ConstructionPro Week, Volume: 4 - Issue: 16 - 04/21/2015

Project Cost Control for Heavy and Highway Contractors – Part 1

Introduction

In the April 10 issue, we discussed various approaches to job cost control for trade contractors. In this week’s issue, the focus is shifted to heavy/highway contractors to discuss the various successful and not-so-successful methods that have been used over the years. Heavy/highway contractors frequently depend on pay items to judge their project progress. However, that may only cover part of the picture. To be complete and effective, a construction job should be subdivided into paid and non-paid items—or direct and indirect costs, as they are sometimes labeled.

 

Indirect Costs

Some indirect items are obvious—insurance, superintendent, job trailer, telephones, photos, etc. These are essentially indirect costs because they produce no work. They are often paid out of the difference between the cost and unit prices of the direct work items. Generally, contractors take the total cost, including direct and indirect costs, and mark it up to their bid price. From that price, they work backward to determine how much markup to apply to each direct cost item to cover the indirect costs plus overhead and profit.


Direct Costs

Direct cost items include specific tasks such as excavation, embankment, culverts and concrete placement. Unlike their indirect cost counterparts, these costs are directly related to the pay items. What is not so obvious, however, is the relationship between paid and non-paid direct items. For example, a bridge may have pay items for concrete in footings, piers and decks. These costs are based on the amount of placed concrete. The owner only pays for the concrete once it is poured and accepted.

 

The work, however, consists of many individual tasks. These tasks may be completed over the course of several weeks and budgeted as individual items by the estimator. Concrete in footings may involve form fabrication, form erection, prefabricated rebar purchases, rebar placement, waterstop placement, concrete purchases, form materials purchases, concrete placement, forms removal and concrete finishing. Usually, the form erection and strip operations are combined into a single item since a crew generally removes the form from one site and installs it in another. The rebar installation is sometimes included in erect and strip forms because the same crew performs both tasks. (It should be tracked separately if separate crews perform it.)

 

Cost Breakdown

In determining how to break down the cost items in such a job, remember that the cost control system design should do three things:

  1. Measure the effectiveness of the construction processes compared to the estimated cost
  2. Determine productivity and unit cost that may be useful information for future bid estimates
  3. Determine earned value for revenue recognition and over/under billing analysis

The first measures how much money the company is earning on the job and at what rate. The second provides useful benchmarks for future estimating. The third is required for proper accounting of work in process. For any of these measurements to be useful, field agents must be properly instructed and the information must be viewed as a tool, not a club. In too many cases, owners and senior managers are so critical of substandard work that field agents distort their personnel time and quantities of work figures to “make the numbers.” This generally results in unreliable data.

 

Unreliable Data

The consequences of unreliable data are threefold, at minimum: (1) Unreliable estimates lead to inaccurate reporting of earned revenue; (2) Flawed measure of productivity and job progress; and (3) Estimators won’t consider historic information because it does not accurately represent the cost of the work.

 

Experienced estimators often review old estimates because they know how the costs were derived. Cost reports from the field may not always be trustworthy since the estimator cannot always be sure if the costs were properly reported. To solve this problem, cost control systems must be carefully designed so the activities are descriptive, clearly defined and properly grouped. A hand-off from the estimator to the field staff also helps ensure that the agents know how the job was estimated and how budgeted costs were covered. Field reporting and costs also need to be monitored and reviewed for accuracy. When a field task is erroneously omitted from the estimate, it should be tracked, not buried, to avoid future problems and record distortions.

 

Next week in Part 2 of this article, we’ll look into details of cost codes versus billing codes, grouping of items to accommodate multiple tasks for both cost control and billing, and making sure your accounting software is designed to accommodate the way you manage budgets, track production and costs, and provide useful reporting for costs versus payments.

 

 

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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