CONSTRUCTION JOB COSTING
Job costing - in its broadest sense - includes the allocation of costs; the determination of earned value and profitability; and the control of materials, subcontracts, variations and progress billing. Inadequate or inappropriate costing is one of the most important causes of contractor failure in the construction industry.
Why Is Costing So Important?
Success in contracting is basically dependent upon two things:
Getting work at the right PRICE, and
Doing the work at the right COST.
Costing makes four vital contributions to this success:-
1. Running the Job
It should assist the project management team to evaluate progress and efficiency on the job and provide a timely and effective aid in motivating staff to both reduce costs and increase output. This aspect (commonly called "cost control" since costs are compared with a value or "standard" derived from the estimate) must be of primary importance to the contractor because of the immediate effect on profitability. If direct labour and plant operations are being undertaken, then clear and focused results should be available promptly and frequently - usually weekly - and within days of the period end.
2. Forecasting the End Result
A contractor's credibility with supporting organizations, as well as his own strategic and financial planning, demand that he be able to predict the outcome of current jobs with some confidence - and early rather than late. This requirement can overlap with the first (management may wish to take action to contain problems that are beyond the capability of the project team) but is really a separate exercise and part of overall company control. A monthly reporting cycle may be adequate here.
3. Help with Future Tenders
Cost reports should provide information that will assist estimators in tendering similar types of work. Reports should highlight and separate those variable costs which require special discretion in tendering, e.g., productivity, wastage rates, overheads. Data must be accurate - and known to be so by estimators and management - but timeliness is less important.
4. Support for Claims
Costing should be capable of supporting contractual claims. It must provide details of the actual cost of identifiable variations and provide background to more complex claims in the form of productivity comparisons across time periods, operations and jobs.
Effective costing systems must also be efficient. They must satisfy these conflicting demands without being too complicated or too demanding of supervisory and clerical time.
VARIOUS LEVELS OF COSTING
In the makeup of costs four different levels can be identified:
1. Unit Resource Cost
The cost per man-hour, the hourly cost of owning and operating equipment and the purchase cost of materials are all basic input costs.
2. Elemental Cost
The basic input costs combine with productivity and usage rates to produce - for each cost code - elemental costs for labour, plant, materials and subcontractors.
3. Contractor's Cost Code
The elemental costs are summarized at a cost code level (not necessarily the same for each type of elemental cost). These codes may range from those closely associated with pay items to codes that are more time related, such as supervision.
4. Owner's Cost Codes
For his own control, the owner or developer may allocate portions of the total contract outlay to different cost codes. These allocations are typically at a summary level and reflect both contractual commitments and directly incurred staff costs etc.
SOME APPROACHES TO COSTING
The differing emphasis of costing systems is largely a response to the relative importance and variability of the labour, plant, material and subcontract elements in the costs incurred. Where one of these elements is predominant in variability, we often see extreme "partial" cost systems such as:-
"Man-hour" Reporting
Trade contractors (e.g., electrical, mechanical or bricklaying) often find their costs break down into fairly small or "fixed" amounts for materials and plant, along with predictable hourly wage rates. Financial exposure is largely through productivity variation. Cost reporting can consist of a comparison of actual and planned man-hours for each of the cost codes. This makes allocation simple and quick and, without concern for varying wage rates, eases the task of comparing jobs through time. Problems occur where the labour and plant mix changes. The concept is really only applicable where plant is not significant or the plant/labour mix is fixed for each type of operation. Subject to the same constraints, the system can be successfully extended to machine or whole crew operations.
"Commitment" Reporting
Public authorities, developers and some building contractors execute virtually all their work through contracts or subcontracts. Financial exposure comes from contract letting and variations; i.e., when making "commitments". The risk of productivity variation and materials wastage is passed to the subcontractor. "Commitments" focus on the end result rather than progress to date. This has obvious merit and economy when the commitments can be relied upon. It cannot be effectively extended to handle direct labour, plant or variable material usages. The limitations of these approaches to costing, (particularly for the more diverse general contractor who has to contend with changing mixes of direct labour, plant, materials and subcontract) has led to the use of more "complete" costing systems such as:-
Full Matrix Costing
There has always been an intuitive appeal in the idea of a coding matrix formed from the item cost code and an "element" code corresponding to labour, subcontract, etc. Value to date for each of the "cells" can be determined from measured progress and the "allowed" elemental unit costs in the estimate. Declining computing costs have encouraged many consultants to recommend - and many contractors to adopt - this system. For reasons of economy and system integrity, many went further and "integrated" the cost allocation with posting to the accounts. The results are often unsatisfactory and the simplicity an illusion. Accuracy and timing are dependent upon the slowest and most difficult element to code - usually materials - and a system of accruals must be introduced to accommodate late postings. Coding is either very broad or materials must be split across codes reflecting contract pay items or plant and labour divisions. A conflict arises between the accounting system's need for accuracy and the costing requirement for timely reporting. Contract and support staff expenses increase because of the need for detailed coding and posting of all costs. Progress on an item may not be identical across all elements, making assessment and valuation difficult. Of course, many of these problems can be reduced by a flexible cost plan that splits some of the elements into more appropriate codes. However, the basic defects remain and limit the success of this system. |
