Where did the Money Go? – 9 Guidelines for Owner Construction Cost Management Control
Updated: Jun 4, 2020
Company stakeholders have heated discussions early in a project about scope, schedule and cost, but how often are those discussions followed with regular and detailed scrutiny? Owners understand scope intimately, schedule adequately, but detailed costs, not very well. Most owners don’t want to be accountants and most company accountants aren’t well versed in the contracts and forms of general contractor (GC) pay applications. This skill gap combined with non-accountant GC administrative staff, complex overhead, labor and burden rate calculations and the contract changes that inevitably occur can make a material difference to the amount paid by the owner.
Define the Project. Cost control begins with clarity of scope. Reducing ambiguity reduces the potential for misunderstanding. New trends in Lean Construction are bringing architects, GCs, major trades and owners to the scope definition process earlier and are encouraging more thorough dialog. If at all possible and practical for an organization, this practice will undoubtedly improve the quality of cost estimation and budgeting.
Determine Accountability and Authority. Before the project begins, it is important to determine –and communicate- who is accountable and who has authority to approve work and expenditure. In the absence of guidelines of approval authority, work and cost may be pursued in error and lead to waste of time and/or funds.
Negotiate the Details. In the negotiation process, understand the rates being proposed for all elements of the work, particularly general conditions. Would a reasonable person rent a truck for $800 per month? On a short job, that may a reasonable rate to provide the GC with appropriate mobility to run errands and facilitate the efficient resolution of on-the-spot issues. Conversely, on a large, multi-year project, the cost could be the equivalent of buying the truck for the contractor. What if there are several trucks charged to the project or if there are other, more expensive, pieces of heavy equipment being rented for long periods of time? At the end of the job, does the contract provide the option for the owner to take possession of those assets or to get a credit for a reasonable amount of the useful life of the assets?
Read the Contract. Understand your company’s boilerplate contract or carefully read the GCs proposed contract. Know the contract terms well enough to assess if the contractor is in compliance on an ongoing basis. Company standards that are applied to internal efforts should also be applied to the project and included as appendices to the contract. This includes standards regarding staff reimbursable expenses, limits of financial approval authority, documentation guidelines, etc.
Manage the Changes. It is inevitable that changes will occur, driven either by unforeseen circumstances, errors or adjustments that will improve the end product of the project. When the contract is amended or a change order is executed, read thoroughly and understand the details before approval. In particular, it is crucial to determine whether the change should be funded from contingencies already included in the contract amount or whether additional funds will be required. Be sure to determine which budget line items will change and if any additional overhead or fees will be incurred as a result of the change.
Scrutinize the Pay Applications. Every time a pay application is submitted:
Review cover page for original contract amount, change orders, amounts paid previously, retainage held, amount due, architect sign off
Review continuation sheet (aka statement of values) and compare to prior months.
Have any of the contract values changed between line items? If so, why have they changed? Is the bottom line correct?
Is the percentage of general conditions being billed at a more accelerated rate/percentage than the direct costs of the work? This has implications for bad planning on the part of the GC. This can result from over staffing, waste, theft or other undesirable situations. This should be discussed and resolved with the GC as soon as possible. Early resolution can save significant cost in later phases of the work.
Are the direct costs of the work backed up by appropriate documentation? Is there a person on the owner’s side of the project team who will verify that the costs are appropriate? Generally, corporate accounting staff will not have the experience to make this assessment.
Is the fee amount appropriate? It should either be the % agreed in the contract applied to the current direct costs or a pro-rata percentage of the total fee that matches the % of work completed to date.
Document any discrepancies and attempt to have them resolved before payment, if possible. If not, communicate that they must be resolved before next pay application is presented or, as appropriate, that they will be tracked for future resolution. A log of these discrepancies should be kept as part of the project file and discussed as appropriate in regular project meetings. These are issues as important as scope and schedule considerations.
Look for Trends. Don’t ignore the big picture for the details. While the current pay application may meet all of the above criteria, there may be a trend in one or more of the line items that would predict an overage at the end of the project. In particular, inefficiencies in the management of general conditions early in the project can lead to skimping later in the project. Changes in the market costs of materials and labor will pass through to the project and may result in a material overage (or savings.) Plotting the anticipated burn rate and the linear projection of actual costs can help predict this situation early.
Retain the Records. It goes without saying, but retention of all project documentation is vital. In the event of a dispute, the documentation of correspondence, requested adjustments and questioned charges can mean the difference between reasonably swift resolution and litigation.
Obtain Third Party Confirmation. Even the most scrupulously monitored project can benefit from an objective review. If the project is material to the company bottom line, an independent audit may be necessary. Let the GC know up front that they will be audited by a third party and follow through. This will reinforce the company’s commitment to internal control and accountability for cost control.