RICS Conference, Robinson College, Cambridge. 17 th November 2005

1. PERFORMANCE MEASUREMENT IN CONSTRUCTION RICS Conference, Robinson College, Cambridge. 17th November 2005

2. Presenter • Nick Curran BSc MRICS • Chartered Quantity Surveyor • 8 years experience on site in construction • 7 years experience working with business systems • Combining industry experiences • Working with major industry players to provide performance measurement solutions • Cost capture • Cost Value Reconciliation (CVR) • Earned Value Analysis (EVA) • Client defined cost reporting & management hierarchies • Integration with client systems • Works Order management for fixed term maintenance

3. Experiences with solutions

4. Overview • What measures do we have for Performance Management ? • Why use Performance Management and what benefits can it bring ? • What are the components of EVA ? • How can technology assist ?

5. Detailed Agenda • Define Performance Management – what does it mean ? • Why would we want to measure performance ? • What does it mean to the Construction Industry ? – EVA & KPI’s • How has it been achieved traditionally what were the problems ? • How is the industry changing ? • What is being measured now & how ? • Open Book Accounting & the drive towards EVA • What role is IT playing ? • More about EVA • What is it ? • Where did it come from ? • What are the barriers ? • Why are they now being broken down ? • Case Study • Open Questions

6. Contractors 142 T/O £100M + 154 T/O £50M - £100M 212 T/O £30M - £50M 1,135 T/O £10M - £30M 7,118 T/O £2M - £10M 206,549 T/O £0 - £2M Construction Industry Summary Consultants Top 30 QS Firms Top 50 Architects Top 100 Consultants

7. Construction Spend • Total construction output in 2004 £102.4 billion • Total construction spend in 2004 (new orders) £38.7 billion • Split by • Public Housing £1.6 billion • Private housing £12.2 billion • Other Public £6.7 billion • Private Industrial £2.5 billion • Private Commercial £11.9 billion • Infrastructure £3.7 billion • Water £598 million • Sewage £391 million • Electricity £358 million • Roads £1.06 billion • Other (gas, communications, air, harbours & railways) £1.3 billion Source – DTI

8. Statistics – Project Performance In 2004; • 55% of all projects were delivered within budget • 63% of all projects were delivered on time • Constructing Excellence demonstration projects showing client satisfaction is rising but cost predictability remains elusive • 49% delivered within budget or better • 62% delivered on time or better Source – National Audit Office

9. Statistics – Project Performance Other research has indicated that; • 70% of projects are: • Over budget • Behind schedule • 52% of all projects finish at 189% of their initial budget • And some, after huge investments of time and money, are simply never complete Source: The Standish Group

10. Statistics – Project Performance Huge potential for improvement in areas of; • Performance Management • Cost Management • Supply Chain Efficiency • Knowledge Sharing • Identifying & Adopting Best Practice Source – National Audit Office

11. Define Performance Management • The measurement of performance or in simple terms… • Seeing how well we are doing • At a given point in time based • Against defined criteria i.e. measures • Performance Measurement Techniques • Performance measurement techniques are the methods used to estimate earned value. different methods are appropriate to different work packages, either due to the nature of the work or to the planned duration of the work package * *Source – APM Website

12. Why Measure Performance ? • If you need to improve you need to know where you are now • Provides an “Early Warning” signal for prompt corrective action. • Bad news does not age well. • Still time to recover • Timely request for additional funds

13. Performance Management & Construction • Construction Industry measures… • Time • Cost • Quality

14. Construction Industry Measures • Plan Comparisons • Comparisons of planned v actual progress • Cost Value Reconciliation • Profitability of a project at a given point in time • Earned Value Analysis (EVA) • Predicted profitability of a project at a future point in time • Industry KPI’s • Introduced by Government backed initiatives such as M4i • Contract KPI’s • Measuring service levels on a particular contract

15. Traditional Methods • Plan Comparison • Using the original hard copy plan, highlighter pen and a ruler • Cost Value Reconciliation • Measure against a BQ for value • Historic cost from head office accounts system for costs • Re-key data from these systems reported in Excel or similar • EVA • Manual analysis until evolution of computer systems in 70’s • Accountants, estimators, buyers, planners and QS’s have different aims • Not attempted in the UK construction industry for 30 years • Too hard to pull together data • KPI’s • Retrospective analysis of historic data • Not pro-active • Unreliable to benchmark

16. Changing shape of the Construction Industry • Major changes in UK construction industry • Latham report in 1994 • Egan report in 1998 • Modernising Construction 2001 • Accelerating Change 2002 • Leading to changes in procurement • Performance based contracts • Benchmarking • Partnerships & Frameworks • Open book accounting • Resulting in increased use of technology • Demand for robust systems • Capturing data at source • Standardising methods of capturing performance • Using core data for performance management

17. What is being measured now and in future ? • Performance based contracts • Response times • Completion times • Service Level Agreement’s (SLA’s) • Productivity improvements • Cost savings • Benchmarking across contracts, contractors and regions

18. What is being measured now and in future ? • Partnerships • Actual costs the basis for payment • Open book accounting • Access to data • Auditability • Financial risks are part borne by the client • Client driven trends towards EVA techniques • Re-use actuals for future estimating • In summary; • More shared information • Greater client access to contractors systems • Commercially available software

19. Open Book Accounting - A Definition “A generic expression describing a level of access to accounting data that would not normally have been available under a conventional procurement method. The level of access must be agreed on a case-by-case basis to reflect the circumstances of the partnering arrangement and the need for access to certain data to monitor performance or benefits arising” Source - Defence Estates

20. Open Book Accounting - Points to Consider • Access to Accounting Data • Where is this information currently maintained ? • At what level is access required ? • How will access be achieved and achieve consistent audit ? • Performance Measurement • Target Price ? • Pain/Gain share ? • Cost Reimbursable ? • KPI’s ? • Benchmarking ? • Earned Value Analysis ? • Work Breakdown Structure • Common levels of comparison between cost collection, target estimate and project plan

21. Accounts Estimating Asset Management Project Management Access Excel Project Accounting…Audit CLIENT Commercial

22. CLIENT VIEW Project Accounting Committed Costs Accrued Costs Actual Costs Activity/WBS Costing Valuations & Applications Benchmarking KPI Analysis EVA Reporting Contractor Estimating Libraries Import Bill Compile Detailed Price Submit to client Contractor Accounting Treasury Functions Payment Control Cash Control Corporate Financial Management Project Accounting … Client View

23. A Sample Work Breakdown Structure • Using something simple like pizza delivery operation as an example Serve Pizzas to Customers Provide the Place Cook the Food Serve Customers (Others) Make the Dough Cook the Sauce Build the Pizza

24. Client Minimum Requirement Audit Spreadsheets Access Databases Client Driving Project Accounting ERP Financial Reporting & EVA Benchmarking Client Driven Project Accounting Contractors ‘Back Office’ Accounting

25. The site • where the profit is made or lost • where majority of resources are employed Projects • The Head Office • non profit making people • traditionally where all the money on IT is spent Buying Estimating Plant Head Office Accounts IT - The role it has to play … Historic Least Functionality Most

26. IT - The role it has to play … Open Book Most Contracts & Clients Functionality Buying Estimating Plant The Head Office used for producing standard historical, statistical and legislative information Head Office Accounts Least

27. IT - The role it has to play • Substantial IT advancements over recent years • Software • Infrastructure • Most organisations throughout industry in general have installed specialist software applications • Delivering Benefits • Business Process Automation • Time & Cost savings • Reduction in Errors • Single database - Visibility of information • Meaningful management reports

28. IT - The role it has to play • Specialist Construction Software Applications • Estimating • Pre-contract software providing ability to compile a detailed resource based estimate • Accounting • Payment & Cash Control • Financial Reporting • Project Planning • Managing time and resource • Collaboration & Document Management • Sharing information electronically • The gap - Client driven Project Accounting

29. Project Accounting … The problem • Traditionally no option other than • In-house developed • Access Databases • Spreadsheets • The problems • No Integration to source transactions • Open to Errors & Abuse • Impossible to provide consistent Audit across all Projects • Efforts by suppliers of Accounting software to bridge the gap are flawed due to product design

30. Project Accounting … The Solution • Integration to EXISTING back office applications • Estimating • Accounts • Project Planning • Clients Systems • Project Driven • Client and Project based WBS Activity Coding • Provide both Cost & VALUE Management • Applications for Payment • Schedule of Rates for Recovery • Recoverable & Non Recoverable Costs • Ability to Audit and Benchmark across Contactors

31. More About EVA • “Earned Value Analysis” is an industry standard way to: • Measure a project’s progress • Forecast its completion date and final cost • Provide schedule and budget variances along the way • By integrating three measurements, it provides consistent, numerical indicators with which you can evaluate and compare projects.

32. What is EVA ? • It compares the PLANNED amount of work with what has actually been COMPLETED, to determine if; • Cost • Schedule • Work Accomplished Are progressing as planned • Work is “Earned” or credited as it is completed • Often done informally without realizing it for example • 30% time used • 30% allowances spent • Therefore if 30% of the work is done we must be OK ??

33. EVA Terms • BCWS - Budgeted Cost of Work Scheduled • Planned cost of the total amount of work scheduled to be performed by the milestone date. • ACWP - Actual Cost of Work Performed • Cost incurred to accomplish the work that has been done to date. • BCWP - Budgeted Cost of Work Performed • The planned (not actual) cost to complete the work that has been done.

34. More EVA Terms • SV: Schedule Variance (BCWP-BCWS) • A comparison of amount of work performed during a given period of time to what was scheduled to be performed. • A negative variance means the project is behind schedule • CV: Cost Variance (BCWP-ACWP) • A comparison of the budgeted cost of work performed with actual cost. • A negative variance means the project is over budget.

35. Even More EVA Terms • SPI: Schedule Performance Index • SPI=BCWP/BCWS • SPI<1 means project is behind schedule • CPI: Cost Performance Index • CPI= BCWP/ACWP • CPI<1 means project is over budget • CSI: Cost Schedule Index • CSI=CPI x SPI • The further CSI is from 1.0, the less likely project recovery becomes.

36. Shortcomings of EVA • Quantifying/measuring work progress can be difficult. • Time required for data measurement, input, and manipulation can be considerable. • Difficulty in aligning progress measures, levels of cost collection and project plan WBS

37. The Role of the Surveyor • Traditional Roles • Setting Baselines • Agreeing WBS • Measuring Progress • Auditing Cost Allocation • Calculating current state of play – CVR & EVA • Using data for forecasting • New Roles • Advising on systems • Implementing systems • Consulting on implementing best practice & processes • Designing WBS for projects

38. Information Efficiency Transactions

39. Information What percentage of information owned by a company is not properly managed?

40. Multiple Choice A - 30% B - 50% C - 70% D - 90%

41. Multiple Choice D - 90%

42. Corporate Data Types • Unstructured data doubles every two months (IDC) • Problem is compounded in the Construction Industry • Collaboration systems are the tip of the iceberg / problem • Organisations require a strategy for all of their content Structured Data 10% Unstructured Data 90% Source: Goldman-Sachs

43. Efficiency What percentage of Professionals spend over 2 hours per day searching for information?

44. Multiple Choice A - 34 B - 46 C - 51 D - 68

45. Multiple Choice C - 51

46. Corporate Data Types Time business professionals spend per day searching for information needed to do their jobs Source: Delphi

47. Transactions What is the percentage cost saving per transaction currently being achieved by electronic trading

48. Multiple Choice A – 24% B – 48% C – 63% D – 75%

49. Multiple Choice C – 63%

50. Transactions E Trading • GAP estimates that the cost per invoice has reduced from £12 to £4.40 • Reduction in handling time from 8 to 4 days Source: John Foster, IT Manager, GAP Group