IMPLEMENTATION OF ENTERPRISE RESOURCE PLANNING (ERP) SYSTEMS IN THE CONSTRUCTION INDUSTRY

Syed M. Ahmed*, Irtishad Ahmad**, Salman Azhar** and Suneetha Mallikarjuna*

* Dept. of Construction Management, Florida International University, 10555 W. Flagler St., Miami,

FL 33174, USA.

** Dept. of Civil and Environmental Engineering, Florida International University, 10555 W. Flagler

St., Miami, FL 33174, USA.

ABSTRACT

Enterprise Resource Planning (ERP) is now being hailed as a foundation for the integration of

organization-wide information systems. ERP systems link together entire organization’s operations

such as accounting, finance, human resources, manufacturing and distribution, etc. Moreover, they also

connect the organization to its customers and suppliers through the different stages of the product or

the process life cycle. There are very few studies conducted about the implementation of ERP systems

in the construction industry, particularly for the construction contractors. The focus so far has been on

client organizations, engineering and design firms. The objective of this paper is to investigate the

suitability and the implementation status of ERP systems in contractor firms. The methodology

employed is a mix of literature review, market studies and detailed questionnaire survey. It is found

that the majority of contractor firms have awareness about the ERP systems but very few organizations

have so far implemented such systems. The major reason is that the implementation of any ERP

system needs a huge investment in time, money and resources. However, when implemented to solve

the right problems, these ERP systems can be a powerful tool for business improvement. The study

shed light on the barriers to the implementation of ERP systems in the construction industry and also

highlights valuable lessons learned and benefits gained by companies that have such systems in place.

INTRODUCTION

The construction industry is a highly fragmented industry. It needs to communicate on a large scale

with other related businesses such as material and equipment suppliers, vendors, subcontractors and

clients. ERP systems are being used by construction companies to improve responsiveness in relation

to customers, strengthen supply chain partnerships, enhance organizational flexibility, improve

decision making capabilities and reduce project completion time and lower costs. These information

systems are designed to integrate and partially automate many of the company’s business processes

such as human resources, financial management, manufacturing, procurement, construction, operations

and maintenance. The goal of ERP is to support one time entry of information at the point where it is

created and to make it available to all the participants within the organization.

The aim of this paper is to investigate the suitability of the ERP systems for the contractor

organizations. The paper begins with a brief literature review shedding light on the basic concepts of

ERP system, it advantages and disadvantages, and implementation. This is followed by two case

studies illustrating the operation of ERP systems in the construction sector. At the end, the results of

the questionnaire survey are shown and major findings are discussed.

LITERATURE REVIEW

ERP Basic Concepts

ERP systems could be used in the construction industry for the following general purposes:

1. To improve responsibilities in relation to customers

2. To strength supply chain partnerships

3. To enhance organizational flexibility

4. To improve decision-making capabilities

5. To reduce project completion time and cost

There are few studies conducted about the implementation of ERP in the construction industry.

However most of the concerns have been made within both the owner engineering/project management

organization and contractor/supplier organizations; and the impact that these systems will have on the

facility engineering and construction delivery process (Connor and Dodd, 2000).

“In Residential and commercial construction companies, functional areas may include project

development, facility management, land development and acquisition, warranty and post-construction

support, work planning and preparation, Web-enabled services, real estate and property management,

and real-estate sales and configuration management. In addition, the solution enables automated

selection of homebuyer options, integration from the original sales contact through actual project

system management, use of pervasive devices for remote construction processes, and easy access to

executive management information. ERP systems can help push sales and project information to

customers, sales representatives, construction managers, subcontractors, investors, financiers, and

corporate audiences - all from one source” says a senior consultant, in a private consulting firm that

offers these ERP systems.

The following benefits could be gained by implementing the ERP systems:

1. Provide an integrating working environment.

2. Enable automation

3. Availability of information from field level until the management level

4. Integration in applications in any departments

5. Flexibility and facility to standardizing process or to accommodate changes and globalization.

6. Achieve balanced people, process and technology changes across all areas.

7. Apply planning and program management practices throughout the program life cycle of a project.

Disadvantages of implementing the ERP systems:

1. High implementation cost. It can range from some hundred thousand dollars in small companies to

a billion dollar for large multinational companies (these numbers including training and

consulting).

2. Delay on return on investment. The benefits of ERP may not be shown until after companies have

had it running for some time (Calogero, 2000).

IMPLEMENTATION OF ERP SYSTEMS IN CONSTRUCTION

Material Management in Construction

The material management process combines and integrates the individual functions of material

requirements planning, material takeoff, vendor evaluation and selection, purchasing, expedition,

shipping, material receiving, and inventory, material distribution, and even accounting functions (Bell

and Stukhart, 1987). Those engaged in this complex process has to be coordinated and communicated

effectively. This is what makes material management systems suitable to be benefited from

information technology implementation.

Many construction firms have got computer base material management systems (MMS), which stores,

sort, combine and print data files pertaining to materials requisition, purchasing, vendor evaluation and

warehouse inventories (Bell and Stukhart, 1987). Now the purpose is to integrate MMS with external

computer systems to perform functions related to design, project scheduling and accounting, improving

so cost and document processing cycle time by the used of information technology systems.

Implemented information technology systems are DBMS (data base management system) and EDI

(Electronic data interchange) (Elzarka and Bell, 1995). DBMS permits the user to organize, store and

management all electronic data relating to a major activity or area of interest, while allowing users to

enter and store data for once and utilized by multiple users and application and EDI is a direct

computer application exchange of business data in standard format, thus eliminating the need for the

reentering the information.

In a study made by Lee et al (2002), a simulation model to implement ERP in the material

management is created. They implemented the model based in four distinct steps, which are

application integration, internal integration, external integration, and automation. This study shows

that the durations of almost all of the activities involved in the material management process are

successfully been reduced and even in many cases these activity durations have become eliminated.

They stated in their study that an ERP system shortens procurement cycle by 80% approximately,

through automating most of the repeating transactions, and by reducing manpower to perform the

tasks. Hereby implementing ERP systems in the materials management area has measurable benefits

in all other areas, which interface with the material management module. (Lee et al., 2002).

Development of a 3-tier ERP Architecture for Construction Firms

Shi and Halpin (2002) presented a 3-tier architecture to implement ERP systems in the construction

firms which is illustrated in Figure 1.

Figure 1: A 3-tier architecture of Construct-ERP (Source: Shi and Halpin, 2002)

The first tier represents user interfaces categorized according to functions such as purchasing,

operations, etc. The second tier contains the intelligent management server which includes scheduled

tasks, system security and System administration. The third tier holds the central applications, such as

corporate-level applications, project-level applications and back-office functions.

This system works as follows:

1. Define and standardize management tasks, which constitute decision- making processes.

2. Identify standard functions, e.g. messenger, scheduling, estimating, etc.

3. Develop an engine which allows users to construct, modify, and register decision-making process

and identifies the right process for a request.

4. Executes the process.

5. Develop standard decision processes for procurement management.

The three-tier architecture discussed in this paper is technically and practically sound. The generic

construction decision-making engine provides scalability and functionality to satisfy construction

enterprise-level business management automation.

R/3: An ERP Software for the Construction Industry

One good ERP software solely designed for the construction industry is “R/3”. Connor and Dodd

(2000) conducted a survey to evaluate the functionality and adequacy of the R/3 software in the

construction industry. Some results of this study are as follows: A common satisfaction point about the

R/3 software is its systems integration, within materials management, procurement, fixed assets,

resource planning, budgeting/availability control, project management, and asset accounting. Specific

areas of dissatisfaction with R/3 project execution functional areas include too many accounting

settlement rules, inability to forecast additional cost, lack of engineering work request functionality,

cash flow planning deficiencies, awkward confirmation process and determination of percentage

complete based on physical progress.

Within contractors and clients, the ERP systems or share systems lead to strength partnering,

standardized reporting, common understanding of terms/functions, single data sources, wider

integration opportunities, simplify contracting, subcontractor vendor interfaces, sharing contractor

systems, map work process. It also has some weaknesses such as tied to SAP development path,

increased access requests and technology change and also some threats, in the impacts on contractors,

stifle local innovation, captive to SAP, micro-management by owners, and security/control (Connor

and Dodd, 2000).

In the study of R/3 software made by Connor and Dodd (2000), there are 15 functions provided by R/3,

but deficient in some way and/or to some extent. These are: unit price tracking, job cost reports, labor

cost report and work hour forecasting, change order cost tracking, work breakdown structure model,

project conceptual/milestone schedule, detailed activity precedence network, project schedule reports,

short interval planning, purchase order development and issuance, monitoring of change orders,

rework, and back-charges, management of contractor retainage, tracking and documenting percentage

of physical completion, field warehouse inventory management and warehouse inventory reorder

management.

ERP CASE STUDIES FOR THE CONSTRUCTION INDUSTRY

Case Study A: An Investigation on the Implantation of ERP in Construction

Project ML Payton Consultants completed a project for a major Japanese engineering and construction

company. The study examined how U.S. and European firms currently use Enterprise Resource

Planning (ERP) systems and how its use will change over the next few years. To accomplish the goals

of the study, ML Payton conducted detailed primary and secondary (a review of published literature,

both print and electronic) research. The primary research involved contacting leading construction

firms in order to discuss a number of issues relevant to the topic.

Study results

1. The market is showing steady growth and could reach $52 billion by 2002.

2. Top vendors include SAP, Oracle, J.D.Edwards, Baan and PeopleSoft. SAP has traditionally been

the market leader, although its share has been declining in the past few years.

3. Most of the Fortune 1000 companies have ERP systems in place, so vendors are targeting smaller

mid-level markets such as construction.

Cost and Implementation

1. Time and cost to implement depends heavily on number of modules installed, the usage of outside

consultants and dedication of internal resources. Firms report costs ranging from as low as

$700,000 to as high as$18 million.

2. Total implementation normally takes less than 3 years with 1-2 years an average schedule.

3. Some amount of customizing will be required in order to integrate new systems with legacy

systems. This customizing adds time and cost to the overall installation as the new modules will

require reprogramming or old systems will require significant changes.

Advantages and Disadvantages:

1. In the past years, the question of whether or not to implement an ERP system has been important.

Today, it has become clear that in order to remain successful, companies will have to implement

ERP in some form.

2. A standard, best methodology for implementation does not exist. It is up to each company to

approach ERP in the way that best fits its business needs.

3. Overall, while companies are pleased by the performance of their ERP systems, they would also

like to see a more concentrated effort by the ERP vendors to meet the unique needs of the

construction industry.

Case Study B: ERP Project for a Marine Construction Company

Project MORSE has implemented a major Enterprise Resource Planning project for a marine construction

company to help it analyze accurately, its business profile, carry out remote procurement and inventory

management and integrate electronically with its approved suppliers.

Stage 1:Morse project managed the entire implementation, providing advice on technology strategy,

operational analysis, solution planning, business change management, development and support.

Technology selected included Oracle Database, Oracle applications (General Ledger, Accounts

receivable, Accounts payable, Purchasing, Human resources and Inventory) and bespoke integrated

Oracle solutions. Morse upgraded Oracle Applications to release 10.7, re-implementing aspects for

improved operation within the constraints of the company’s business processes. A vessel-based system

is used to record offshore labor activities through project and maintenance cycles, which interfaces

with Oracle applications (General Ledger and Human Resources) for cost analysis and payroll

processing.

Stage 2: This stage involved distributing procurement and inventory processes while retaining effective

central control and reporting capabilities. Morse successfully deployed remote requisition and

materials management systems on the vessels and remote bases.

Stage 3: Managing approved supplier catalogues and the electronic integration improved efficiency of

the procurement cycle with key partner suppliers.

QUESTIONNAIRE SURVEY

In order to investigate the suitability and the implementation status of ERP systems in contractor firms,

a detailed questionnaire survey is being conducted. The target population was the contractors

associated with major trade organizations such as the CMAA, AGC, etc. The questionnaire was made

available on the website (http://www.eng.fiu.edu/cm/erp) on October 10, 2002 and e-mails were sent to

around 800 contractors to request them to fill this questionnaire. So far 9 responses were received. A

quantitative analysis is performed on the completed questionnaires and the findings are summarized in

the following section. This analysis will be continued as more responses are expected in future.

Major Findings

Knowledge about ERP systems and their implementation

1. 5 respondents were aware about the ERP systems in general. Of the rest, 1 did not show interest in

knowing and implementing ERP systems in their organizations, 2 were not sure and 1 did not

respond.

2. 3 respondents indicate that they were earlier contacted by an ERP vendor about the possible

implementation of ERP systems in their organizations.

3. 1 respondent thinks that ERP system will work “very well” in his organization and 3 thought that it

will work to “some extent”. The rest of the respondents were either “not sure” or have the opinion

that ERP will “not work” in their setup.

4. 4 respondents indicate that the ERP systems, if implemented, will be beneficial for their

organization.

From the above findings, it can be concluded that a slightly more than half of the respondents are

aware of the ERP systems and they think that ERP systems could work in their organizations and will

benefit the organization. However, a good number of contractors showed fear that such systems will

not work well in their organization due to the small size of the organization, limited resources and not

adequate technical skills.

Benefits Expected from the Implementation of ERP systems

The respondents were asked to mention the general purposes for which the applications of ERP

systems could be beneficial for their company. Their responses in the sequential order are as follows:

1. Improve responsiveness to customers.

2. Enhance organizational flexibility

3. Improve decision making capabilities

4. Strengthen supply chain partnerships

5. Reduce project completion time and cost.

Implementation of ERP systems

• The respondents who are already using an ERP system indicate about their ERP vendors are:

Oracle, J.D. Edwards, AutoDesk and Primavera.

• The respondents point out the following functions which their ERP systems are performing:

Accounting, Project Management, Construction Management (Prolog), Scheduling (P3), Contact

Management, Estimating, Budgeting, Historical cost tracking and Projections, Project

Documentation, CADD, Photography Management, Office administration tools, Messaging,

Project collaboration, HR, Payroll, Corporate finance, Fixed asset management, Equipment fleet

Management, Subcontract Management, Work order Management, Billing generation, Material

purchasing, Mailing list, and Documentation storage.

• 4 respondents indicate that their current ERP systems are not fully integrated and they need further

customization.

• 7 respondents recommended the need of extensive training programs to fully understand the

functionality of ERP software to enjoy their benefits. Majority of these respondents pointed out

that the training must be started with the top management and then on the middle and lower

management respectively.

• The respondents indicate that the implantation cost of ERP system in their organization varies from

$500,000 to several million dollars.

• The minimum implementation time taken was 1.5 years and the maximum was up to 5 years.

• Satisfaction level about the performance of ERP systems:

a. High 22% (1 out of 9)

b. Moderate 34% (3 out of 9)

c. Low 33% (3 out of 9)

d. No response 11% (2 out of 9)

Obstacles in the Implementation of ERP systems

1. Complexity of the ERP systems.

2. Current management practices of many construction organizations are maverick and “shoot from

the lip” style.

3. Organizations that move to ERP solutions are large, complex, and are all dispersed globally. This

can and does cause an issue with implementation.

4. High cost of the ERP systems.

5. Technical inspectors trained in the field generally do not have the computer skills to use an ERP

system without substantial training and handholding.

6. Lack of in-house training, lack of written procedures, inadequate operations personnel input.

CONCLUSIONS AND RECOMMENDATIONS

On the basis of literature review, case studies and questionnaire survey, it can be concluded that a

majority of contractor organizations have some “know-how” about the ERP systems and they think

that the implementation of ERP systems could benefit their organizations by providing better

integration of working environment, more automation and more flexibility in operations and

information access. However, it is found that the implementation of ERP systems needs lot of capital,

human and technical resources and it will not be easy for the small contracting firms to invest their

potential on such a mega-system. Hence, it is recommended that the implementation of ERP systems in

the construction industry should be started with the large contracting organizations and then gradually

moves down.

Training is another aspect, which is very crucial in the successful implementation of ERP systems.

This study indicates that such training should be started from the top management and then move down

to middle and lower management.

It is also found that only a small number of ERP softwares are developed for the construction industry

and this might be one reason of its slow implementation in the construction industry. The ERP

software vendors must work with the professional in the construction industry to developed more

customized solutions for the contracting firms.

REFERENCES

Bell, L C., Stukhart, G. (1987). “Cost and Benefits of Material management Systems.” Journal of Construction

Engineering Management, ASCE, Vol. 113, No. 2, pp 222-234.

Elzarka, H. M. and Bell, L. C. (1995). “Object Oriented Methodology for material Management Systems”

Journal of Construction Engineering and Management, ASCE, Vol. 112, No. 4, pp 348-445

Calogero, B. (2000). “Who is to blame for the ERP Failure.” Sun Server Magazine, June, PCI Publications,

Austin, TX. Nov.3.2000

Connor, J., and Dodd, S.C. (2000). “Achieving integration on capital Projects with enterprise Resource Planning

Systems” Automation in Construction, Vol 9, issues 5-6 pp 5515-524

Lee, S., Arif, A., and Halpin, D. (2002) “Simulation Modeling by Enterprise Resource Planning implementation

in Medium Sized Corporation.” Proceedings of First International Conference on Construction in the 21st

Century (CITC-2002), Miami, Florida, pp 663-670.

ML Payton Consultants. (2000). “Use of Enterprise Resource Planning in the Construction Industry –Summary

of Findings,” On-line. http://www.mlpayton.com/pages/summaries.html

MORSE, (2002). “ERP project for a marine construction company”- Summary of findings, On-line.

http://www.morse.com/templates/casestudy-initial.xml?content_id=85&the_section_id=4065

Jonathan Shi, Illinois Institute of Technology. Daniel Halpin, Purdue University, “Construction Enterprise

Resource Planning (Construct-ERP)” . On-line.

http://www.eng.usf.edu/nsf/conference/scalable/scalable_enterprises/Shi_IIT.ppt