Benefits of Construction Project Portfolio Management
As one of the most capital-intensive industries, the construction sector’s need for establishing effective project management cannot be overstated. According to the KPMG Global Construction Survey of 223 engineering and construction (E&C) industry experts, innovative leaders (the top 20%) are way ahead in governance and controls. Sixty-nine percent of them have integrated their project management systems with multiple tools for projects and portfolios.
Not surprisingly, 66% of their projects came within 90% of the planned schedule. Achieving this kind of close alignment between planned and actual schedules requires well-established project portfolio management (PPM) practices. Let’s take a look at the role of PPM in construction, why you should consider it, and its many benefits.
What is Construction Project Portfolio Management?
Construction project portfolio management is a strategic approach that enables construction companies to maximize the performance and ROI of their projects by approaching them from a holistic viewpoint. Rather than looking at each project as a silo, PPM helps leadership visualize the big picture and make decisions accordingly.
The focus of project portfolio management is to identify problems at the earliest stage and take corrective actions before any negative impact. Construction project portfolio management processes and tools put key data points in front of decision-makers. As a result, you get a holistic picture across multiple projects.
For example, budget allocations and cost calculations benefit from a portfolio perspective. Cost overruns in one project may appear to be a marginal issue, but overruns across multiple projects could be a red flag calling for immediate attention. On the other hand, a project running under budget could be a lifesaver and absorb overruns from another.
Why You Should Use PPM in Construction
The construction industry landscape has evolved over the years—today, it’s a $10 trillion market with one in five projects being megaprojects (billion-dollar projects), where rewards are high but so are the risks. Despite many ambitious projects, the industry is found to be lagging in productivity, costing the global economy $1.6 trillion a year. Its technology adoption is also lagging, ranking just ahead of agriculture and hunting.
The complexity of construction projects—involving owners, contractors, and suppliers each of whom are engaged in multiple projects at any one time—makes this a challenging problem to solve. The McKinsey report recommends improvements in onsite execution, procurement, and supply chain management, and better design and engineering processes as part of its seven-point solution to bridge this productivity gap.
In each of these recommended areas, project portfolio management can make a huge difference. Looking ahead at the future and establishing rigorous PPM processes can break through the convoluted web of interactions between industry players and projects, and help make sense of what’s happening behind the scenes. Portfolio management functions include:
- Management of resources, risks, and changes across the organization
- Minimizing cost and schedule overruns
- Facilitating collaborative communication
- Analysis of data points available from a large number of projects
As a result of these functions, PPM drives productivity and savings for stakeholders.
Types of Construction Project Information
Data is an important pillar of a solid portfolio management framework. Data is crucial in connecting the dots and making decisions at the right time. Because construction projects are complex and of high scale, they often generate large datasets.
On the one hand, this can be good news because there is a lot of data available, but it can also be challenging, because it can create confusion around what to focus on.
So, let us start by identifying some of the critical datasets in typical construction projects:
- Construction schedules
- Cost estimates
- Procurement accounts per organization
- Cash flow
- Design documents, including drawings and specifications
- Periodic analysis and results during the design and planning stages
- Quality control and assurance records
- Construction field activity
- Field progress measurement
- Inspection logs
- Chronological files detailing project correspondence
- Legal contracts
- Regulatory documents
By gathering and monitoring these data points on a regular basis, and taking actions based on this business intelligence, it becomes possible to get the best results from your organization’s project portfolio.
Data Accuracy in Construction Project Portfolio Management
The cost of bad data and communication in the U.S. construction industry—and efforts involved in consequential rework—is estimated at a staggering $177 billion annually. But data errors continue to occur due to many factors: human errors, unconscious bias, transcription errors, scope creep, miscalculations, etc.
It’s essential to be cognizant of these sources of errors and set up systems to avoid them (for example, set alerts on threshold breaches, use technology to minimize transcription errors).
Let us start by looking at two areas where errors often arise:
1. Understanding Cost Accounts
Most construction businesses audit cost accounts to control escalations. High costs are a matter of concern, but it can be hard to decipher their root cause when their driving factors, such as delays and their causes, are not sufficiently recorded.
For instance, let’s say you want to understand why the construction costs are booking more than estimated. On paper, it may appear that the workforce is taking more time to complete their tasks. Consequently, it may look like this is the cause of increasing costs of construction activities. But the real reason could be late deliveries from a contractor that indirectly impact construction progress. This can be correlated only when delays are actively monitored.
2. Calculating Interest Charges
As most construction projects are long-term, the time value of interest amounts needs to be accounted for. For example, let’s say you estimate that a project will be completed in 2 years at a budget of $3 million. You invest $1 million and decide to finance the remaining $2 million, borrowing $1 million at the start of each year.
Financing costs for year 1 for $1 million at a rate of, say, 5% = $50,000
By the second year though, inflationary rise and interest rate fluctuations could change this equation. Assuming, the inflation rate is 2% and interest rate changes to 6%.
Amount that needs to be financed for 2nd year = $1,020,000
Financing costs for year 2 for $1.02 million at 6% = $61,200
If, at the start of the project, you didn’t predict these changes accurately and rounded off financing costs to $100,000, it would create discrepancies. Inaccurate calculation of interest charges could result in expensive errors and project delays. Therefore, accounting for the correct value of expenditures at different points of time is vital in portfolio planning.
Organizing Information with Data Modeling
When corrective checkpoints are integrated with the IT landscape of your company, errors such as interest rate miscalculations can be avoided. However, the first step towards achieving that is a clear and accurate representation of data.
This can be done through the following steps:
- Create a robust and scalable database model that represents relationships between objects in their current state
- Enable the data model to scale for future changes and volumes
- Ensure that the data model is consistent across all systems within the organization
- Identify gaps between the models used by contractors, suppliers, builders, etc.
- Bridge these gaps and align the external and internal models using regular automated processes or jobs
- Remove duplicates from data
- Establish data transparency with powerful reporting features
- Set up regular reviews and alerts to spot errors
Key Elements in Construction Project Portfolio Management
Once the data framework is defined and governance policies are firmly established to generate trustworthy data points, the portfolio management framework is ready for implementation. Let’s look at some of the PPM functions that enable successful management of construction projects.
- Strong team communication and collaboration:With a portfolio perspective, project heads collaborate with each other, rather than compete or operate in silos. This culture trickles down to sub-teams as well, who produce high-quality work when they communicate often.
- Resource visibility:By rolling up resource requirements, availabilities, and constraints from projects and programs to portfolios, senior executives get useful insights that can help them plan resource allocations. Furthermore, they are able to execute future strategies more effectively.
- Effective crew management: Project portfolio management offers effective tools for project heads to gain visibility into their crew’s schedules, activities, time logs, etc. The increased level of transparency creates a win-win situation for both project managers and their crew.
- Bid and document management: Document management systems simplify drafting and approvals of bids and contracts by integrating standard templates with workflows. Additionally, you can automate this process end-to-end with no manual touchpoints.
- Dashboards and reporting: Senior leaders may find it challenging to assess whether the execution on the ground is aligned with their high-level strategy. Dashboards and reports act as a real-time pulse-check. Therefore, senior executives are able to respond proactively to problems in the pipeline.
Construction Management Benefits
Organizations are often trying to make difficult decisions: evaluating if their current vendor partnerships are successful or if they have sufficient resources to onboard new projects, or even finding ways to optimize their work.
PPM has many benefits that lend well to such decision-making scenarios. Key benefits include:
- Accessibility: Real-time access and visibility to information across projects minimize cost and schedule delays and expedite the decision-making process.
- Optimized productivity: By taking a big picture approach, PPM makes it easier to identify areas where productivity can be optimized. For example, using PPM, we can answer questions such as, what are the optimal modes of transport to take inventory to the site? Can we rotate shifts between resources to produce more output?
- Improved quality: Although the main goal of PPM is to select the right set of projects that bring maximum ROI to the company, its integrated approach indirectly translates to high quality of service. As a result, you see increased customer satisfaction.
Enterprise Project Performance for Construction
To implement all the best practices of portfolio management, we need an integrated tool that brings together the various aspects involved in construction. Enterprise Project Performance offers that with a single platform that unifies portfolios, project controls, and contract management.
EcoSys is a centralized hub that can be used throughout the lifecycle of a construction project. EcoSys supports the necessary processes during design, planning, budgeting, and engineering to execution, risk management, quality assurance, and project closeout.
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