How to keep a track of construction project costs
So you have won the tender, signed the contract, and got the programme agreed with the client. So how best to keep track of construction project costs and ensure you complete on budget!
The construction industry requires a slightly different approach to ensuring it keeps a track of costs. The first thing is that costs occur over many months and even years, so adjustments need to be made to take account of this, but also adopting a consistent approach will give the most accurate results.
As an example, if the total cost rate is set for an employee on a project it is important to keep this updated if pay is increased or other costs increase. Below are a few more areas to consider.
The order of things
There is one thing which many smaller and indeed medium sized construction companies struggle to implement and that is a purchase order system! That is one that people stick to. Get this right and it can really help control costs.
The very nature of how the industry has tended to work with sudden changes due to weather, or availability of labour has meant forward planning material and indeed sub contract orders can be difficult.
But current cloud based systems and availability of 4g and WIFI can now allow a lot more flexibility to when it comes to purchase ordering.
The benefits of making this work are numerous, one of which is making sure costs are allocated to the right project, you just need your suppliers to quote order numbers and then if they have an obscure delivery/job address like ?phone 07777 123456 for directions? or the classic ?same place as Monday? or my pet hate the office address! it saves questions being asked when invoice arrives as to what project to allocated it to.
Do you approve
Talking of invoices, if orders are placed with the agreed quantity and price included, it means that when the delivery is checked it can be approved straight away which leads to the benefit of having a much quicker and clearer picture of actual costs.
A word of caution about leaving this entirely to an inexperienced or junior employee, I have seen examples where a supplier price code for a box of 100 screws is set up as per box at ?2.30, but when the invoice arrives it is for 100 at ?2.30 so ?230.00! an error which could be missed because of lack of understanding of what the invoice is for.
This is why I always advice that invoices get a high-level check by a manger/director even when it has been checked against an order and delivery note.
Delivery note approval are another area worth giving some thought to, typically a delivery driver is just interested it getting a signature and will accept anyone?s! but if deliveries are not checked on arrival it is hard to query when later it is discovered some items are missing or damaged, that is why it really pays to have the site manager or a trusted employee often the forklift driver to check and approve deliveries.
One to watch is now that more suppliers use plan paper instead of carbon copy delivery notes the approvers makes a note/amendment on both the supplier and the customer copy to reflect the missing/damaged items.
Another is making sure when items are returned for credit the driver gives a return note, a lot of drivers will not accept a return unless prearranged so check this with your suppliers and keep your sites informed.
Time to wave the flag
So you have your project budget set up and costs are being allocated when invoices are approved and labour/wages are paid great. But this is where things get a little complicated when it comes to construction.
A construction project as mentioned can last a number of months so the total cost of will not get spent for some time so comparing actual to budget each month will not make much sense, what needs to be done is a progress or interim valuation which allows you to compare what the budget cost of progress is so far is to the actual cost.
A simple example for anyone not familiar with this is if building a house and at the end of the month we have completed the roof but not tiled it, we take the elemental cost budget for all the build stages to this point, and if we have a cost for the total roof including the tiling we apply an estimate of how much of that is spent so far so maybe 60% this is then compared to actual. This is a very simple example and it maybe that there is a stock of material on site which needs adjusted for and maybe some invoices from suppliers and subbies need added on before the comparison can be made.
Now it is time to start thinking whether to raise a red flag!, if cost is higher than expected to be further investigated or to see if a variation has occurred or change order cost has not yet been added to the budget.
But equally to raise a green flag! if costs are below expected budget cost, great you think! Not necessarily firstly it maybe that you are using these same standard costs on new tenders and this might price you out of the market.
Secondly it could be you have some other costs you have over looked, or they were allocated to another job. The aim is to be in and around budget, this is construction! and there has to be a balance between tracking every variation in cost and the value gained from this.
If the above, seem a little complicated and you need some advice or feel happier getting someone else to do this please get in touch and enquire how the power of cloud accounting and having a finance business partner can help you keep on track!
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