How important is the Cost Report in Construction ?
First and foremost what is a Cost Report?
A cost report is a means of reporting the revenue and the costs of construction projects on a daily, weekly and monthly basis.
It is the bible according to the numbers for the survival of all construction companies.
It is the ultimate X – Ray of the company’s present financial condition.
It is the ultimate in preventive maintenance for negative financial issues in the future.
It is a measuring stick for the entire construction operation.
It is EVERYTHING!!
When I first started in this business, everything was done by hand. What does that mean? That means that with the help of a pencil, an adding machine, and maybe a ledger pad, we all kept track of the financial elements of a construction project. What did we all keep track of?
- The revenue side of the ledger. In normal situations, where the project was a simply lump sum agreement this was the value of the contract to perform the work. In some instances, such as a guaranteed maximum price, or a time and material agreement, there were variations on the revenue theme. However to understand the simple concept of a cost report, let’s present the simplest of the agreements, the lump sum. If the contract is $100,000.00 the revenue side is the same.
- The cost side of the ledger. The cost side of the ledger simply meant the many different costs that will be incurred during the completion of the project, which includes.
- Subcontracts: the various agreements with individual subcontractors to complete certain elements of the project. Electrical, plumbing, HVAC, etc. all subcontracts that are negotiated and agreed upon to provide the various elements required to complete the project.
- Purchase Orders: the various purchase orders required to purchase material, equipment, or other items required to properly complete the project. Carpentry items such as plywood, masonry items such as brick and block and any items not included within the subcontract agreements made with subcontractors.
- General Conditions elements which are required to complete the project, this includes insurance, temporary sanitary requirements, water, electrical, building permit costs, inspection costs, or any soft costs that are associated with completing the project.
- Payroll costs: this would include the managers, the superintendents, the field engineers, the clerks, etc that become a part of the payroll costs for the project.
- The burden, this is all the costs associated with the other costs. Namely the taxes involved for the material purchasing, the taxes and insurance and vacation costs, associated with the payroll. All the other elements of costs that are associated with the completion of the construction project.
- Each day the costs were accumulated and the financial record updated on the cost side of the ledger. The revenue side, unless a change order was granted remained in most cases a constant.
- Each week the costs for the daily reports were summarized in a weekly report for presentation to the proper management personnel.
- Each month the weekly costs were summarized in a monthly report for upper management and in most cases the accounting firm responsible for the financial integrity of the company was provided with the monthly report for their digestion.
- Each month the accounting firm would issue a cost report to management updating them on the status of the financial health of the company.
What was hoped to be accomplished by this financial cost reporting?
- Overall financial health of the company, is it making money or losing money?
- Financial data for estimating purposes, if the unit value of a residential structure was estimated at $250 per square foot and the cost reporting was consistently identifying a loss on the project, then the estimating department needed to increase the unit values used for the estimating of similar projects.
- Projection of the future costs and financial reporting for the project.
- Anticipation of financial cost issues with enough time to provide some type of management input and remediation for the loss. It is obvious that the earlier the identification of a financial loss, the more time is available for the actual correction or salvaging of the loss.
- Overall financial identification of the health of the company and the association of any future financial gains and uses of such gain to make additional money.
- Insight into the project management of the job and an insight into the proficiency and skill of the project manager for the specific project.
- Overall summary of the company’s ability or lack of ability to make or lose money and a gage for the overall financial future of the company.
- Insight into specific subs and suppliers.
To summarize, the use of the cost report became the overall tool to identify issues or problems and to provide insight to all avenues of the company.
So what happened??
Youth, the computer, lack of hands on experience, lack of mentoring, lack of authority and a mis-understanding of the tools that provide the cost report.
Remember I said that we performed the cost reporting by pencil and by the use of an adding machine. In this manner, every cost, every purchase order, every change order and anything and everything that made up the cost report was a hands on entry, a look at the number, write the number down and add or subtraction of the number from the tally. Each and every entry was looked at, analyzed and identified as a reason and a correct or incorrect number.
Fast forward to the present day cost report. What do we find.
- In most instances the entry into the cost report is made second, third or fourth hand. The computer programs of today allow the user to insert the value that will eventually end up in the cost report. The contract, the purchase order, or the change orders, among other items are developed and entered when the user of the computer program creates any of these documents. This occurs one time, at a time when the user is not even thinking of the cost report or any financial evaluation of the project.
- Due to the ability of the computer programs to allow anyone in the office to actually enter the program and add or subtract various documents, the accumulation of financial data that is imported from other documents into the cost report comes from many sources. Not just the project manager, or the field engineer, or the clerk.
- The addition of data into the cost report appears in the report invisibly and without fanfare. Therefore the accumulation of data occurs without the knowledge of many of the individuals related to the project.
- The cost report is generated automatically and without any personal input, thereby making it a creation of a machine, with the same importance as all the other reports and machine created documents.
- The importance and or the significance of the cost report is an unknown entity to the majority of young and aggressive managers within the business.
- In many cases, I have actually witnessed, a total and complete inability of managers and actually higher management to understand the cost report.
So what happens in general, the importance of the cost report is diminished by the actual computer program that generates the report. The lack of insight and the ability to accurately read the report is lost in the youth and the aggressiveness of the new and better manager. The ability to project the final cost for the project is in many cases simply an automatic function of the program and not an individually created and manipulated analysis. In other words there is NO thought process to the outcome of the report. There are many out there that might be reading this and will respond by the reaction that there should not be any individual creation or projection of costs by an individual, it should all be by the book and by the machine. I have a strong tendency to disagree based upon the following.
- An analytical projection of costs is inaccurate due to the fact that there is no input of what to expect or what to allow for in the cost report.
- Upfront costs are usually not considered in the computer generated projections.
- Manpower changes, supervision changes are not considered.
- Means of performing the work is not considered or anticipated as changed.
- Bad weather or good weather is not considered within the computation.
- Winter weather projections, and or costs, nor the efficiencies of summer weather cannot be anticipated.
- Competitiveness is not considered. What will happen if you challenge the sub that is not performing with another sub beside him that is?
- Money issues such as lack of payment or upfront payment or payment for the payroll portion of the project, are not considered.
- The knowledge that a machine came up with one of countless reports, and that the report is only as good as the input will be elements that will simply take the importance of the cost report away.
- The concept of actually using the report to generate a better or different way of approaching the way the job is performed is more difficult to see when the computer report is a data collection and not individual inputs.
- The ability of management to foresee and correct financial issues is not a part of the knowledge and experience that many of the managers within today’s construction industry have.
The cost report was and still is the most important tool for the project manager. If you feel that money is important to the success of your business and that the accurate financial studies of daily, weekly and monthly cost reports is important to your success, you have to find a means of using the financial cost report effectively. The following are my suggestions.
- Mentor your young managers. Insure that they understand the concept of the cost report and clearly, with the understanding and the patience of JOB, make the new managers aware of its importance. Power point presentations as well as tests and quizzes are necessary and should be formally presented, YOU MUST SUCCEED IN THE PRESENTATION
- Identify individual success stories with the use of the cost report. Indicate how the maneuvering of the way a task is performed, or the number of men, or the use of a special product, or the increase in the hours worked, etc. can be used to improve the cost report.
- Identify by example the importance of accurate values and timely reporting of financial data into the cost report to allow the output to be accurate and insightful.
- Reward the successful and challenge the unsuccessful. It is important that individuals realize that there is a downside to not using the cost report to financially analyze the project.
- There must be a reason that an individual uses a cost report, if they do not understand why they are using it; they have no reason to be a project manager.
It is so important to the success of the individual as well as the projects to properly use the cost report. It is inherent on the project manager to understand the gains as well as the losses within the report and to identify the need to understand where the cost went and how the money was actually spent.
COST REPORTING is invaluable to the success of the construction project, the construction company as well as the construction industry. Without an accurate and detailed one is like driving without a GPS, you have no idea where you are going until you get there, and then, it could be too late!!