During the estimating and execution of a project, procedures for project control and record keeping become indispensable tools to managers and other participants in the construction process. These tools serve the dual purpose of recording the
financial transactions that occur as well as giving managers an indication of the progress and problems associated with a project.
Outside the U.S. and Canada a standardization of construction cost codes (CSI Codes) www.constructionnotebook.com/ipin2/CSIDivisions.asp has not been formalised resulting in contractors being inundated by a variety of project cost codes and lack of standardization. Meaning, each client from the federal, state and private sector have their own way of developing a cost plan. The Royal Institution of Chartered Surveyors www.rics.org/ started in London 1868, founded the idea of Chartered Surveyors or what the construction industry knows today as Quantity Surveyors. This long standing profession’s primary role is to measure and develop related construction cost or cost plans for clients.
Quantity Surveyors construction cost breakup or elemental breakup is a multi-division cost breakup designed to group costs by trade or construction sequence. This estimate or cost plan format has work well in Australia for decades. But the transfer of liability in recent years to contractors due to “No Guaranty” Bill of Quantities (BOQ) has forced many contractors to measure and price the project independent of the BOQ.
Contractors need to think in terms of project execution, resulting in a divergence from the clients BOQ in the estimating process and more towards construction task based pricing. This is due to contractors knowing more about the construction process required to deliver the project than the architects or engineering firms designing the
projects. This issue is one of the major drivers creating added administration and management costs for contractors over the last decade.
How Are Contractors Coping?
Today, most contractors will tell you that they will only use the BOQ as a guide for estimating project costs. The real challenge is meshing (or rolling up) the task based construction pricing method into the client’s BOQ. This is how the client expects to see the quote from the contractor and very little change to that format is accepted.
Contractors who have standardize internal estimating and project cost codes are seeing a multitude of advantages. Not only is this allowing estimates to move directly into a project budget and program (Gantt Chart) as per the requirement of the build process, but variations can be easily mapped back to the original contract estimate. The time savings are enormous. This allows project managers to get busy managing the job instead of designing one off spread sheets without an audit trail back to the estimate. Though there is still one major problem. Contractors still have to report back to the client or prime contractor in terms of progress payments or other construction considerations. Additionally the quote has to be produced in the format the BOQ was provided. Increasingly construction companies are looking to estimating and project management software that provides the flexibility and integration to adapt to the lack of standardization. A recent report commissioned by the Bureau of Statistics shows the Australian construction industry productivity is declining by over 2% per year. Many of contractors intuitively know overhead costs are going up by the deduction in profit
margins.
What is Quest doing to help Contractors Reduce Overhead Costs
Quest ProContractorMX was specifically designed to manage these challenges and reduce the amount of administration time weighing down construction companies. ProContractorMX can easily import BOQ using the clients cost categories yet allow contractors to apply their own company WBS Codes. Cost codes can be designed, edited and updated as the contractor needs with an unlimited amount of descriptions and referencing codes.
The result is a quote that can be produced as the client requires and a flow on effect into project management interests once the job is awarded. Variations can be tied back to the original contract estimate so contractors can track additions or deductions in construction costs against the original and outstanding project balance. Additionally project budgets using WBS Codes, can be managed by percent complete, unit complete, or time and materials independent of the client’s billing schedule. This gives contractors the flexibility to manage the project in terms of how it will be built yet summit payment application in the required client format.
Eric Silcott – director of Quest Business Solutions writes. “From my experience most contractors have never heard of WBS Codes or even considered applying a standard estimating and project management structure to their business. There is a real
misconception that an accounting package like MYOB with chart of accounts is the tool needed to budget construction costs. “
“What many contractors don’t realize that once a supplier’s or subcontractor’s invoice hits the payables basket and is allocated to a chart of account category this does nothing for managing project budgets, it’s simply historical information. What
they need to do is apply a standard cost code breakup by project and allocate
payroll and any other expenses by WBS Codes. This will not only allow them to take advantage of real time job costing but also give visibility to the all important actual(s) against estimating cost comparisons so mistakes are not duplicated.” If you think about it, construction accounting only provides historical cost information. For a contract construction company, money is earned and lost at the estimating and project execution side of the business. Nothing against accountants or book keepers, they play an extremely important role, but I’ve seen a lot of good project managers being restricted by accounting processes. The tax man needs, have little to do with getting a job done on time and on budget.
Closing
In simple terms, contractors need to standardize their own cost codes. The Australian government doesn’t understand or is unwilling to lead in this critical area. The lack of standardization is creating additional overhead costs and risk to contractors. Quest encourages companies to look into this area and review technologies that can assist in reducing these challenges. For further information on this subject
please go to www.pmbook.ce.cmu.edu/12_Cost_Control,_Monitoring,_and_Accounting.html
Written by: Matthew Green, Quest Business Senior Consultant
