IMPROVING PROFIT MARGINS IN AEC:

VISIBILITY, RISK-MITIGATION, AND

PROJECT MANAGEMENT
September, 2014
Kevin Prouty, Senior VP, Research,
Nick Castellina, Research Director,
Business Planning and Execution

Report Highlights
p3
Visibility across
multiple projects is a
major challenge that
ties directly into
managing risk and
profitability across
those projects

p3
Success is all about
getting the
information to
people who can use
it

p7
Everything starts
with getting the
quote right

Based on our survey of Architectural, Engineering, and

Construction (AEC) companies, this report will show how
successful AEC companies manage information, resources, and
risk.

p11
Users of ERP and
project management
applications perform
better in every
meaningful category

2
From standardized
business processes,
to skilled-based
resource
management and
basic exceptionbased management;
Leaders are likely to
have a significant
edge over Followers.

Improving Profit Margins in AEC: Visibility, Risk-Mitigation, and Project Management

AEC companies have traditionally had to shoehorn business

processes from other industries into their own processes and
these have usually been very manual and labor intensive. And
when it comes to dealing with these business processes, the
focus has been on managing expensive and scarce skilled labor,
as well as managing costs on a per project basis. Aberdeen
research has consistently shown that the key challenges facing
AEC companies are around visibility of information and
managing delivery to meet customer expectations. Based on the
experiences of over 70 survey respondents, this report looks at
how successful AEC companies are connecting all of the right
people to the right information, so that the right decisions are
made at the right time.
The Business Environment in AEC
In Aberdeens 2014 Project and Portfolio Management
Benchmark Survey we surveyed and talked to 73 AEC companies
about their business environment and how they have addressed
key challenges in their own businesses.

In this report, Aberdeen groups

survey respondents into two
maturity classes:

Leaders: Top 35% of

respondents based on
performance
Followers: Bottom 65%
of respondents based on
performance

Figure I: Top Challenges in Architecture, Engineering, and

Construction
Lack of available resources (skilled or
other)

47%

Lack of visibility across multiple projects

45%

Increasing risk exposure across project

portfolios
Inability to determine profit potential of
new projects and price accordingly
0%

26%
22%
20%

AEC
40%

60%

Percentage of Respondents, n = 73
Source: Aberdeen Group, September 2014

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Improving Profit Margins in AEC: Visibility, Risk-Mitigation, and Project Management

As you would expect from companies that have a large

dependency on skilled labor, the lack of necessary resources is a
top pressure. But, interestingly, visibility across multiple projects
is also a major challenge, which ties directly into managing risk
and profitability across those projects.
As you can see from the sidebar, when it comes to the pressures
that AEC companies face, they are focused on effectively
managing projects. Its about managing risk more discretely,
managing projects better, and managing resources, as well as
improving customer management and visibility.
The short of it is that companies have to be better at managing
risk. Not like the big amorphous risk management category you
see in finance organizations, but managing risk at the discrete
business process level. AEC companies are feeling the pressure
and facing the challenge of understanding risk at every
milestone, every delivery date, and every customer change
order.

Leading AEC firms were asked to

indicate their top two pressures:

Build assessment of risks

into various stages of the
project (stage gate): 48%
Define and implement
standard project
management best
practices: 44%
Improve communication
with clients throughout
projects: 33%
Improve deployment of
skilled resources across
multiple projects: 26%
Improve visibility into
project data: 19%

Leaders are Better at Managing it All

So now that we know the environment that AEC companies are
working in, lets take a look at what leading AEC companies
actually do that makes them better. The sidebar on page 4
shows how we determined who is a Leader and who is a
Follower. From there, this section will look in detail at the
business capabilties that Leaders have andthat Followers dont
have.
Figure 2 is a great place to start. It is all about getting the
information to people who can use it. Figure 2 shows that
Leaders are better at basically everything to do with making
information available for decision-making.

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Projects delivered on-time or

early:
o Leaders - 89%
o Followers - 61%
Projects delivered within
budget:
o Leaders - 92%
o Followers - 71%
Improvement in project
profitability over the past
year:
o Leaders - 8%
o Followers - 2%

Figure 2: Improving Project and Financial Visibility

Leaders

70%

Percentage of Respondents, n = 73

In Aberdeens 2014 Project and

Portfolio Management Benchmark
Survey, AEC organizations were
ranked on the following criteria:

59%

60%
50%

59%

56%

63%

56%

44%

42%

39%

40%

Followers

30%

26%

30%

21%

15%

20%
10%
0%
All project
information is
captured in a
central
repository

Real-time
visibility into
project
deliverables

Ability to share
Real time
Real time
visibility into all visibility into all and integrate
project budgets / data with the
project
extended
milestone and estimates versus
enterprise
actual costs
schedule status

Source: Aberdeen Group, September 2014

Automated
integration of
project /
portfolio
management
data with
financial
management

We can see that critical information is provided and shared

across many siloes. It is centralized, visible, shared, and
integrated. This isnt just about project management. Its also
about sharing resource information, customer information, and
financial information.
The next area where Leaders outpace Followers is around risk
management. Figure 3 shows us exactly where Leaders lead.
Figure 3: Making Risk-Based Decisions
Percentage of Respondents, n = 73

Improving Profit Margins in AEC: Visibility, Risk-Mitigation, and Project Management

80%
70%
60%
50%
40%
30%
20%
10%
0%

Leaders

Followers
67%

56%
34%

41%

36%

41%

32%

22%

Ability to perform Ability to perform Risk information

Ability to do
can be embedded
profitability
demand planning 'what-if' scenarios
into project plans
analysis
and forecasting

Source: Aberdeen Group, September 2014

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Improving Profit Margins in AEC: Visibility, Risk-Mitigation, and Project Management

Leaders, while still leaving room for improvement in certain

areas, are twice as likely to be capable of running a profitability
analysis on projects and portfolios. This, and the capability to
run what-if scenarios, makes Leaders more likely to know what
current and future financial impacts will affect projected sales
and cause changes to existing projects.
That is not just a project management capability, its a basic and
key financial modeling capability applied to projects that many
companies use ERP to manage. Figure 3 shows that Leaders are
almost twice as likely to be capable of doing demand planning
and forecasting. Again, its not a project management-specific
capability, but a straight up good business capability with
project overtones.
Now we get to the meat of the capabilities; project management.
Project Management is the core of any AEC company. It is how
their resources are managed and how they sell their value. It is,
or should be, how they manage their finances. Figure 4 reveals
how much better equipped to effectively project manage
Leaders are over Followers. From standardized business
processes, to skills-based resource management and basic
exception-based management; Leaders are likely to have a
significant edge over Followers.

25% of our labor goes

to managing the
finances of our
projects. With our new
business system, its
down to 8%.
~ Sr. VP of Engineering,
US$500M Waste Water
Engineering Firm

Aberdeen defines ERP as an

integrated suite of modules that
forms the operational and
transactional system of record
upon which any business is
based. With its roots in Material
Requirements Planning (MRP) it
is most ubiquitous in the
manufacturing industries, but
has truly expanded beyond these
boundaries to become a mature
business application that
provides value to a far more
extensive set of industries. ERP
systems provide much-needed
capabilities, such as
management of financial,
product/inventory, human
capital, purchasing, and other
transactional data within one
environment.

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Improving Profit Margins in AEC: Visibility, Risk-Mitigation, and Project Management

Figure 4: Effective Project Management

Percentage of Respondents, n = 73

Leaders
70%
60%
50%
40%
30%
20%
10%
0%

Followers
63%

54%
44%

37%
23%

41%

37%
26%

Required skills are Decision-makers

Project
Management best mapped to project are notified in
real-time as
resources
practices are
exceptions occur
implemented and
standardized

Standard
performance
metrics
established to
assess project
health

Source: Aberdeen Group, September 2014

Today, 15% of leading AEC firms

have mobile access to project
management technology, in
comparison to 5% of Followers.
Further, another 44% of Leaders
plan to implement this in the
near future, in comparison to
35% of Followers.

But the one item in Figure 4 that stands out is one that many
people miss in its significance: standardizing performance
metrics, which Leaders are almost twice as likely to do over
Followers and is a key process that even some Leaders miss. It
allows the normalization of performance tracking across
multiple projects and lets finance quickly integrate and track
projects with customization and manual collating of
information. In the end, standardization is the foundation of a
uniform and standardized project tracking system.
Technology Enablers Should Make the Project World Go Round
We have established what some of the critical business
capabilities are for AEC companies. But to get to the point where
you can have the capabilities of a leading AEC company,
technology enablers will have to play a role. You cant get there
and be profitable with all manual business processes, but it also
doesnt mean that you have to over-automate every business
process. You do, however, need to prioritize and look at what the
Leaders tend to do from Table 1.

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Improving Profit Margins in AEC: Visibility, Risk-Mitigation, and Project Management

Table 1: Leaders Rely on Technology

Technology

Leaders

Followers

Project Costing
Document Management
Budgeting and Forecasting Applications
Quoting and Estimating
Procurement
Time Tracking Against Projects
Expense Tracking Against Projects
Resource/ Workforce Scheduling
Customer Relationship Management
Contract Management
Enterprise Resource Planning
Change Management
Subcontractor Management
Project Portfolio Management

89%
74%
71%
70%
70%
68%
64%
63%
60%
59%
56%
52%
52%
52%

64%
60%
46%
41%
38%
51%
57%
47%
48%
45%
38%
43%
41%
39%

Source: Aberdeen Group, September 2014

One point that jumps out from Table 1 is that project costing is
almost universal for AEC Leaders but only two-thirds of
Followers are using it. Even some basic business applications,
like procurement and ERP, are far more likely to be used by
Leaders to support business functions that go beyond project
management.
An important area that we usually look at for AEC companies is
quoting and estimating. This is the foundation for profitability
for AEC companies. Everything starts with getting the quote
right. Table 1 shows that almost three-quarters of Leaders use
technology to support the process while less than half of
Followers use the same technology.
But we want to focus on a couple of areas that really show the
business maturity level of Leaders in AEC. The first one is change
management. Leaders are about 20% more likely than Followers

Our estimating and

site management
operations have been
disconnected for years.
We are trying to find a
way to get them
linked.
~ Director of Project
Management, US$100M
Construction
Management Company

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Improving Profit Margins in AEC: Visibility, Risk-Mitigation, and Project Management

to use an application to support change management. Change

management tends to be where AEC companies make or break
their projects. Not knowing the risk of impact, and especially not
making the information visible, is why projects fail when they
should have succeeded.
The second area is subcontractor management. Again, Leaders
are around 20% more likely than Followers to use application
support for managing subcontractors. In the construction
industry, managing subcontractors is especially important, but it
is also dynamic and almost always loaded with risk. Having
enterprise-wide visibility into contractor performance and
capabilities can be a key advantage.
Case Study Pinnacle Construction
As an example of the challenges in the AEC industry, as well as
creative solutions to those challenges, Aberdeen talked with
Cory McFarlane of Pinnacle CSG. Pinnacle is a full
service construction management company and provides
construction management, construction design, and
construction technology consulting. Cory is the Chief Visionary
and is responsible for Pinnacle's adoption of technology and
new business processes.
One of the key challenges that Pinnacle, as well as most other
construction companies, faces is the ability to operate remote
job sites in synchronization with the operational headquarters.
Getting operational and financial information to and from sites
has traditionally been based on manual labor and paper. Other
important challenges have been managing subcontractors,
customer requirements, and collaboration, and timely financial
reporting.
Cory stated that Pinnacle made the strategic decision to move
beyond the very paper-based business processes that are almost
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Improving Profit Margins in AEC: Visibility, Risk-Mitigation, and Project Management

universal within the construction industry. Pinnacle did a top-tobottom assessment of the technology and business processes
that they would need to be a Best-in-Class operation. The critical
components of the solution stack are:
Sage 300 Construction and Real Estate - Manages all
accounting and finance, human resources, and
estimating
Sage Construction Anywhere - Mobile application to
connect job sites to business systems
DocuSign - Manages workflow and approvals for
contracts and change orders
Other 3rd party systems round out the solution
stack: Office Connector, MyAssistant, and GC Pay
While Cory stated that Sage was the foundation for all of the
progress that Pinnacle has had, he called out Sage Construction
Anywhere in particular. He said that time tracking on job sites
used to be just paper time sheets that got faxed daily into
corporate. The sheets would then be entered into the accounting
system. This process was slow, labor-intensive, and error prone.
Sage Construction Anywhere, and in reality most mobile
systems, allows for a direct entry of time information into the
Sage accounting system. It eliminates several steps and comes
close to error-proofing the process. Pinnacle has seen close to a
90% improvement in labor hours needed to track project labor.
Another significant process change has been the ability to use
workflows from Sage and DocuSign to submit and approve
change orders from customers and subcontractors. The
construction industry operates on proper and efficient
management of change orders. The new business processes and
technology provide not only an efficient process, but also the
ability to quickly assess the impact and risk on change orders.
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Improving Profit Margins in AEC: Visibility, Risk-Mitigation, and Project Management

One area that Cory called out as a major change to their business
process was subcontractor management. Using their portfolio of
applications, Pinnacle collects subcontractor information on
safety compliance, quality, change order management, and
delivery performance. Using these parameters, and a few
others, Pinnacle benchmarks all subcontractors. When new
projects come up or when an existing project needs more
support, Pinnacle can easily assess the risk and capabilities of
each of the subcontractors. This saves time in the bidding
process and significantly reduces risk in subcontractor
management. Overall, a solid technology stack and new
business processes have helped Pinnacle improve subcontractor
management, risk management, change orders, and operational
costs.
The Results for AEC Companies
All of the discussions above mean little without talking about the
results that AEC companies achieve with their own metrics.
Table 1 already showed us that Leaders tend to be bigger users
of technology and applications than Followers. Many of the
capabilities and enablers from Table 1 are part of ERP and
project management applications. Table 2 shows us the
comparison of AEC companies that use ERP and project
management applications versus companies that dont use
them.

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Improving Profit Margins in AEC: Visibility, Risk-Mitigation, and Project Management

Table 2: The Results in AEC

Average Performance

ERP and Project

Management

No ERP and Project

Management

Average cost of a typical internal

change order
Improvement in time-to-decision
over the past year
Percentage of customers that report
better than average satisfaction
Percentage of projects delivered ontime or early
Percentage of projects delivered
within budget
Improvement in project profitability
over the past year

$32,788

$43,760

11%

2%

75%

71%

81%

68%

84%

79%

7%

5%

Source: Aberdeen Group, September 2014

It is quite startling to see the difference in just the average cost of

a change order. Assuming that the sample size dampens out
significant variations in business type, a delta of $11,000
between users and non-users of ERP and project management
applications is incredibly significant. When you consider that a
typical large construction project has over a hundred major
change orders, you are now at a $1M change order cost delta
between Leaders and Followers. That is $1M straight to the
profitability of a large construction project, if the change orders
are internally generated.
A more basic and even more important metric is the change in
profitability. Just the two percentage point difference between
users of ERP and project management is a big enough difference
to make any CFO of an AEC company sit up and take notice.
Users of ERP and project management applications perform
better in every meaningful category.

Change orders are the life blood of

construction and AEC in general. But
not all change orders are created
equal:
External Change Order: These
are the change orders a customer
requests based on a need to alter
a design or
implementation. These are
typically high margin
opportunities because of the
leverage the AEC company has in
the middle of a project.
Internal Change Order: These
are change orders that are very
common, but not desirable. This
usually happens due to
unforeseen situations during
construction or execution. It can
also happen due to plain old poor
quality. These changes can be
costly and usually make and or
break a project
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Improving Profit Margins in AEC: Visibility, Risk-Mitigation, and Project Management

Key Takeaways and Recommendations

Leaders in the AEC industries are not only good at managing risk,
but they also outpace all others in visibility to critical
information, looking at risk in discrete steps, implementing
technology, and operating key processes in project
management. Below are some of the important steps to follow
to improve your business and become a Leader in the AEC
industries:
Implement an ERP system to manage the overall
business. Add project management applications and
you cover almost all of the enablers needed to be a
Leader. ERP is especially important for managing the
overall finances of portfolios.
Standardize your performance metrics across all
projects. This allows more effective portfolio
management, as well as more agile decision-making
at senior management levels.
Use technology to manage the change process and the
quoting process. These are two of the most important
processes that make or break most projects.
Manage risk as discrete steps at milestones and gates.
Always keep an eye on the change process from a risk
perspective.
Provide broad visibility to manage projects and allow
decisions to be made in the context of the entire
business. This isnt just about project management,
its also about managing a portfolio of projects for
profitability.

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Improving Profit Margins in AEC: Visibility, Risk-Mitigation, and Project Management

For more information on this or other research topics, please visit www.aberdeen.com.
Related Research
Social Project Management: The Whole is Stronger
than its Parts; October 2013
Project Management in the Cloud: Enabling the
Keys to Project Success; July 2013

Project Management: Putting the Pieces Together;

March 2012
Project Management in Professional Services:
Managing People for Profits; July 2012

Author: Kevin Prouty, Senior VP, Research (kevin.prouty@aberdeen.com); Nick Castellina, Research
Director, Business Planning and Execution (nick.castellina@aberdeen.com)
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