ConstructionPro Week, Volume: 4 - Issue: 22 - 06/05/2015

Project Cost Controls for the General Contractor

Introduction

Working with general contractors around the country has shown us effective and not-so-effective methods for managing costs. Some approaches are so tedious it is worrisome about the time it takes a project manager to manage the project as well as the data necessary to “manage” costs. In April and May, we looked at cost control issues encountered by heavy and highway contractors. In today's issue, we address cost scenarios that affect general contractors.

 

Doing It the Hard Way

One general contractor we know has an elaborate routing system for invoices—he doesn’t book invoices into the computer as incurred cost until they are approved by project managers and superintendents. All non-labor costs go through this analysis. Because the costs are often late getting into job cost, the PM must conduct an offline analysis and produce a work-in-process (WIP) report, which includes booked costs, “un-booked” costs and the projected cost to complete. Thus, the PM must essentially guess the actual cost to date and forecast. If an invoice is misplaced, it might be omitted from the “un-booked” cost. Factor in a guess of the actual percent completed and the WIP is an all-around guess. Project managers who hide costs can easily do so. These figures are then reviewed by the accountants who prepare the over/under analysis for management.

 

This appears to be an almost perfect system, except for two things—it factors in too many guesses and takes too long to prepare. It takes almost a month to compile this information, so it is obsolete by the time it’s done. One must ask several questions: (1) Is this the best method?; (2) Is it necessary to have monthly interim statements?; (3) Is it the best use of the PM’s time to take the hours necessary to complete the report at this level of detail?

 

To consider the answers to these questions, we must look at the cost control systems in place. A general contractor typically has three kinds of costs:

  • Subcontracted items for which the cost is determined at the time of subcontracting (assuming the scope is covered)
  • Direct cost of labor and materials for self-performed work
  • Indirect field cost for general conditions (field supervision, temporary heat, sanitary facilities, trailers, phones, etc.)

 

Each type of cost requires a different cost control structure.

 

Subcontracted Items

Subcontracted items are generally controlled at the buyout. What you contract for is what you expect to pay, absent scope changes or missed scope. In one project, for example, a fire stop at the top of an 18-foot masonry and drywall wall was not included in either the drywall or mason’s contract. The GC tried unsuccessfully to saddle the insulation contractor with it under a catch-all clause. GCs prefer to avoid this condition by carefully reviewing the plans and specifications to ensure that all work items are covered. Thorough scope discussions and proper bid analysis can ensure that such lapses don’t occur.

 

The point of this example is to illustrate that once the work scope is bought, the general contractor should only need to manage the time and quality elements of the subcontracted work. The total cost of such work will be managed by the subcontract payment process, which should be controlled by software to ensure that the payments don’t exceed the total commitment.

 

Indirect Project Items

Indirect project items typically relate more to time than magnitude. For example, if you know you need three storage trailers and they each cost $100 per month, you can easily figure out how much to budget for a nine-month job. However, if the job extends, you can guarantee that the storage trailer cost will exceed the budget. Some indirect items, however, can be more troublesome. Temporary heat, for example, is predicated on the number of BTUs required, which can vary dramatically with the seasons and building condition. The cost of temporary heat can skyrocket if the work slips from fall to winter or if the building must be heated with no permanent windows or insulation. Therefore, the cost controls should document the expected conditions and track the actual cost. Documenting the variances will help ensure the possibility of recovery if the entitlement exists.

 

Direct Field Costs

Direct field costs are generally related to job conditions and production. For this, the cost control needs to be more like that of a trade contractor. Line items should be carefully defined with measurable quantities—finite definitions that are unmistakable to field personnel—and linked to the project schedule so all charges accurately compare to the budgets. One major mistake people make is that budgets aren’t revised when the work scope changes; so, cost to budget comparisons are meaningless. This requires the project manager to manually track the changes offline to know where s/he stands with that work item. This results in extra work and poor internal communications.

 

Getting Down to Business

Based on these requirements, a general contractor’s system requires flexibility to handle any type of work condition, from lump sum to unit-priced projects. And, it needs to be tied to a committed cost system that tracks actual costs against project commitments. If the system is well structured and properly set up, the manager can focus on the job and periodically review cost reports and make adjustments for deviations.

 

This is the third of an ongoing series of articles on project and cost controls by retired construction cost consultant Larry True.

 

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