As I sit in my office working on a large construction claim, I can hear my associate chastising the field management team, regarding a cost report on a large highway job. They are being questioned on a cost report that apparently does not indicate a very lucrative financial forecast, for the future of the project. I am listening to numbers well into the hundreds of thousands of dollars lost and have to wonder in amazement, how this could have possibly advanced this far?
What can we learn from this type of interaction and communication?
The most important aspect of any cost data program or report .
The most important aspect of this type of management interaction that I just witnessed, is the lack of foresight in projecting any cost issues that may be developing on a project. This lack of due diligence delinquency, is squarely on the back of field management, but certainly reflects negatively on upper management as well.
The reason that a cost report is generated and updated, is to predict any cost issues at the time of their development. The rationale of this type of reporting, is that the issues will be identified in time to determine a resolution and subsequent solution to any negative cost impacts that could be occurring on the project.
How a good construction cost control system, monitors cost, is extremely simple.
Each activity on the project is identified with a quantity. For example if there is foundation concrete on the project, the estimating team quantifies this activity, and develops a unit price, which is then multiplied by the total quantity and a value for the activity is subsequently established. This same exercise is repeated for each construction activity on the project, until a total value for the project is determined. Once the project is contracted for, this estimate is transferred to form the cost report for the project.
The field management team is assigned to closely monitor the actual field conditions and performance, by identifying the daily quantification of progress on the project. A quantity analysis is performed for each daily report and entered into the project cost report. This analysis is compared to the anticipated estimated value for each unit that makes up the actual line item for the project. In this manner, any cost deviations are quickly and accurately determined, and the final projected value of the line item can be analyzed.
If there is significant deviation between what is actually being performed in the field, and what the project cost report indicates for each line item, adjustments can be made in the field operations, hopefully reducing any financial losses that are being incurred.
This is the total reason for the cost report which provides the ability to logically and efficiently interpret field costs in real time, by the field management team.
Want to know about cost reporting in construction?
Key to the proper use of cost reporting on a project.
One of the principal elements regarding the proper use of a cost report on any project, is the timeliness of its use. The most important concept of cost reporting, is to allow the field management team to predict cost issues on individual line items or work activities. This prediction is initially used for identifying any cost issues that are occurring on the project in time to minimize any negative cost conditions. For example, if the wrong type of equipment is being utilized in the field to perform the work, and the estimating team had anticipated a smaller or larger piece of equipment, maybe this is the reason for the negative cost projection. The simple solution of changing equipment, may allow the field to reduce the cost of the work, and bring the individual line item closer to the estimated cost. Or in some instances, the field conditions have evolved on the project to make it impossible to perform the work as originally planned. In this case, the field team could start to investigate a possible claim against the owner for the additional costs, if the changed conditions have not been caused by the contractor, but were a result of the owner’s actions.
To make all of this work, the field reporting must be accurate and timely, to allow any adjustments to be made in an effort to minimize any financial losses. Accuracy is key to the success of this cost reporting, and management must be both consistent and efficient in their reporting. Remember that garbage in is garbage out, just like all data informational systems.
Primary reason cost reporting fails.
Although the concept of cost reporting and prediction appears relatively simple and easily followed, the typical field management team will fail in more cases than would be expected. Why would a field management team fail at the proper use of the cost reporting system?
Unfortunately, as with a majority of construction failures, there is a reluctance to perform the required paperwork and a hesitance to accept an inherent realistic financial prediction that results in financial losses on a project. The construction industry has promoted the concept of “ bullshit” to such an extent and for so long, that it is very difficult for a seasoned construction veteran to admit defeat or predict failure. They would prefer to kick the can down the road in an overall effort to solve the issue. The majority of construction personnel do not like what is negatively determined as “ paperwork”. In this computer age, this term also reflects that daily use of a computer keyboard. This inherent reluctance, is magnified by the normal human tendency to not like to face a financial disaster. We all have the same tendency, whether it be our credit card balance, school loans or the mounting mortgage payments, it is simply easier to put off for tomorrow, what you should be accomplishing today. This is a human tendency, especially if the ultimate forecast is known to be negative, and difficult to face. In addition, if you simply stay positive, everything will work out, until it doesn’t, at which time it is too late.
Cost reporting will fail if any of these tendencies are allowed to determine how the cost reporting systems are being utilized. Proper cost reporting must be consistent and unwavering. Quantities must be accurately determined for proper projections to be made. In addition, the results, even when negative, must be analyzed in a timely manner without panic and with a realistic attitude.
Cost reporting is a beneficial tool if used in the proper manner, and nothing but a waste if not. There is no reason to predict a loss at a time when there is no time to correct the loss. Once the money is expended, it is gone, and there is no getting it back. Create a means of predicting a financial loss in time to change something and minimize the loss.
How can proper and timely cost reporting be managed?
Construction personnel must be handled in a manner that stimulates their interaction and their awareness of the importance of a task. The normal construction management personnel is a pragmatic individual, that has chosen construction for the reason that they enjoy building as well as the management and supervision of construction projects. These individuals are not journalists, or computer analysts that have chosen a field of so called paperwork and data control No, these individuals are normally offspring of other generational construction workers and are using their contemporary talents to work within the industry.
Based upon this, obviously, bias and very generalized opinion of construction managers and supervisors, how do we keep these individuals aware and interested in the proper and timely use of the cost report.?
The most important aspect of making a task relatively easy to perform, is to make it stress free. This is important as a general management tool for any aspect of a job. If a task is stress free, then it will be accomplished on a normal basis and without hesitation. If a task only adds to the stress of the day, then it will fail.
The management of a cost report when it confirms a problem, cannot be associated with punishment or chastisement. The results must be acknowledged as a tool, and not a measuring stick for performance. The manager must be educated in the use of the cost report and must be convinced that a negative result or interpretation will not result in a penalty of any sort.
The cost report is a tool to predict a fixable problem, and not to identify a foregone conclusion.
This is extremely important!
The manager must feel that there is a common working relationship that all parties will use when reviewing the cost report. If an item is failing, then all parties involved with the project must be associated with the failure, and the subsequent solution must be shared by all parties.
Allow the manager in charge of the project to offer suggestions for solutions to the issues. Do not simply acknowledge the problem, and state your interpretation of a solution. Allow the manager in the field, first dibs at a solution. This will stimulate future interaction, and allow the field manager to interpret the correction of the financial problem as their solution, not upper management, or someone else's solution.
Why is proper cost reporting so important to the success of a project?
The proper use of a financial cost report, can save the project thousands if not millions of dollars. The ability to anticipate overruns and project losses is invaluable to the success of the project. Years ago, when the projects were run by the seat of the pants, we had no idea where the actual money was, or was not, until the job’s end. In today’s extremely enviable age of total and complete computerization, there is no reason why we should not be constantly on the forefront of all financial data. If we can determine that an activity is costing too much money, what a perfect situation to financially identify this immediately, and in time to coordinate a different method of averting the financial issues that continuance in the same financially losing manner would entail.
Timeliness, accuracy and diligence are the keys to properly handling your cost report
Peter Arcoma has been in construction for over 40 years. He currently works for Manafort Brother in Planville, CT. You can read more of his construction insights on his personal website at www.builder-questions.com.