Choosing the right ERP software is a critical factor in a construction business’s sustainable success. But it can be a nerve-racking process.
An ERP (Enterprise Resource Planning) system is a business management software that allows for the smooth running of accounting processes and company operations. It enables the business to use one system to manage all the business procedures.
ERP has skyrocketed in fame for growing businesses – by simplifying complex processes it provides organizations with a competitive edge.
Construction companies, in particular, benefit a lot from using ERP software due to their detailed and complex payment processes. However, to reap all the benefits of implementing ERP software, it is crucial to make the right choice.
This can be daunting due to its time-demanding nature, which also warrants internal and external collaboration. Each business has its challenges when making this decision.
In this article, the criteria for selecting the perfect ERP software for construction companies is established, along with picking the right vendor – which can be just as important.
You can also find a detailed analysis of the points to keep in mind when transitioning to a new ERP system in the article – 6 Points to Consider When Transitioning to a New ERP
The Right Approach to ERP Selection
Procedures
For construction companies, specific processes are more significant than others. For example – customer relationship management (CRM), job costing and construction accounting, managing bids and creating estimates, budgetary and variance analysis, human resources (HR), and month-end financials like payroll management and billing. A collaborative view of all these procedures needs to be taken into account when deciding whether a single or integrated system will fit the company’s requirements or else a system with separate applications would serve better.
Size
As deciding on the best ERP system according to your organizational needs is a complex decision with many variables it is wise to also consider the size of your organization.
There are 3 tiers of ERP systems according to the scale of the business.
Businesses with revenues above $500m are considered large, for whom complex systems are built.
Businesses with yearly revenue between $20m to $250m are considered mid-size, while the tier 3 systems are relatively cheaper and easy to implement – these are focused on small companies.
However, choosing between these tiers is a complex process with many organizations losing money by making the wrong choice, with additional associated costs to correct this mistake.
This is because there are a lot of other factors at play when you’re choosing a tier, like how many people are simultaneously using the system, the number of transactions taking place, whether the bids are of a complex or simpler nature, the number of subcontractors allowed, etc.
For example, in the case of a construction company with various high-end projects, like skyscrapers, that uses many contractors – going for Tier 1 is obvious.
However, if you’re technically a mid-sized company with the associated number of employees and revenue streams, you might automatically choose Tier 2 – but this might be a wrong choice if you only have a few contracts with a relatively higher value, and fewer subcontractors and transactions taking place.
Conversely, Tier 3 might not suit a small company with lots of small contracts, resulting in a high number of transactions and subcontractors.
Therefore, to save considerable costs by making the wrong choice and then spending time and resources correcting the mistake, it is essential that organizations give this decision a fair amount of thought and make data-driven decisions.
Placement
According to your organizational requirements and size, the next step is to choose between three deployment methods – hosted, on-premise, or cloud-based.
By allowing access to real-time data via mobile devices, very useful for field technicians on the job site, cloud-based systems are proving to be the top choice.
This is also due to their cost-friendliness as well as the fact that it is a more efficient system that creates optimum value with fewer resources and provides safety for the company data.
Horizontal and Vertical Systems
A further choice to make when considering ERP systems is whether you want an industry-specific solution and the configurational capabilities of the chosen system.
Horizontal Systems
Horizontal systems offer features like project management, a robust budgeting system, payroll, estimation, etc. For construction companies, the particularly useful features include being able to create project prototypes, user-defined progress billings, and tracking projects, with many horizontal systems also coming with accompanying mobile apps for on-site users.
They do not, however, allow you to change order management or project cost categories – features that are especially useful to the construction industry.
Vertical Systems
With vertical ERP systems, you get features like job costing, bid management, job progress billing, field time entry, payroll management, reporting, etc.
Some vertical systems also come with property management elements specific to the needs of the real estate industry.
But vertical systems are not as advanced as horizontal systems and, mostly, do not offer mobile applications.
Ultimately, organizations need to consider business process requirements like billing, bidding, payroll, month-end closures, procurement, etc. to make the final decision.
You must choose a system that is specific to your organizational needs. And very clearly define needs in your RFP (Request For Proposal) so the supplier can set up the system per these requirements.
Find out how AP automation can help you achieve sustained success by reading – Revolutionizing Construction Company Finances: Why Account Payable Automation is Essential
5 must-haves in a construction ERP
For construction ERPs to provide optimum value, in addition to some common characteristics, some distinct features are also required.
1. Estimation of Costs
An estimation of the overall costs of a project no matter the nature – whether it’s construction, renovation, internal, external, etc. – is the fundamental component of every construction ERP system.
For the client and contractor to reach an agreement a basic estimate of the final cost and revenue must be made. Several factors go into creating this estimate and adjusting for the resulting discrepancies. For example – variable cost calculations like percentage of completion, the time and material required, actual and estimated costs, budget comparisons, storage costs, an audit of the changes, etc.
2. Variable Accounting Systems
Construction ERP systems in particular call for a crude methodology for financial management. Top of the range, refined construction ERPs include features like; change order management, contractor and vendor indexing, efficient management of materials, equipment inventory, and contracts, accounting for time, billing, and taxes, etc.
3. Raw Payroll Processing
The costs, transactions, and payroll processes of construction companies are inherently different and much more complex than other industries.
In the case of payroll, construction companies need to compare actual hours worked with estimated costs of operation and also provide an in-depth analysis when reporting. These complexities include accounting for costs related to labor, tax, insurance, and unit costs, as well as reporting for unit productivity, labor cost, EEO, state and federal reporting, and FTE background investigations, synchronized payroll processing, cost revenue consolidations, multi-project capable, etc.
4. Management and Accounting
Due to the sheer volume of materials and equipment required by construction businesses, a suitable ERP should be able to efficiently manage and account for items like small hand-held tools, to heavy machinery like bulldozers and excavators.
5. A Thorough Financial Reporting System
When choosing the ideal ERP system for a construction company, it should be ensured that it offers superior financial reporting tools like asset tracking, balance sheet management by project, profit and loss management per unit and product mix, optimum resource application analysis, are multi-location and company, etc.
This is because construction ERP is focused on singular projects, rather than following conventional organizational doctrines.
View a list of some of the best ERP systems for construction companies – Best Construction ERP (2023)
Choosing The Right Vendor
These are some of the points a construction company must look for when determining the right ERP software pick. Conversely, there are some glaring problems that need to be avoided when choosing the vendor to do business with.
Choosing an ERP that caters to your niche
It is crucial to pick the right dealer to help you put the right ERP system in place – one who has experience in your operational niche.
If you operate in the housing industry and the retailer is relaying information regarding massive DWV systems, they are likely more experienced with builders of large construction projects like skyscrapers. If you deal with things like repairing, installations, or painting, make sure the vendor is familiar with subcontract jobs rather than general contractors.
You don’t “click” with the dealer or their team
It is important that the dealer as well as their entire team – who will be performing the work for you – are familiar with your organization and its processes.
Ineffective prototypes
If the dealer knows your business and has experience with similar companies, they should provide you with a great variety of prototypes and have a clear idea of how to go about implanting their construction ERP to provide you with optimum value.
Complex execution
Whenever introducing software to the organization, it is essential to keep it as simple as possible. Technology can be only as useful as those who operate it. Even the most amateur employees should be able to utilize the system efficiently to provide true value to the company.
Exceeding deadlines
Take note of whether vendors are adhering to deadlines for information when searching for the right ERP. If they are lacking in this department at this stage, it’s very likely to happen when you’ve gone through the buying process.
The ERP requires excessive personalization
Sometimes, a little customization is required over time but if the system needs customization at the very beginning, likely, it is not built for your organizational needs. Furthermore, it could be that the vendor is proposing customization just to add to the cost of the ERP system.
Vested Vendor
Choose a dealer who doesn’t treat your business only as a way to earn money but as an entity they care about. A great dealer should be professional, helpful, and detail-oriented. Pointing out factors that you might have missed.
To Sum Up
In conclusion, selecting the right construction ERP system is critical for the success of any construction project. With the right ERP solution, construction companies can streamline their operations, improve communication, and increase efficiency. However, the selection process can be overwhelming, especially with so many options available in the market. To make an informed decision, construction companies must first evaluate their needs, prioritize their requirements, and conduct a thorough analysis of the available options, including vendors.
By doing so, they can choose an ERP system that aligns with their business goals and helps them achieve success in their projects.
