Project Financial Management: One Pebble Partner's experience in fostering its ‘No Secrets’ culture
How are we doing on the budget?” Have you ever been asked that question, or maybe you have been the one who has asked it? Have you always been satisfied that your financial information was up to date, complete, and accurate? At Lakeland HealthCare, in Michigan, we were not, and set out to correct it.
Having previously experienced frustration with project budget management in past projects we knew there had to be a better way. Since we were embarking on the largest and most expensive project we had done in 25 years (an inpatient care addition), we also knew it was important to understand exactly where we stood financially with the entire project at all times. Finally, we had to be able to communicate the finances to various audiences with different interests.
In the past, we had faced several challenges when working with contracted construction management (CM) firms and even internally managed projects. The structure did not allow for the ability to provide:
overall project costs (construction costs, as well as costs such as furnishing, equipment, and design fees often managed by Purchasing or the affected department);
timely updates when needed; and
easy-to-read and understand reports suited for multiple audiences.
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Our internal CM team at Lakeland HealthCare recognized that this approach led to undisciplined cost control and a lack of confidence in the accuracy of total project costs reported throughout the project. We also knew there was an opportunity to create new processes and tools to mitigate the risks associated with the cost-control methods and financial reporting that had been experienced in the past. The result allowed us to successfully manage the overall project budget in a way that provided near real-time cost information and meaningful reports designed for specific audiences.
Step 1: Create Accountability.
Our first step was to centralize the overall project budget management to the internal CM team, which included approval and tracking of all project costs. This established single source control and accountability. Two team members were designated for all approvals: the Manager of Biomedical Engineering, who focused on furniture, fixtures, equipment, and low-voltage systems, and the Director of Facilities and Construction Management, who focused on construction and other project-related costs.
Step 2: Commitments and payments. We then established processes that would be used for requesting and approving commitments and payments. The CM firm was engaged as an agency CM so all of the contracts were held by Lakeland and all payments were made directly from Lakeland to the contractors and vendors, which made the processes easier to establish and regulate.
Step 3: Plan purchase and payment processes. The purchase and payment process we established enhanced our ability to capture all of the costs in an accurate and timely manner. We primarily used contracts for construction costs and purchase orders for everything else (i.e., equipment, furniture, low voltage and other owner generated costs). Payments on contracts were obtained by submitting a pay application using standard AIA documents routed through the architect, CM, and Lakeland. All contractor change order requests were approved using the same process, and contractors would not be paid for work outside of the scope of the original contract unless they had previously obtained an approved change order.
Step 4: Who? What? Where? When? How? Once we had established the financial control and accountability issue, we asked ourselves: “What do we want to know and when do we want to know it?” We needed information which would help us manage the overall budget as well as provide answers to possible questions, such as “Why are we over budget?” and, “How much money do we have left?” The “when” was easy; we wanted to know exactly how we were doing at least weekly and daily if we could. The “what” took a bit more thought but ended up including:
actual approved budget;
what, when, and how much has been committed;
what, when, and how much has been paid;
balance to finish on construction contracts;
retainage on construction contracts;
construction change orders;
out-of-scope costs; and
pending or potential costs.
All of these items were to be tracked as project totals, major and minor categories, and individual line items.
The original estimate and budget had been broken down into major categories, which were mostly retained for tracking purposes. These were the major categories, along with some of the minor categories that were uses for tracking purposes.
Step 5: Create a tracking tool. The next question we asked ourselves was, “How do we capture and track everything and who is responsible for it?” One of the team members created the budget tracking tool using Excel and was assigned the responsibility for entering all of the information, maintaining its accuracy, and keeping it up to date. This included a record of every purchase order (PO) issued, contract let, and payment made. The spreadsheet consisted of nine tabs each containing the information from one of our major cost categories. The totals from the nine major cost categories automatically updated a summary page, which provided the following information for each major category along with a project total:
percentage of budget committed;
pending costs (anticipated, but not formally committed with PO or contract);
remaining amount available to commit;
percentage of budget paid; and
remaining amount available for payments.
We attempted to set up a liability for all potential/pending costs as soon as we learned about them.
Step 6: Develop meaningful reports. The summary page was a one-page relatively simple look at where we stood not only as a whole, but also by each major cost category. This allowed us to see if one particular cost category was significantly deviating from budget.
By creating three different reports (all targeting a specific audience) we were able to easily and effectively communicate project financial status, no matter who was asking, or how much detail was needed.
Step 7: Communicate. We did not wait for people to come looking and asking questions, however. In fact, we specifically wanted to avoid that. On a monthly basis, the CM team created a project report that was distributed to all senior leaders and other interested parties. This report included an update on construction progress, pictures of the construction, and the one-page financial summary report. We also kept all documents (read-only of course) on a shared network drive so that anyone in the organization could review them. Taking these steps was consistent with our no-secrets culture at Lakeland.
Step 8: Institute checks and balances. Introducing a process of checks
and balances to ensure accuracy of the report mitigated the risk of error. There were inherent risks associated with having one person entering all of the data so on a monthly basis the report would be sent to the architect and the construction manager for review. Additionally, because we knew that the architect and CM wouldn't be familiar with all of the owner-generated costs, we added another layer of check and balance. We requested a monthly report from our Finance department listing all payments associated with the project. Regardless of who, why, or how a charge was initiated, it was included in the Finance report. We then performed a line-by-line comparison between the Finance Department report and our CM finance report. This allowed us to capture and appropriately cost code expenses that had bypassed the process. We found that our most troublesome area was with small-purchasing card purchases, but using this system of checks and balances allowed us to maintain the accuracy of our report.
Working out the kinks
We did experience some challenges with our process, although many related to adjusting to change, rather than with the process itself. During the early stages of the project, the CM was frustrated that the responsibility for tracking and reporting construction costs was being moved from the CM to the owner. A CM traditionally had this control and had a self-interest in distributing costs and reporting in a way that represented their performance in the best possible way. When it appeared that we were moving some construction dollars to non-construction costs, the construction manager felt his money was being taken away. We had to remind the construction manager that it was not “his” money. It was a bit of a challenge helping the construction manager accept that our financial management encompassed much more than the construction costs and needed to be managed holistically.
One of the purposes of redesigning our construction financial management was to minimize the number of unapproved ad hoc purchases. In the first few months of the project, we had to remind people a number of times that they had to follow the proper process for approvals to make sure we captured all of the costs in an accurate and timely manner. After a learning curve in the first several months, the process worked well.
Payments were always made within 30 days or less. Invoices associated with POs were automatically paid the week received as long as the invoice matched the PO. Discrepancies were resolved by the Manager of Biomedical Engineering, who had typically approved the original funding request. While a small number of purchases bypassed the system, requiring additional work, the vast majority of purchases and payments did follow the developed process, which greatly enhanced cost control.
Given the volatility in the construction market and all of the unknowns that accompany major construction projects, this represents a remarkable achievement.
So, how did we do on the budget? Nine months after occupancy, we had committed $70,868,904 out of a budget of $71,000,000, which represented a -0.2% variance. Given the volatility in the construction market and all of the unknowns that accompany major construction projects, this represents a remarkable achievement. As a Pebble Partner, we felt this lesson was worth sharing.
This level of success could not have been reached had we not implemented significant changes to our project financial management process. Taking full and direct responsibility for the overall project costs provided the CM team with the information needed to make better decisions and keep our internal customers accurately informed. HD
Russell Furst is Manager, Biomed at Lakeland Regional Medical Center. Healthcare Design 2010 April;10(4):22-27