You’ve landed a great project. Congratulations! Now you’re faced with the task of building a cost report. Before you begin, consider the following goals of cost reporting:
- Project Transparency
- Productivity Measurement
- Early Identification of Potential Overruns
- Cost to Complete Projections
- Determine Cost of Impacts, Changes and Claims
Does your cost report help the project team achieve these goals, manage costs and maximize profits? If not, the following ideas may help focus your setup efforts:
Work Breakdown Structure (WBS)
WBS is a way of splitting the project into smaller components, defining and grouping a project’s discrete tasks that describe the project scope. The project schedule defines these tasks and can serve as a guide for the activities to be reflected in the cost report. The schedule and cost report should tell the same story.
Cost codes should be assigned to track discrete work activities. An electrical contractor’s scope may include conduit installation, wire pulling, devices, fixtures, and terminations. Each of these activities has its own planned quantity and distinct rate of productivity. Tracking each activity separately allows for the concise measurement of productivity, identification of issues by activity, and more reliable cost to complete assessments.
Pay Items / Phases
Many projects have multiple work areas consisting of the same or similar activities. In the construction of a multi-story building, a contractor will likely perform the same activities on each floor. Assigning a Pay Item or Phase to each floor permits the contractor to track the activities for each floor independently, reusing the same standard cost codes for each Pay Item throughout the project. For example, we can establish pay items for each of three floors (01 – 03) and track Conduit Installation for each floor, as follows:
Pay Items can be critical in identifying disruption-related cost impacts. If the contractor is forced to accelerate Conduit installation on the 2nd floor, those discrete cost records can be used to more precisely quantify inefficiency costs and substantiate his request for additional compensation.
Cost categories represent the different types of costs on projects including “Labor”, “Burden”, “Equipment”, “Overhead”, “Materials”, and “Subcontractors”. Typically, estimated costs are entered for each cost code, by cost category, from the original estimate. In many cases, contractors establish too many detailed cost categories in their accounting systems. When the data is posted to the cost report, it can create confusion and do little to inform the project team.
For cost reporting purposes, “Overtime” and “Double Time” can be more generally classified as “Labor.” “Taxes” and “Insurance” can be more generally classified as “Fringe Benefits.” The details for each of the cost components listed above are tracked independently in the Payroll module.
A well-organized cost report will set the stage for your project team to understand and manage costs. It can also provide a meaningful history for the cost of performing specific work and make your more company more competitive.
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.