The Mighty “S” Curve
The “S” Curve Report came to our attention when working with a general contractor who had previously built a project for which Jones Lang LaSalle served as the bank’s representative. The anecdote shared with us by the general contractor was that the project was behind schedule and the bank elected to bring in JLL for additional oversight. At their first meeting, the JLL representative stated to the general contractor that they would finish the project six months past the contracted delivery date. The general contractor objected vehemently, stating “you have no idea what our organization is capable of” and insisted that the project would be completed on time. Whether based in bluster or genuine pride for one’s firm, this is not an unusual attitude amongst general contractors and was, therefore, understandable and may have even been convincing in the moment. However, when the project did complete six months behind schedule, the general contractor sheepishly acknowledged that the JLL representative had been correct all along. But how had he identified this so quickly, at their first meeting, and with such accuracy? The answer is a highly underutilized, but very powerful tool, the “S” Curve Report, a report JLL utilizes on all construction projects they oversee.
What is the “S” Curve Report?
The report is a simple excel tool which requires only a few inputs: Total contract amount, contract start date, contract end date and the amounts drawn each month. The report uses these inputs, as well as a simple algorithm, to map actual draws against a projected curve. By comparing the two, one can see visually whether a project appears to be on, ahead or behind schedule.
Why does the report work?
The premise of the report is that no matter how good the general contractor, the dedication of the project team or the ability of the subcontractors, if a project gets behind with regards to work in place it is extremely difficult for a project to make up for this shortfall. The work in process any given month builds upon the work in place completed the prior month. If insufficient work was completed the prior month, it will limit how much can be put in place this month, which in turn will impact what can be put in place the following month. Recall our prior article on the Clear Flow Matrix. This is a related concept. As a dependent chain of events, there is no way to “skip the line” and suddenly catch up once a project falls behind. Every project, no matter the project type follows a similar work in place ramp up, peak and ramp down (see the example below).
While we implore developers to establish a culture of trust amongst the project team, we also believe verification is prudent (trust but verify). This highlights another advantage of the report: it can be generated by the developer’s accounting team without the need to involve the general contractor or the owner’s representative. Why is that important? Whether ill-intentioned or out of a sincere desire not to alarm senior management, the general contractor and/or the owner’s representative may honestly believe that no significant time has yet been lost and that everything will be fine as soon as the project ramps up to full steam. We discuss in other articles the need for transparent and rapid communication, particularly early in the construction process. Therefore, it is only to the benefit of the project to employ this sort of check and balance to ensure that the project is off to a good start (and to monitor its progress throughout the construction process). As the general contractor who initially brought this report to our attention put it, after they understood and later championed its use, “the ‘S’ Curve Report keeps you from fooling yourself.”
How does the report help identify and prevent further delays?
One key to utilizing the report is to evaluate progress in the first few months. The first month may or may not be an accurate reflection, due to the timing of the start date and first draw date, which if too close together may not accurately reflect work in place of a 30-day period. But usually by the second month/draw, and certainly by the third, it will become clear whether or not a project is off to a good start. See below an example of a project which one could definitively say (even early on) is behind schedule.
Similarly, where a project is off to an incredibly strong start, one might even begin to project that the project is likely to complete early. See below an example of a project which completed three months ahead of schedule. Evidence that the project would complete early was already evident within the first few months.
These are two relatively stark examples, and while the S Curve Report cannot tell the whole story, it is a highly effective tool which can serve as a check on information senior management may receive from the general contractor or their owner’s representative. It also remains a good way to monitor progress and see if the general contractor is adjusting (to the best of their ability) if behind. The following chart shows a project which fell behind schedule. The general contractor has expended significant efforts to try to catch up, and though there has been improvement, the project will still (ultimately did) finish behind schedule. One can observe the “S” curve itself (the bright blue line) deviate from the ideal projected curve, then increase slope to come closer, but then fall off. This further indicates how challenging it can be to try to “catch up” once a project has fallen behind schedule and why early intervention is so critical.
It is important to be aware of various attitudes which are pervasive in the construction industry. These are not necessarily out of malice but germinate where accountability can be muddled over time should sleeping dogs be left to lie. General contractors may fear of the developer “shooting the messenger” or may find it less painful to commit a lie of omission rather than being forthright (unfortunately, it becomes far harder to assess blame and accountability several months later, especially if other challenges arise which a general contractor might use as excuses which have nothing to do with earlier delays). Often general contractors, or their on-site teams, may not even wish to admit to themselves that they are behind schedule. They may be focused on other issues which they believe to be of greater importance (e.g., buyout, subcontractor disputes, keeping municipal inspectors happy, etc.). Even if they can admit that they are behind, they may delude themselves with the belief that once the project really gets rolling, they will be able to catch up. But the first step in addressing any problem is identifying it and acknowledging its existence. This is where the S Curve Report, in our opinion, is so useful.
If we return for a moment to our ahead of schedule project, can we consider how this might also create issues which could negatively affect the developer’s returns? Obviously, delivering a project three months early should always be considered an absolute win, right? Well, only if the developer capitalizes on this knowledge. Here too we uncover a pervasive tendency of the construction industry. Just as those in the industry tend to delay communicating bad news, they will similarly delay communicating good news. Why? Most savvy construction professionals feel that until they can definitively state something as true, it may be better to hold that best case scenario close to the vest. Hence, a general contractor or owner’s representative might conceal the fact that they believe they can deliver the project significantly early until they are 100% sure all obstacles have been removed and then deliver the news as a pleasant surprise (fully expecting to be lavished with praise for this sudden good fortune). The problem with this is that, if the potential for a project to complete early is not communicated sufficiently early to the broader organization, it is unlikely to result in early revenue (and in fact will increase the construction interest expense above what would have otherwise been projected). Delivering early where commercial leases have already been set may or may not help the project at all unless the tenants are willing to move in early (for which early communication is key). With regard to multifamily housing, generally leasing can occur early as there is an ever-present pool of potential tenants. But again, failure to communicate that a project has a high likelihood of delivering early will not allow the developer’s human resources team (or third-party brokerage firm) sufficient time to get leasing staff in place, leading to a lost opportunity. Here too, the S Curve can help as one will be able to identify very early which projects seem to be tracking ahead of schedule. In addition, one can adjust the Projected Completion date to better align the projected vs actual S Curves to get a sense of just how early a project might deliver. Observe how the S Curve report changes as we do this for our ahead of schedule project below.
By moving the Projected Completion date up by three months, we see a far tighter convergence of the two S Curves, which gives us an indication that the project is likely to deliver as much as three months early (which it ultimately did).
To enable you to leverage this powerful tool, we have created an online version here which your accounting personnel responsible for processing draws can use to create reports for your own projects. We recommend having them do so monthly as the draws are approved. We hope you find this tool as powerful and effective as we must provide greater insight into your project’s schedule performance.
