In last month’s post, “Is Your Job Cost Reporting Preparing You For Success,” I discussed some of the factors to consider before you set up a new project’s cost report. Once you’ve got the report set up, it’s time to think about some of the data that helps your cost report perform its intended functions.
One of the cost report’s primary purposes is the computation of the project’s estimated total cost. Soon after the project is awarded, most contractors “buy out” the project, issuing purchase orders for materials and subcontracts to specialty contractors. These “committed costs” should be reflected in the cost report budgets. By doing so, you quantify or monetize the risk for these activities and also confirm their estimated total cost.
If your buyout process is successful, your committed costs are less than the budgeted amounts. Because it is still early in the project, I like to account for these savings in a “contingency” cost code. There may be unexpected costs or profit fade in the future. The contingency can be used to offset some of these “unknowns.”
Once the construction phase of the project begins, the profitability of self-performed activities depends upon productivity. Certainly, you need to focus on coding labor hours to the correct cost codes. Equally, the installed quantities or observed percent complete for each activity need to be faithfully tracked and reported in the cost report.
Installed quantities should be reported to coincide with the regular payroll. Achieved man hours per unit or man hours per percent complete serve as the basis for computing estimated total hours for an activity. For example, if you have achieved a two-man-hours-per-unit production rate and you have 100 units to install, you can reasonably project that you will incur 200 man hours to complete the activity. Labor cost will also be projected through completion of the activity and, when compared to the estimated cost, will quantify your projected variance. If you are accurately collecting and reporting quantities and labor hours, you will be able to continually monitor your productivity and project estimated total cost. More importantly, you will be able to provide early identification of potential cost overruns, investigate the underlying cause, and potentially take corrective action before the losses are actually incurred.
Finally, most projects experience change orders to some extent. If the change order is related to additional or reduced quantities of base scope items, it reinforces the importance of a robust quantity tracking process. If the change order is related to a new scope item, it is critical to track the costs associated with that item discretely. A distinct cost code numbering system such as “99-001,” “99-002” for change orders will help to keep change order costs segregated from base scope costs and will aid in substantiation of costs, if required.
A process for collecting and reporting the right data can make the difference in a project’s fiscal management.
About the Author
William Kerns is the President of Construction Turnaround Consultants (CTC). CTC helps contractors improve financial performance through the use of industry-proven cost control processes and reporting solutions that bring project transparency. Prior to founding CTC, Bill served as an expert construction testifier as well as CFO for several specialty construction firms.