Project Controls - The Job Cost Approach

Knowing the Numbers

Last issue covered many aspects of appropriate and necessary project controls and how they relate to the overall profitability of the contractor. This issue introduces various approaches to job cost control.

Controlling cost in construction is a constant battle and the approaches are as varied as the contractors. In the early 70s, a well-known successful heavy/highway contractor had very detailed costs on every job, and compared costs to budgets in great detail – in spite of the fact that it was done with an NCR mechanical posting machine! One of the contractor’s major competitors, equally successfully, got the jobs done with no detailed cost reports and no project budgets. The “old man” just knew. He could walk the job and figure out what it should cost and he could watch the machines at work and he just knew whether he was making money.

Most of us are not as astute as “the old man.” Even with more than 30 years experience, most of us still need the numbers to know what’s going on. And a good feel for the work is not foolproof; the numbers can vary widely depending on fairly subtle differences from one job to the next. The devil is in the details as they say.

Shoe Box Accounting Can Mean Unpleasant Surprises

When working on construction claims in the early days, many smaller contractors performed accounting activity using the “shoebox” method; they started the job with so much money in the shoebox (e.g., the budget) and if there was any money in the shoebox when the job was over, they made money – provided they got paid for everything they did. What frequently happened in using this approach is that the owners and senior managers didn’t know they had problems on a job until it was over and the shoebox was empty. When they asked the superintendent and foremen what happened they heard all the war stories: we had this problem, the owner didn’t give us the materials they were supposed to furnish, the drawings were bad, the mechanical contractor didn’t get the ductwork in so we couldn’t pull the wire to the AHU’s, etc., etc.

So clearly what is needed is an early warning system. Obviously, part of the solution is to educate the people on the job to know what is in the contract and to alert management if there are problems. Time control with a CPM schedule is only part of the picture. You can be on time but over budget.  (Conversely you can also be on budget but not finish on time.) A good cost control system is necessary to alert managers quickly when there are problems. Keep in mind that it doesn’t take a computer to develop a good cost control system. The computer only makes it easier to get timely information in more detail with fewer people.

Two Approaches to Project Cost Control

There are two approaches to project cost control: 1) centralized with the core accounting and job costing systems, and 2) project specific with a field job cost tool that is not integrated with the main accounting system. There are advantages and disadvantages to each. While there are good tools for each approach, the correct application of either method is critical to its success.

The project specific systems tend to be stand-alone, but can enable a project team to track manpower, equipment, purchases and subcontracts independently from accounting and can compare standardized costs against budgets. Field personnel can see the costs on a day-by-day basis without concerning themselves with the turnaround time in the home office. The advantage of this approach is that it is up to the field people to keep it updated so they can blame nobody but themselves if they don’t have timely information. The downside of field-centric systems is that most of the data is redundant – i.e. it already is, or soon will be, in the central accounting system as well. The reason such systems have become popular is that 1) too many centralized systems are non-responsive to the time requirements of the field, 2) many centralized systems do not have the right detail to satisfy the job’s requirements for analysis, and 3) many companies have such poor procedures for managing their accounting transactions that all the information is old before it is available to the field.

On the other hand, while centralized systems eliminate the redundancy, they are under the control of the accounting department and frequently tend to get bogged down in elaborate approval procedures that prevent quick turnaround of the data to the field. Consequently the field people feel that the accounting department is not responsive to their need for information – thus, the need for the project systems. It becomes a vicious circle. It should be noted that field people are frequently part of the problem by failing to pay adequate attention to the timeliness of paperwork! While the turnaround time dealing with centralized systems steadily improves with cloud computing and other new technology, data from field personnel may well be the weak link in both scenarios.

Tracking Is No Substitute for Control

Before the existence of the first wave of dedicated accounting systems, there was VisiCalc, Super-Calc and other spreadsheet programs. Revelation, dBase and Access became cost management tools as well when the field people had the capability of becoming programmers. In many cases, dedicated project systems have not changed the relationship of the field to the office, they have just taken the place of Excel or Access as field tools for cost tracking. Notice, we use the term “tracking,” not “control.”

Elaborate field cost tracking systems have a way of becoming substitutes for control. We refer to this syndrome as "losing your butt under perfect control." Managers get so involved in the “tracking” they forget to “control” the cost. Take the example where a project manager is “doing better than anybody else” at providing timely updated cost to complete reports. The trouble was, the data was all wrong and the reports were useless – garbage in, garbage out.

Project Controls Must Differ By Type of Project

Project cost controls must be different for different types of contractors and different types of costs. Trade contractors on building projects, for example, are driven by logistics, material and adequacy of work space. Accordingly, the cost measurement must be broken into elements that can be tracked on a day-by-day basis to be effective. Heavy/highway earthmovers are totally dependent on equipment for the productivity but the skill of the operator can make the difference between meeting costs and not meeting them. Other factors such as equipment breakdowns, weather, material quality, site conditions and proper balancing of crews all play a part in meeting costs. The measurement systems must be different than that of a building trade contractor. General building contractors frequently have a need for a mix of subcontract control and trade productivity. Again, we must look at the process of cost control rather than the software of cost tracking to ensure that we are really controlling the project. The software can only do what the people tell it to do, so the field procedures must be able to collect the right data and the field management personnel must be knowledgeable enough to make the right decisions with the results.

Here’s an example of a very effective cost control measure used by an electrical contractor on a fast turnaround job. The company palletized the materials for a day’s work for each crew. At the end of the day, if there were materials left on the pallet, the supervisors discussed it with the crews to find out what the problems were and, where necessary, made changes in crews or wrote letters notifying the customer or general contractor of the problems encountered requesting the extra time and compensation. No computer needed – perfect control.

Accurate Measurements Required

Another electrical contractor had its crews turning in quantities of conduit installed, wire pulled and terminations made each day. The unit costs were analyzed and the project was always going well. What this system – totally computerized – did not show, however, is that the quantities reported were wild guesses by the crews and that there was no centralized control over the dispatching of the materials. They “installed” more pipe and wire than they purchased! They just reported the units so it always looked good. The job ended up in a giant claim with huge cost overruns. What was missing was the accurate measurement of the work put in place.

Earned Value Method

Another approach to trade construction is the “earned value” method. In this approach, the contractor “earns” a certain amount of budget based on the quantities installed. For example suppose a particular 300-foot run of pipe had been estimated to take 24 hours for hangers, 12 hours for fittings and 14 hours for pipe installation. When this run of pipe has been completed, it can be said that the contractor has “earned” 50 hours of his total contract budget. If the contractor completed it with 48 hours of labor and the average cost per hour was within the budget, then the contractor knows he made money on that part of the job. The advantage of this method is that it works on bundles of work completed within a measurable timeframe so it eliminates the need to know how long it took for each piece. The disadvantage is that somebody must measure the work each day. It is very accurate but it also requires a disciplined person to do the measuring. Many trade contractors use their estimating software to “take-off” each day’s work to accomplish this.

Conclusion

Being busy, having a backlog and making money do not ensure long-term profitability. Before selecting software systems or starting your next project, take the time to review the cost control methods currently employed. Talk to your project managers and superintendents for their views, find out what type of information they would like, and what kind of data they can accurately and consistently return.

Next month we will discuss cost control for heavy/highway and structural contractors. Following that we will delve more into the varying needs of self-performing industrial contractors. Stay tuned.