Part 1 of 4: Mastering Construction Project Cost Reports – The Good, the Bad and the Ugly
I’ve always prepared monthly project cost reports for my projects. They’ve often been the fun part of the project where we’ve seen how well we’ve done that month on the project – how much profit we have made. Of course there have been some projects where we’ve lost money and these cost reports haven’t been quite as fun. These cost reports produced their own challenges as we tried to figure out where we were losing money and what we could do to recover the money and prevent further losses in the future. So helping your construction clients master the creation and interpretation of cost reports is obviously critical for the health of their businesses.
Construction project cost reports can provide a huge amount of valuable and useful information which can literally save clients’ projects, save clients’ companies, and save lots of money. But unfortunately some cost reports are wholly inappropriate for the construction industry, others are completed poorly, and a few take an inordinate amount of time to complete. Many don’t utilize the correct information - all of which can mean that the project team wastes their time producing misleading or useless data. In some cases the data may be out of date by the time it’s produced while in other cases the data is simply ignored.
The Good – How Cost Reports Help
Make sure your cost reports process is setup to help in the following ways:
- Provide a basis for pricing future projects. Knowing where money was made and how much, as well as where money was lost, helps contractors price their next projects more accurately.
- Investigate losses. Knowing about losses can help contractors prevent further losses from occurring and hopefully aid with recovering the loss. The losses could be due to:
- Wasted materials on the project which could include excessive breakage or work that has to be redone due to quality issues.
- Theft or fraud on the project. Sometimes this may be direct theft, other times it could be subcontractors and suppliers over-invoicing for their work or materials, even double invoicing for the same items.
- The contractor failing to make claim for legitimate costs from their customer.
- Poor productivity. Losses incurred with labor or equipment is often an indication that the productivity on the project is lower than allowed.
- Make the project staff accountable. Reports afford a target for the project team to aim for - without a target to aim for the project team can become complacent, not focusing on productivity and the smart and efficient use of materials.
- Assist the company with their financial forecasts, budgets and cash flow. Knowing the project is losing money may allow the company to make contingencies and take steps to survive the losses. More than one company has gone bankrupt when a project un-expectantly declared a large loss.
- Identify project losses that are often indicative of other underlying problems on the project.
- Provide information on which types of projects are profitable. Some contractors keep constructing particular types of projects even though they aren’t good at them and the projects always end unprofitably. Knowing which projects aren’t profitable means the contractor can avoid pricing them and concentrate on projects which they know they can complete profitably.
The Bad – Cost Report “Gotchas”
Unfortunately some cost reports can be complex and time consuming to prepare. Furthermore contractors sometimes make errors in their cost reports which then provide bad data. Occasionally management ignores the cost report and doesn’t take action to figure out why the project is incurring losses, or they misinterpret what the cost report is showing.
Some Project Managers leave the preparation and interpretation of the cost report entirely to their Estimators or Contract Administrators and pay little attention to the end report. They view it as just another document produced for their senior managers.
You’ll likely find the following problems with costs reports:
- The reports take too much time to prepare. I’ve known some companies with cost reports that took several days to prepare. You couldn’t find the Project Manager for two days as he was locked away in his office trying to complete his report before month end. This meant that things went unattended on the project while the cost report took priority. The lengthy time taken to complete the report could be because:
- The information required to complete the cost report isn’t readily available.
- The cost report is too complex to complete.
- The cost report breaks items down into too much detail making it difficult and time consuming to track down the costs and revenue.
- The reports deal with historical data – often a month or more after the fact. This means by the time we detect a problem on the cost report it may be too late to take corrective action, or the problem may already have become worse than that reported. The more up to date the cost report the more useful it is to the project team. We need to understand the historical nature of the information and adapt our actions accordingly.
- The reports don’t include all of the project costs. This may be because:
- Subcontractors or suppliers are late with their invoices and no allowance is made for these in the cost reports.
- Not all of the costs have been captured because of problems with the accounting system.
- Invoices are held up because of disputes so they aren’t processed or allowed for in the report.
- They aren’t comparing revenue against the correct costs. Although the overall result may be correct the report may indicate we are making money on some items while losing items on others. This is normally because costs and revenue haven’t been allocated to the correct cost codes.
- The revenue used is incorrect. This is usually because:
- The information hasn’t been entered correctly into the cost report.
- The monthly valuation, or claim, is incorrect.
- Often the preliminaries and overheads are claimed each month according to a set percentage. However the costs associated with the preliminaries are usually not incurred at the same rate. These costs usually vary depending on the stage of the project.
- The report has math errors or the data hasn’t been entered correctly. Sometimes in the rush to complete the report the project team makes the incorrect assumptions or even guesses costs.
- The cost report doesn’t take into account the costs to completion. Often projects appear to be profitable (their cost reports show a profit) until the last few months when things suddenly go wrong. This is especially the case with projects that run past their completion dates. Invariably the costs of remaining on the project beyond the scheduled completion date haven’t been allowed for. Project teams regularly underestimate the costs of completing punch-lists (final quality control items), completing project documentation, and handing over the project.
- When the report is completed nobody bothers to read it because it is too lengthy and difficult to interpret.
The Ugly – Lies, Manipulation and More
But even when the project team has all the correct information we can encounter ugly, dangerous problems:
- Some project teams don’t like to show a loss and will manipulate the cost report to show a profit. Of course ultimately the truth will come out. Regrettably I’ve never found a project making a loss to suddenly turn around and become profitable unless action was quickly taken to stem the loss and reduce costs or uncover additional revenue.
- Unfortunately some managers don’t like bad news. I’ve been told to:
- Not show the loss I had calculated on one project as the manager had previously reported to their manager that the project was going to be profitable.
- Add in revenue from change order requests we hadn’t yet submitted. As long as the customer hasn’t approved a claim it is in doubt, and may be rejected, or the final agreed valuation may be less than what we claimed. I don’t like trading on claims which haven’t been approved since it’s dangerous. I would rather show a loss, and at least the project team is reminded to resolve the outstanding claim as soon as possible.
- Immediately cut costs by reducing the number of employees, even though this wouldn’t have solved the problems and would have hurt the progress of the project.
- The reports aren’t used or the information in the report is disregarded.
- We assume the wrong reason or cause for a loss. On one project our cost report showed the project was losing money on concrete materials and the Project Manager attributed the loss to the fact that the client had changed the mix design and asked for higher cement content which we would claim later. Yes, this did contribute to the loss, but when we eventually uncovered the real cause, which was that cement was being stolen from the project, we had lost over a half million dollars. Sometimes the project team is quick to blame the estimating team for losses on the project when in fact the main contributing factors are something else.
What we can do to make construction clients’ cost reporting better
- Often cost reports and accounting systems are transferred from other industries but they aren’t suitable or robust enough for the construction industry. Preferably use systems that have been developed specifically for the construction industry. If using QuickBooks, make sure all costs and payroll info (derived from time tracking info) are being costed accurately and timely.
- The systems used should be suitable for different types of projects. No construction project is exactly the same. In fact there can be large variations of material, equipment and labor inputs between building projects, roads, concrete and steel projects.
- Pricing a project should be done in a logical manner from first principles calculating the labor, material, equipment and subcontractor components for each task. These should be broken down further to reflect the components that will be measured and assessed in the cost reports. The pricing breakdown needs to be readily transferable to the project when revenue is calculated each month for inclusion in the cost reports. Without the alignment of the company's pricing (estimating/takeoff) methods with their accounting and costing systems the project cost reports can become difficult to compile, or yield meaningless information.
- Most construction projects don’t resemble factories. Workers on a construction project don’t do the same task every day and all day long. A construction worker can move between several different tasks in a day and it’s not always easy or practical to measure each and every task the worker is engaged with as well as the exact time spent on a particular task. Getting time reported and moved into accounting using a modern time tracking app can help. Sometimes cost reports have to focus on the overall picture and when a problem is detected a more in depth analysis will have to be done on the project site.
- Cost reports should be simple to compile, have cross-checks in them to uncover obvious errors, and have results that can be easily interpreted.
Summing it All Up. What Does This all Mean?
Regular construction project cost reports are invaluable and can provide much useful information. However, cost reports with the incorrect information can give the project team a false sense of security. It’s essential that cost reports are kept relatively simple and also that companies have accounting systems which can quickly and easily provide accurate data to support the cost report.
It’s important to investigate anomalies in cost reports. Don’t just take the report at face value. I’ve discussed investigating your losses, but sometimes it’s equally important to investigate where you are making money. You don’t want to find later that where you thought you were profitable you actually aren’t, and there were in fact errors with your report.
Stay tuned for the next three articles in this four part series on helping your construction clients. Now go help your clients be awesome!
with QBO and QBDT. Author Paul Netscher writes for the ClockShark blog and is the author of ‘Successful Construction Project Management: The Practical Guide’ and ‘Building a Successful Construction Company: The Practical Guide’. Both books are available in paperback and e-book from Amazon and other retail outlets. Visit www.pn-projectmanagement.com to find out more about these books)