The Business of Construction

Capacity Planning in Construction: don’t get caught with your pants down

Capacity Planning in Construction

 

 

 

Capacity planning is at the core of good project management, having the right resources scheduled at the right time can make the difference between a profitable project and a loss. Keeping everything together is challenging, but it’s required in order to keep your projects and company profitable.

By its definition capacity planning is “the process of determining the production capacity needed by an organization to meet changing demands for its products”. For construction, this means the existing process you have to determine what resources you need to complete all projects. Capacity, generally speaking, means labor and materials.

If you are a sub-contractor, this means you need to forecast the labor you need to complete when scheduling a project. Managing crews and be challenging with understanding accurate labor costs, keeping accurate timecards, and assembling & scheduling the right crew with the right certifications/credentials. Most of the time materials have a reasonable lead time to delivery. That said, a poorly trained or misinformed framer can make a costly mistake and short cut hundreds of feet of boards on a project, increasing the materials cost. Things like this happen and can put project profitability at risk. Not tracking these kinds of things make it even more impossible determine if a project if profitable or not. Tracking performance is a key part of capacity planning.

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If you are a general contractor or are a sub-contractor managing other sub-contractors, this means you need to work with sub-contractor schedules and material delivery forecasts. It goes without saying (which generally means it needs to be said), the more effective and timely communication you have with your sub-contractors and vendors, the more likely you are to develop a realistic project completion date.

At the beginning of a project, we can schedule resources—things like crew/team time and materials or other contractors. With business booming, work for many contractors’ ebbs and flows with their bid conversion ratio. The age-old contractor challenge: when you don’t have enough work, you drop your prices to make sure you have work in the future… when you have too much work, you increase the price you bids because in the event you win the job you will need to hire more people to execute the project.

Why is capacity planning important in construction? The obvious reason is to reduce the risk to your company by developing a strategy that handles the increase or decrease in your project pipeline. Here are a few things to consider in your capacity planning strategy…

What’s forecasted in your future? Filling the project pipeline is the front office activity of sales and marketing. Forecasting sales for your business can be one of the most difficult things to do. Some contractors view their forecast as simple as winning one out of ten bids, so the more bids you participate in, the more work you will have. Forecasting you project pipeline can be a much more detailed process. Suffice it to say that your sales team matters and needs to be included in capacity planning. If your sales people aren’t used to forecasting the deals they are likely to close, train them up.

Your people matter in capacity planning. You will likely know how much your people can handle. You should be tracking how your people perform with a good understanding of their capacity. It’s true that some people can do more than others, but with the right tools and training everyone can do more. Managers often have a good feel for how much labor they need or sub-contractor availability. Managers need to be part of the capacity planning process, they can often identify likely issues with vendors, material delivery. In addition, they will have valuable input on other variables, such as an opinion on the weather and how it may impact a project schedule.

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I’m oversimplifying this, but there are basically two approaches to capacity planning, being proactive and being reactionary (technically there are 4, so I’m oversimplifying here). It may sound strange but both are valid strategies.

Getting ahead of a short-term labor shortage can save you in terms of customer relationships, company reputation, and the ability to complete a project. On the opposite side, investing in recruitment and a vendor diversification plan that you ‘may’ not need costs money. Adding people, vendors, and new sub-contractors as you need them is a conservative strategy that ensures you are paying to acquire only the resources you need. This ‘Lag Strategy’ (adding resources only after existing capacity is peaked out) can be detrimental to a project’s schedule costing more to complete the project the longer it takes. Finding the right balanced strategy is what you will need to determine in what’s right for your organization.

So, how do I do this capacity planning thing?

Ideally you would use tools that are collecting the information you need, such as bid tracking conversion rates, employee management, project management, budget management, communications, document management and others. For the construction industry, some of the construction management software like ours or others help with capacity planning. There are software developers that just focus on human resources capacity planning (though they generally have a focus in IT projects).  You don’t need software to determine capacity planning, but it makes it a lot easier. There are lots of resources, tools, and books that focus only on capacity planning.  Here is a simplified approach:

Start with your forecast. Talk with your sales team to figure out a realistic sales forecast. This means they need to look at each deal and determine how likely (generally as a percentage) your company is going to win each bid. In addition, and arguably as import you need to know when the award will be made. You need to know what bids you’re most likely to win and when those projects deadlines happen.

Once you have a realistic (or as realistic as you can make it) forecast, you can overlay forecasted projects with existing resources. Managed growth is good, unmanaged growth is risky. Analyze the current snapshot of your organization and compare it to 30, 60 and 90 days out. Depending you’re your business, you may need to look 6 months to a year out for some resources, such as heavy equipment purchases and other resources that may be required for growth.

Identify the things you need and make a plan that include how and when to acquire it. For people, there are two basic ways to get the expertise you need, acquire them (hire, generally expensive) and train them (takes longer but you tailor their training to your company needs). If you need to hire a key project manager, it could take up to 90 days to find the right one. If you need sub-contractors in 30 days and your existing subs are too busy, use your sub-contractor evaluation and approval program to find and approve new sub-contractor resources. If you don’t have a vendor evaluation process, you should create one.

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You need to task someone with the responsibility of always keeping an eye on capacity management and provide regular reports. Armed with knowing what you have and what you need, it’s easier to make the decision on when to take action to add the resources you need to handle growth.

Once you have a good understanding of what you need to add the resources you need to complete forecasted projects, you need to make a decision that suites your company’s situation and needs.

The basic steps:
   1. Task someone with the responsibility of capacity planning.
   2. Generate sales forecasts on a monthly and quarterly basis.
   3. Implement a system for measuring the performance of existing resources specifically to understand existing capacity.
   4. Compare forecasted project resource needs to your company’s capacity.
   5. Identify under and over capacity in your organization with forecasted capacity needs.
   6. Create a plan to acquire or adjust the necessary resources your organization needs.
   7. Make a decision on when to implement resource acquisition.

 

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