What is a project cost report?
Cost reports usually compare the costs spent on the project with the income earned. Usually these cost reports allow contractors to break the cost and income down into separate cost codes. Contractors can then compare costs versus income for labour, equipment and various materials. Some reports can be quite detailed and break the report down even further to different types of labour and equipment. There are dangers of breaking cost reports down into too many different categories as it can become difficult to monitor, which inevitably leads to errors.
Cost reports are usually done on a monthly basis. However they can be done more frequently, even done daily for a particular task. Contractors often don’t do cost reports as they believe they take time and one needs computer access. Yet, I have done simple exercises in the field on a daily basis. So for instance, on a bulk earthworks job if you know what each item of equipment costs it’s easy to work out the hourly cost of the equipment team (say excavator and trucks). If you know how many cubic metres of earth the team is moving in an hour it’s simple to calculate the cost per cubic metre.
Why cost reports are useful
Project cost reports can yield much useful information. They often save contractors money, or help contractors make more money.
I’ve always done monthly project cost reports and found them useful for a number of reasons. They:
- Uncover theft or fraud - One of my projects was in a remote area of a foreign country. The project required twenty thousand cubic metres of concrete, which was produced from our mixing plant on site. The cement was transported in bulk from a cement factory six hours drive from the site, using our own cement tankers. We couldn't seem to get cement delivered fast enough and the project was constantly delayed due to shortages. Our monthly cost reports showed that we were losing money on concrete materials. The project team couldn’t explain the losses which became worse each month. Eventually the site team reconciled the concrete materials and found that half a million dollars of cement was unaccounted for. On investigation we found that when our cement tankers carried a load of cement to the project they made a detour, stopping off and discharging cement from one of the tanker’s compartments, which the drivers sold. In fact, a third of every load of cement was being stolen from the truck en-route to the site. Not only was there the direct cost of the stolen cement, the project also had insufficient cement as every truck only delivered two thirds of what they should have, and the trucks took a couple of hours longer on each return journey because of the detour to unload cement. The project suffered serious delays due to a lack of cement. We have often uncovered similar cases of theft and fraud by reviewing our monthly cost reports. Some of these involved suppliers double invoicing us, or delivering less materials than were on the delivery dockets.
- Ensure materials aren’t being wasted – Sometimes projects use more materials than they should. Concrete slabs are cast too thick. Materials are broken in transit, while in storage, or when being installed. Materials aren’t mixed properly and too much of one product is added. There are often wasted off-cuts because the wrong size material is ordered, or the installers aren’t working to a cutting schedule.
- Act as a check that all work has been claimed correctly – On one project it appeared we were losing money on reinforcing steel. The contract administrator was convinced it was because there was unfixed stock on the project. I eventually convinced him that we didn’t have that amount of stock. After further investigation he sheepishly came to me and admitted he had overlooked about 120 tons of reinforcing steel which we had already installed. If we hadn’t been doing monthly cost reports we may never have claimed this steel.
- Can indicate whether the project has grown in scope or when there’s been a change to specifications - For instance I’ve had projects where the customer has changed the specifications for materials. On one project the specifications for stainless steel pipes was changed. If we had claimed according to the original pipes specified we would have shown a loss as the new pipes were considerably more expensive than those originally priced. Losses on cost reports are sometimes an indication that quantities have increased or that the customer has varied the contract in some way.
- Highlight problems with productivity - Losses incurred with labour or equipment is often an indication that the productivity on the project is lower than allowed. Investigating the cause of this low productivity could lead to solutions to improve productivity.
- Form the basis of future tenders and prices - Estimators assume certain rates of production and material wastage rates. If projects don’t do accurate cost reports the estimators don’t get feed-back whether their estimates are accurate or not. The risk of this is that the contractor wins projects that are bid too low, or they don’t win projects because their price is too high because they haven’t used the correct rates.
- Provide information on which types of projects are profitable - Over the years we constructed two separate sets of cooling towers. Both times we lost huge amounts of money. Although the projects appeared straight forward they were obviously more complex than our estimators envisaged. After that we made a conscious effort to avoid similar projects. Some contractors keep constructing projects even though they are always unprofitable, simply because they don’t know these projects are unprofitable.
- Afford a target for the project team to aim for - Without a target profit to aim for the project team can become complacent, not focussing on productivity and the smart and efficient use of materials.
- Give the company early warning when a project is losing money - Knowing there’s a loss enables the company to prepare themselves and check they have adequate cash to sustain the losses. Recently I witnessed a company declare losses of $500 million on two projects. How was it possible that the projects had been under construction for more than two years and were reaching their completion stage when the company suddenly declared this huge loss? Regularly accurate cost reports should have shown this loss developing over the course of the project. Needlessly to say the company went into liquidation leaving suppliers, subcontractors and employees unpaid. Detecting these losses earlier could have allowed the company to take action to stem the losses and also to put in place measures to cover the cash-flow problems that these losses induced.
- Can be very satisfying. I usually enjoyed completing my monthly cost reports. It was fun to know we had made money in the month. Unfortunately the occasional project lost money which wasn’t nice.
An accurate cost report is a useful tool on construction projects providing information on where the project is making and losing money. Unfortunately many cost reports are poorly done or the information is ignored which can lead to problems. I’ll deal with cost reporting errors in my next post.
Do you prepare project cost reports?
Have you found them useful?
Read: 'Avoid these 10 cost report errors'
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