The Effective Delivery of Construction Business Development - Case Study Example

CONSTRUCTION BUSINESS DEVELOPMENT A strategic analysis for the effective delivery of Construction Business Development February 14, Table of Contents A strategic analysis for the effective delivery of Construction Business Development 1 February 14, 2010 1 1. Introduction 3 2. Variables for Key Performance Indicators - KPIs 7 3. Creating the Business Strategy 13 4. Conclusions 19 References 20 1. Introduction The conventional performance indicator for successful construction project was based on the factors of adherence to time and cost. There are a number of variables that determine the success or failure of construction projects. Since the past decade, it has been observed that construction firms generally meet the time and cost restraints. In addition, there are certain key performance indicators that allow a firm to provide a higher service quality and a higher efficiency and customer satisfaction while giving the desired profitability (Kulatunga, 2007). This paper would examine research these key performance indicators – KPIs, to create a construct of such indicators that can be mapped to the success of projects. Case studies of a few leading construction firms have been studied and their adherence to the KPIs are discussed. A business strategy is then developed for a selected construction firm and a scenario created to produce the strategy that would cover the KPIs. The paper is organised as follows, section 1 gives information about the construction firms selected for defining the KPI variable and it gives a brief overview of the economy and construction sector. Section 2 discusses various models for performance measurement of construction firms and the KPI. Section 3 presents the business strategy to increase the revenue by leveraging the KPIs. 1.1. Selection of the Construction Firms A scenario is created for the paper. It is proposed that the author of this paper is working as a Business Development Manager with Taylor Woodrow Construction. The firm was created in 1937 and has completed many large construction projects such as Tesco supermarkets, airports, football stadium, roads, theme parks and also some projects under the private finance initiative. The firm was merged in 2007 with Vinci Construction Company. A report would be prepared for the Marketing Director, advising him about the economics in the construction sector and adopting certain KPIs that can be bench marked as successful variables. In addition, project reports from other construction firms have been used to prepare a database. The four construction firms are Balfour Beatty, Alfred McAlpine, Costain Group and Kier Group. These firms are internationally reputed construction firms of almost the same size as Taylor Woodrow Construction. 1.2. Construction and UK Economics Experian (Experian, 2009), the network of leading UK construction representatives have forecast that construction and building activity would decrease by 7.5% in 2009 - 2010 following a decrease in 3% over the previous year. This was mainly due to the recession and the credit crunch that cut off finance to construction firms and individuals. Countries such as Ireland and Spain had over the years posted growth figures of 17% and this had been fuelled by a construction bubble that burst in 2008. Stawinska (2010) writing for Eurostat, Construction activity in the EU 27 provides employment for 14.8 million people and generates revenue worth 562 billion Euro. The construction industry has witnessed periodic cycles of bust and boom and the reasons attributed are due to consumer confidence, non availability of mortgage finance for customers, political events and so on. Following figure gives the indices for the construction industry for EU 27 nations for the years 2000 to 2009. The categories of buildings and construction has dipped from 2007 onwards, while civil engineering that includes construction of dams, roads and infrastructure has risen. There are varying reports as to when the building activity would pick up again. The problem is the excess capacities that have been built during the boom Figure 1.1. Production indices for construction from 2000 to 2009 for EU 27 (Stawinska, 2010) Following graphs are of important statistics relating to the construction sector. Figure 1.2. Important Construction Statistics (Eurostat, November 2008) The first graph shows the index of production, construction and seasonally adjusted growth rates for UK, EU 27 and the Euro Region. The growth rates are compared to the previous period. It is seen that the growth rates for UK have reduced from -14.3 to -8.5 and this is some kind of consolation but still the figures are negative. In the second graph, the index of new orders received and the construction growth rates are given, In UK it is seen that during Q2 of 07, the index was 10.2 while in Q3 of 08, it was -10.8. This indicates an overall negative trend in new projects. The last graph gives the index of building permits in square meters of useful area for non residential buildings. It can be seen that the index had peaked in 2007 but then started dipping confirming that construction industry has dipped. Following graph shows some interesting statistics about profitability of construction industry in the EU 27 region, UK, Belgium and Ireland. Figure 1.3. Important Value Add Statistics (Stawinska, 2010) The above graph would be useful while framing the KPIs as it introduces the terms of value add, the average personnel costs and the apparent labour productivity and these are per employee. The average personnel costs per employee in EU 27 is 27900 Euros and for UK it is 42200 Euros while Ireland has the highest of 49300 Euros and Belgium the lowest at 2800 Euros. These figures show that the cost of labour in UK is the second highest among the EU 27 nations. The next set of data relates to the apparent labour productivity measured in Euros per workers. While EU 27 has 38000 Euros/ person, UK has 75500 Euros/ person and Belgium has the lowest at 7900 Euros/ person with Ireland having the highest at 112100 Euros per person. These statistics indicate that UK workers are the second most productive and in value add to their firms even though they are paid the second highest wages. The next section would examine KPIs for the construction industry and present data from projects of leading construction firms. 2. Variables for Key Performance Indicators - KPIs As explained in the introduction of this paper, merely completing a project as per the schedule cost and time is not a proper indicator of the project success. There are sets of other key performance indicators - KPIs that can be used for effective performance management. 2.1. Frameworks for KPIs Chan (2004) has analysed different frameworks for defining the project success measurement. According to the author, project success is measured by factors such as time, health and safety, participants satisfaction, user expectations/ satisfaction, environmental performance, commercial/ profitable value, quality or the technical specification and cost or the variation in costs. These are indicated in the following figure. Figure 2.1. Framework to measure Project Success (Chan, 2004) 2.2. Performance Measures and Management Kim (2007) speaks of performance measures and management in the construction projects and this is a systematic approach for goal improvement through a continuous process of establishing strategic performance objectives, performance objectives, analysing and reviewing data and then using the data effectively. The model that he is has proposed is illustrated in the following figure and it borrows from the performance measurement process in the information technology industry. The author disagrees with the common perception that the construction industry is too coarse and has many uncertain variables. According to Kim by using the model and certain KPIs, it is possible to control many uncertain variables of men, materials and equipment. The obvious input needed is an understanding of KPIs. Figure 2.2. Performance Measures in Construction (Kim, 2007) 2.3. Defining key variables for KPIs Robinson (2005) notes that KPIs allow performance measurement of projects, organisations, processes and individuals. The KPI is a general performance indicator that concentrates on certain critical outputs and results. To produce the desired results, the underlying processes have to be again benchmarked and run without slack or error. The author recommends that for an entity, there should be a limited number of KPIs. If there are excessive indicators, then some would clash with each other and keeping track of them would be difficult. KPIs are framed after careful collection, filtering and analysis of data. Once the KPIs are framed, they should be undisputed and accepted by all firms in the sector. Following figure gives a set of proposed KPIs that can be used. Figure 2.3. Proposed Variables for KPI measurement (Chan, 2004) Brief explanations and calculations for objective measures are as given below: Time: The duration taken for project completion. Construction time is the absolute time for construction, calculated as the period from onsite work starting to completion. It is given as = (practical completion date - project commencement date). Speed of Construction: is the ratio of gross floor area and the construction time = (Gross floor area in square meters/ construction time in days or weeks) Time variation: It is the percentage change in estimated project after considering and extension of time - EOT by the client = [(construction time - Revised contract period)/ Revised contract period] x 100. Here the Revised contract period = (original contract period + EOT). Cost: Is the degree by which the project is completed as per the budget, It refers to the overall cost of ownership and includes all costs arising from modification, legal claims and rework. It is measure in terms of unit cost and percentage pf net variation over the final cost. Unit cost = (Final contract sum/ Gross floor area in square meters) Percentage net variation over final cost or percent NETVAR = (Net value of variations x 100/ Final contract sum) Net value of variations = (Final contract sum - Base) and Base = (Original contract sum + Final rise and fall - Contingency allowance) Value and profit: is the measure of value by evaluating owners satisfaction and needs. It is quantified by the Net Present Value or NPV = Σ (from n to t=0) NCFt/ (1+r)t. Where NCF is the net cash flow and r is the discount rate. Health and safety: are the extent to which general site conditions are conducive to project completion with major incidents. Accident rate = (Total number of reportable construction site accidents/ total number of workers or man hours put in) x 100. Apparent labour productivity: is the ration of turnover and the number of workers employed. There is another indicator called the employee costs and this is the ratio of total cost of personnel and the number of workers The KPIs for Subjective measures are estimated by survey instruments such as interviews and questionnaires. These include factors such as environmental performance, quality, functionality, user expectation and satisfaction and participant’s satisfaction. 2.4. Constructing a Comparative Database of Key Variables In this section a comparative database of actual KPIs from project are presented. The values are drawn from the Construction Industry Institute (CII, 2005) where member construction firms upload their project data in the form of reports. A sample report is as given below. Figure 2.2. Sample Report on Benchmarking (CII, 2005) Four projects from the CII knowledge centre were examined for the firms Balfour Beatty, Alfred McAlpine, Costain Group and Kier Group and data that corresponded to the KPI variables defined in Section 3.2 was extracted. These are presented in the matrix given below. Table 2.1. Correlation matrix of KPI Variables (CII, 2005) Firm Name Balfour Beatty Alfred McAlpine Costain Group Kier Group Nature of Project New Work New Work Extension Demolish & Build Project Type Acute Hospital Large Commercial Railway Complex Education Complex Procurement Method Enhanced design & build Enhanced design & build Traditional Traditional GFA (square meters) 65000 100,000 30000 50000 Original Contract sum (USD Million) 122 170 61 98 Final contract sum (USD Million) 125.8 177 63 108 Original contract period (days) 910 1100 550 630 Total agree EOT (days) 87 0 60 58 No. of accidents 70 20 Nil 10 KPI Results         Construction time (Days) 997 1100 610 688 Speed of construction (square meters/day) 65 63 62 64 Time variation (%) 0 0 0 0 Unit Cost (USD million/ square meters) 0.02 0.02 0.01 0.02 Apparent Labour Productivity (000 USD/ employee) 77.3 75.6 75.9 76.4 Average personnel costs (000 USD/ employee) 41.2 42.1 43 41 Environmental performance ISO 14000 ISO 14000 ISO 14000 ISO 14000 Quality Satisfied Satisfied Satisfied Satisfied Functionality Satisfied Satisfied Satisfied Satisfied Stakeholders Satisfaction Satisfied Satisfied Satisfied Satisfied Overall project performance Successful Successful Highly Successful Successful The section has explored the concept of KPI variables and defined them. A matrix of th KPI from successful projects of big firms was created. 3. Creating the Business Strategy The previous sections have provided a set of variables that were used to define the KPIs and a comparative database of project variables from live projects were extracted. In this section, a business strategy for using these variables would be framed. 3.1. Creating the Construction Excellence Model Bassioni (2004) has suggested a Confirmatory Factor Analysis – CFA model for construction excellence that has the factors and entities required to gain excellence. The model is shown as below. Figure 3.1. CFA Model of construction excellence (Bassioni, 2004) According to Bassioni (2004), a construction firm has to achieve control over variables in a number of factors and relations indicated in the right side of the figure. The factors are: leadership, customer focus, other stakeholder focus, information and analysis, strategic management, intellectual capital management, people management, partnership and supplier management, resource management, risk management, process management, work culture, internal stakeholder performance, project performance, external stakeholder performance and organisational performance. Again Bassioni (2008), has created a workflow for the CFA model and this is illustrated as below. Figure 3.2. Workflow for the Construction Excellence model (Bassioni, 2008) The factors are segregated into two groups, enabling criteria and results criteria. Strategic management obtains inputs from the customer focus and other stakeholder focus. Output from strategic management is to factors such as intellectual capital management, resource management, risk management, etc. These again provide the inputs for the processes management and all these factors form the work culture that in turn is the enabling criteria. The outputs from the process management are seen in the form of various results as seen in the results criteria. Both criteria are driven by information and analysis thus forming the workflow for the excellence model. 3.2. Creating the Business Strategy Kotler (1999) speaks of marketing as a method of gaining competitive advantage. In the construction business, this would refer to outstanding design and creating a winning combination of 7Ps of marketing. Kotler (2008) argues that the marketing campaign has to use the unique selling points and they should be directed to meet the strategic goals of the firm. The combination of the two would allow a firm to obtain premium rates and demand for its products. Therefore, if the USP is green building, or a very convenient location or excellent construction, then these should become the main points in the marketing campaign. These would help the firm to obtain leadership in cost, quality, technology, brand identity and so on. Corbusier (1985) has written about important milestones in the project life cycle that have a huge impact on the project performance. Some of these milestones are: getting the requirements correctly and freezing them; creating and freezing designs that provide the best utilisation of space for commercial use and also open spaces for recreation. The author notes that while designs should allow some flexibility there should be some control over the scope creep. A proper change management program helps to control adverse and unforeseen impact on cost, time, efficiency, profit and productivity. Preece (2003) has written about the achieving value from the design and when a design is created and implemented, it would imply that value addition will occur when the design is converted into practice. There should be very little variation between what has been constructed and what was designed. Variation can occur because of problems in design, inadequate requirement analysis and no control over scope creep. These factors lead to project inefficiency and loss of productivity. Smyth (2000) also speaks of ‘Constructability’ in the design process and it states that engineers should be actually able to build what has been designed while maintaining the allotted human resources and materials. Therefore, the designer cannot remotely design a structure for any location but he has to be aware of the surroundings, ensure that the process is sustainable and does not require extra skills or resources. Cagno (2007) speaks of project risks that have to be mapped and mitigated. He has proposed a framework that can be used for project management as project risk identification assumes a critical aspect. Please refer to the following figure that illustrates the framework. Figure 3.3. Risk Management and Mitigation in Projects (Cagno, 2007) As seen in the above figure, the business strategy involves identifying the project risks and these are made of technical risks, managerial risks, commercial risks and environmental risks. These risks have to be identified and classified as pre their severity, impact, probability of occurrence by using the risk mitigation process. 3.3. Recommended Business Strategies The following points provide the recommended business strategies. KPIs are process results and all of them are interlinked and integrated. Only a holistic project management process would help in meeting these targets. Attaining them is not the work of accountants, though they may sound like finance terms but the work as to done by engineers and the management. Stakeholders and the management should clearly specify the realistic and desired goals from the project. These can include the desired saleable area, desired selling rate, profit margin, profile of customers and so on. The marketing campaign should be oriented towards achieving these needs and goals. Initial project life cycle phases such as requirements gathering and analysis and design are crucial. They should be carefully thought of to meet the stakeholder’s needs. Once requirements are defined and sign off obtained, they should be frozen. Design should consider factors of constructability within the desired costs and time and once a sign off is obtained, it should be frozen. Risk management is a critical aspect and all possible risks should be identified as per severity, impact and probability and mitigated. 4. Conclusions The paper has explored the construction business development process and used first presented the UK economy from the construction sector perspective. A set of variables for defining the KPI of construction projects was identified. Using peer-reviewed sources, a few projects were examined that met the KPIs and the data of the project performance was extracted to create a database of key variables. Next various aspects of business development and strategy were researched and these were listed as recommended business strategies. References Bassioni, H, A., 2004. Performance Measurement in Construction. Journal of Management in Engineering, 20(2), pp. 42-49 Bassioni, H,A., 2008. Evaluation and analysis of criteria and sub-criteria of a construction excellence model. Engineering construction and Architectural Management, 15(1), pp. 21-41. Cagno, E., 2007. A Multi-Dimensional Analysis of Major Risks In Complex Projects. Journal of Risk Management, 9, pp: 1-18. Chan, A., 2004. Key performance indicators for measuring construction success. Benchmarking: An International Journal, 11(2), pp. 203-221. Corbusier. Le., 1985. Towards a New Architecture. Dover Publications, UK CII, 2005. Benchmarking & Metrics Implementation Toolkit Pocket Guide. Construction Industry Institute, Texas, USA. Eurostat, November 2008. Eurostat -Quarterly panorama of European business statistics - No. 4/2008. [Online] Eurostat Available at http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-DL-08-004/EN/KS-DL-08-004-EN.PDF [Accessed 11 February 2010] Experian, 2009. Euroconstruct 2009: Lean times ahead for European construction. [Online] Experian Available at http://www.corporatewatch.org.uk/?lid=278 [Accessed 13 February 2010] Kim, N., 2007. Performance management method for construction companies. 24th International Symposium on Automation and Robotics in Construction - ISARX 2007, Construction Automation Group, IIT Madras, India. Kotler, P., 1999. Kotler on marketing : How to create, win, and dominate markets. London Simon & Shuster Kotler, P., 2008. Principles of Marketing, 5th European Edition. Financial Times Press, London. Kulatunga, U., 2007. Performance measurement in the construction research and development. International Journal of Productivity and Performance Management, 5(8), pp. 73-88. Preece, C., 2003. Construction Business Development. Butterworth-Heineman, Oxford. Robinson, H., 2005. Business performance measurement practices in construction engineering organisations. Measuring Business Excellence, 9(1), pp. 13-23. Stawinska, 2010. Eurostat - The EU-27 construction sector: from boom to gloom - Issue number 7/2010. [Online] Eurostat Available at http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-SF-10-007/EN/KS-SF-10-007-EN.PDF [Accessed 12 February 2010] Smyth, H. J. 2000. Marketing and Selling Construction Services. Blackwell Science, Oxford. Taylor Woodrow, 2010. Performance Beyond Compliance. [Online] Taylor Woodrow Construction. Available at http://www.vinciconstruction.co.uk/Divisions/Building/index.html [Accessed 10 February 2010] Read More