Project Cost Control for Heavy and Highway Contractors – Part 2

In Part 1 of this two-part article on cost control for heavy and highway contractors (published in the last issue of CPW), we introduced some of the unique aspects of tracking costs for unit cost pay items.  Timely cost and production reporting is crucial in order for contractors to be able to track costs and make adjustments in the field when necessary.  This week, we look at common situations of cost conflicts in more detail, as well as approaches to the design and implementation of cost control systems to manage these issues.

Accurate Billing Codes

Try to avoid nebulous item descriptions such as “Miscellaneous Hand Excavation.” Without a proper explanation, a superintendent or foreman will probably charge any hand excavation to this item. In this scenario, hand excavation was probably billed elsewhere as part of “fine grading.” This sort of confusion invites coding errors, which create unreliable cost records. To avoid this issue, use precise descriptors.

Another common problem stems from attempting to separate items typically performed together. This generally does not work. For example, suppose a single crew loads and hauls excavated material and places it as compacted fill. The owner could have three separate pay items—excavation, hauling and embankment. Breaking it out by pay item is not practical. Let’s consider the truck cost breakdown in this sample project. While the trucks are loaded, time is billed to excavation. Then, the drive time is charged to hauling and the dumping time is charged to the embankment, right? Not likely!

In this example, the contract may have three separate pay items but it should have only one cost item. For cost purposes (and revenue recognition), the item excavation and embankment should have a unit price that encompasses the composite of all the bid items for excavation, hauling and embankment. For billing purposes, the pay estimate should reflect three separate items with, perhaps, three separate units of measure. This method provides a reliable measure of actual cost against earned budget (assuming the reported quantities are reliable), because there is no guessing or cost allocation across multiple items. The control is that the final excavation payment quantity is the most that can be included in the job cost system.

Item Groupings

Another useful technique is proper grouping of items in the job cost control system. For example, in the bridge footing scenario, suppose the estimator assumed that one set of forms would be fabricated, and then used twice. The form fabrication is considered 100% complete when the forms are ready for use. Installing and preparing the forms for concrete, installing rebar and installing waterstop are other separate operations, no doubt measured in square feet of contact surface. Concrete placement is generally measured by cubic yards and should agree with the owner’s pay quantity (though it may not because of concrete wastage, normal delivery sizes, etc.).

The chart below depicting two identical concrete footings shows the net effect of this approach.

In this small example, the entire work item would be completed in one accounting period. However, when building a large bridge with several hundred cubic yards of concrete a single task can take weeks and the final pay quantity may not happen for several months. Take an example of a dam project in which one form takes a few months to build. In this example, 34% of the revenue would be recognized upon completion of the form fabrication, setting half the form and installing half the rebar. The owner would not make a payment for any of the work, however, until at least one of the two footings had been poured and accepted.

Software Options

The cost control system must be designed to separate billings from production because they are often not in sync and result in erroneous analysis that does not reflect actual production. Next, it is necessary to consider the accounting software options necessary to accomplish the above analysis. Simple systems frequently view the budget for each item as a lump sum. That may be adequate for items not directly related to pay items. Dewatering, for example, although sometimes paid by the thousand gallons, is really a time-based operation. The number of gallons pumped may not significantly impact the total cost. Therefore, this item could produce less than the required budget because of a quantity underrun. However, some systems would view the budget for this item as a lump sum amount even though the quantity is payment based.

In providing cost control systems that track unit price work, the contractor must consider the potential for the budget variance related to quantity. Trying to track such work when the quantities vary significantly can be a chore if the projected budget is not automatically adjusted. Manual changes must be continuously made to properly reflect the variances. (Some systems do accommodate this need.)

Another feature to seek out is a method for comparing billings to cost. In the above examples, a many-to-one relationship between payment and cost items would provide a reasonable means to accomplish a proper analysis. Some systems accomplish this easily while others make it very difficult.

Conclusion

Several needs of heavy/highway contractors’ project cost control systems should now be apparent. First, computer systems must be able to accommodate the proper analysis for the contractor to remain informed. Second, the field reporting procedures must be clearly understood by field agents so time and quantities are reported correctly. Finally, the management must be vigilant in monitoring cost and quantity variances so the reported information is reliable.