated cost of the project and the actual project cost. It measures the deviation from the estimated cost of the project. This is usually carried out at the end of the project by the project team, and it involves comparing the project estimated cost with the actual completion cost of the project. The process provides knowledge for improving on subsequent projects. In most cases, it actually involves the actual cost at project completion less the estimated cost. Mission effectiveness: This is a performance measure that evaluates how satisfied the client is with the completed project. In order words, it reflects how close or far to the expected result the completed project is. This is often reflected in how satisfied the customer is with the end product of the project, or in case of public project, how useful the completed project is for the goal it was intended. This is carried out at the end of the project by both the project director and the client. It can be assessed on a 5point scale, from 1 (poor) to 5 (excellent) (Kagioglou et al, 2001; Raymond et al., 2002; BICE, 2005). Conclusion The measurement of an organisation's performance is a generally acknowledged to lead to improved services and products. This fact is greatly exemplified by the numerous performance measures and indicators that have been developed in the last two decades; the construction industry has not been left behind in this trend. This essay has examined performance measurement in the construction industry. It has also presented performance measures for a construction project that addresses cost (finance) of the project, project management and customer service. It is believed that the explanations provided in this essay will further strengthen the value of performance measurement in the construction industry. References Raymond, T, Aoieong, S Tang and Syed M Ahmed (2002). A Process Approach In Measuring Quality Costs Of Construction Projects: Model Development. Construction Management and Economics, 20:179-192. Kagioglou, Michail, Rachel Cooper and Ghassan Aouad (2001). Performance Management In Construction: A Conceptual Framework. Construction Management and Economics, 19:85-95. 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