Why is it the construction industry lags other sectors when it comes to productivity? Why are cost and schedule overruns the norm for engineering and construction projects?
The answer to these questions is complicated, as there are many factors that affect project outcomes. However, there is one critical factor that is often overlooked, but has a huge impact on returns and margins – Predictability.
What is predictability and why is it important?
Predictability is simply defined as knowing the outcome of an event as early as possible. For construction projects, we mostly focus on cost and schedule predictability. In order to have predictable projects you need early AND accurate forecasts.
To illustrate, consider projects A and B.
- Project A) Find out about a 20% overrun 20% into the project duration
- Project B) Find out about a 20% overrun 80% into the project duration
Imagine instead your organization had highly predictable projects, like Project A. If you learn about an overrun 20% into the project duration versus 80%, you have ample time for course correcting action.
Keep in mind, this example is just one project. If you multiply this issue by hundreds or thousands of projects across your organization, you begin to see how important predictability is.
An organization’s inability to accurately predict cost and schedule outcomes massively impacts the bottom line and management confidence, to say nothing of investor confidence. Given Wall Street speaks the language of predictability, executives in our industry must also attain fluency in predictability. Again, early knowledge of outcomes enables project teams to address project performance proactively to reduce cost and schedule variance.
You cannot eliminate all surprises, but the quicker you identify them the better chance you have to take action. Simply put, improved predictability breeds better project control and better financial outcomes.
What causes low predictability?
Tasked with Improving the Predictability of Accurate Project Outcomes, the Construction Industry Institute (CII) released findings from its Research Team (RT) 291.
The research revealed that there were distinct and identifiable practices that affected predictability of projects. The research team categorized these practices as follows:
- Human behavior and organizational culture
- Project characteristics (project complexity, external influences, market conditions, project team)
- Forecasting practices (forecasting methods, forecasting data, contingency management, reporting)
- Management processes (project planning & execution, contracting, risk management, change management)
Somewhat surprisingly, the single most important factor in project overruns was found to be the people element, including a mix of leadership, competency and human behavior. RT-291 found evidence of systemic delays in reporting accurate cost and schedule variance, otherwise known as “the hockey stick effect,” named after the typical shape of curves depicting forecast change over time.
If you think about it, this makes sense.
Project teams are typically measured based on the outcome of a project i.e. the deviation of actual costs and schedule from planned. With outcome-centric evaluation, project teams will not feel compelled to become better predictors. Project managers express that the prediction of an overrun at completion raises concern, scrutiny, and suspicion from the home office. Therefore, project managers tend to adopt an optimistic and biased view toward the report of deviations with the hope that future corrective actions will effectively readdress performance. As a result, deviations tend to be reported very late in the project execution process (Back and Grau, “Four-casting for early predictability”).
Achieving high predictability
In order to increase the predictability of projects, executives must first and foremost address the human factor and culture within their organization. By institutionalizing and incentivizing proactive behaviors no longer driven by outcome-centric Variance Analysis but instead by Predictability Analysis.
CII introduced the Predictability Index to help organizations do just that. The predictability index measures a project team’s ability to accurately and timely predict cost and schedule performance by assessing three core competencies:
- Timeliness of forecasts
- Accuracy of forecasts
- Deviations at completion
CII has found that when organizations implement performance measurement based on predictability, deviations are reported earlier, root causes of issues can be identified sooner, corrective action can be taken to mitigate risk, and resources can be optimized across the organization.
Furthermore, organizations that measure and assess predictability are able to utilize predictability as a benchmarking metric. This allows them to analyze and track predictability against variables such as business unit, project size, geographic sector, team leadership etc. Additionally, the benchmarking of predictability performance is also perceived as a reinforcing message within itself, promoting behavioral shifts in the organization that emphasize trust, transparency, alignment, and timely disclosure of project performance information (Back and Grau).
Technology’s role in predictability
It’s no coincidence that in addition to productivity and predictability, the construction industry also lags other sectors in technology adoption. Deloitte notes that Construction invests just 1.5% of revenue into IT, less than half of the average for all industries. Further, KPMG reported that two-thirds of surveyed firms don’t use advanced data analytics to monitor project-related estimation and performance.
This void of technology has contributed to low predictability in the industry, as executives lack visibility and transparency into the project level to properly incentivize and drive predictability across the organization.
There is hope, however, as digital transformation is becoming a critical business initiative for organizations in the Engineering & Construction industry. Many firms are increasingly utilizing technology to successfully deliver projects and achieve performance targets. Digitization can extend the reach of an organization, improve management decisions, and drive efficiency throughout an enterprise.
Another benefit of technology is its ability to help track, analyze, and ultimately drive predictability. Technology can directly impact many of the practices that CII identified as distinctly correlated to predictability:
Project characteristics – technology helps you manage complex projects more efficiently, promotes more effective communication and collaboration between project teams and management, helps mitigate the impact of external influences, and in some cases, software can help directly measure and assess project teams based on predictability.
Forecasting practices – utilizing one software solution as a central hub for project data can help improve forecasting, making sure forecasts are based on consistent, accurate, and real-time information. In addition, reporting can be done much more quickly, and with less manual effort.
Management processes – software solutions can help make project planning, execution, and contract management more efficient and effective. The correct software will also improve risk and change management, and make sure that best practices are standardized throughout the organization. Solutions that integrate management processes with project controls provide the added benefit of making sure project delivery is aligned with organizational strategy, and that all data is accurate and consistent across the enterprise.
Human behavior and organizational culture – there are some solutions on the market that can even help with the human behavior and culture aspect of predictability. Software that leverages predictability indices can help organizations measure, track, and benchmark based on predictability. Shining a spotlight on predictability allows management to reward it, thus helping drive out “optimism bias.”
A digital transformation of your enterprise provides a great opportunity to increase the productivity of your organization. And since predictability is such a critical part of project and organizational success, it is very important to consider predictability as part of your digital transformation strategy.
For more information about how to deliver highly predictable projects as part of your digital transformation strategy, contact us.