12 Construction Project Cost Report Mistakes You Should Avoid

​Are your construction project cost reports worth the paper they’re printed on?

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In a previous article, I discussed how important it is to know whether your construction project is making or losing money. Some contractors don’t bother with project cost reports. They simply hope for the best, and that the construction project ends profitably.
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While some contractors do sometimes prepare monthly project cost reports, unfortunately, these cost reports are of little value because they contain errors, or the information contained in them is ignored by the project team.

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​12 Common Cost Report Mistakes

​Common construction project cost reporting mistakes include:

1. The cost reports take too much time to prepare. This takes valuable management time away from managing the construction project. Cost reports should be easy to complete and require minimal time. Reasons for reports taking time to complete include that:
   1. The information required to complete the report isn’t readily available. It’s essential that the company’s systems supply accurate costs in the same format and codes as the reports use.
   2. The cost report is too complex to fill in.
   3. The cost report breaks items down into lots of detail, making it difficult and time consuming to track down the costs and revenue for each item or code. 
2. The cost reports are sometimes only completed months after the events occurred. This is because the data required for the report isn’t immediately available, or the company only requires the cost report by that date. Unfortunately in the interim since the data was collected much has happened on the project. Frequently when a loss is detected it’s too late to rectify the problem and in the meantime the losses have become worse. Cost reports need to be current and should never be later than a month after the project costs were incurred.
3. The project cost reports include revenue from variation claims which haven’t yet been approved by the client. I’ve had managers instruct me to add in variation claims to our project revenue, even though these claims hadn’t been accepted by the client. As long as the client hasn’t approved a claim it’s in doubt and may be rejected, or the final agreed quantum could be less than the amount claimed. Trading on variation claims provides a false sense of security and the project could appear profitable, only to take a dramatic loss when the claim is later rejected. But, as long as the project team doesn’t allow for the variation claim the cost report shows a loss and the project team will be spurred into action to quickly agree the variation claim with the client so that the losses can be recovered. 
4. The cost reports don’t include all the construction project costs. This obviously means that the project shows a profit until the missing costs are added, surprising management when the project suddenly shows a loss.  Construction projects costs might be missed because:
   1. Subcontractors or suppliers are late submitting their invoices. Always ensure that all work has been accounted for in the cost report, even if it’s only an estimate.
   2. Not all project costs have been captured. This might be because the processing of invoices are late or because some costs have been accidentally omitted. Again efficient company systems are essential to ensure all costs are captured when they’re incurred.
   3. Suppliers’ and subcontractors’ invoices haven’t been paid. This might be because the project team is disputing part of the invoice. 
5. The cost reports aren’t comparing revenue against the correct costs. This is because costs or revenue haven’t been allocated to the correct items or codes. Although the overall construction project profit or loss could be correct, individual items may be incorrect, meaning that the losses seen aren’t actually for those items but are for something else. This makes tracking the cause of the loss difficult.
6. The revenue used is incorrect. Often the project revenue is overstated because:
   1. The monthly progress valuation or claim is incorrect and includes an over claim – a claim for work that hasn’t been done or is incomplete.
   2. The preliminaries or overheads are claimed from the client each month according to a set pre-agreed rate. However the costs associated with the preliminaries are frequently not incurred at the same rate and these costs vary depending on the stage of the project. 
7. The data hasn’t been entered correctly. Sometimes in the rush to complete the report the project team makes the incorrect assumptions or even guesses costs.
8. The cost report doesn’t take into account the costs of completion. Often construction projects appear to be profitable (their cost reports show a profit) until the last few months when things suddenly go wrong. Project teams regularly underestimate the costs of completing punch-lists (snag-lists), completing project documentation, and handing over the construction project.
9. The project team assumes the wrong reason or cause for a loss. I’ve previously written about a construction project where the cost report showed the project was losing money on concrete materials and the project manager attributed the loss to the fact that the client had changed the concrete mix design, asking for additional cement which we would claim later. Yes, this did contribute to the loss, but when we eventually uncovered the real cause for the loss, which was that cement was being stolen from the project, we had lost over a half million dollars. Frequently the project team is quick to blame the estimating team for losses on the project, when in fact the main contributing factors are something else. Often losses are caused by a number of different problems, so uncovering and solving one reason may only be part of the solution.
10. The reports are deliberately manipulated by the project team so that losses aren’t shown. They either deliberately hide costs or add in additional revenue. Of course, ultimately the truth will come out. I’ve never found a construction project making a loss suddenly became profitable without action being taken to stem the loss and reduce costs, or to find additional revenue, such as a justifiable variation claim.
11. The information contained in the cost report isn’t acted upon. Cost reports should highlight areas of concern and, if required, additional information could be sought to uncover the actual cause of the problem.
12. Cost reports are ignored by the project team. There is little point in completing a cost report if it's going to be disregarded. Ignoring a cost report which is showing signs that the project is losing money could mean that losses continue to increase leading the project and company into financial difficulties. Actions aren't taken to stem the losses.

Getting value from project costings

Cost reports are only valuable if they are correct and if the information produced in the cost report is acted on by the project team. They should be easy to complete and simple to interpret so that project management time isn’t taken up preparing the report.

It’s important to investigate anomalies in cost reports. Don’t just take the report at face value. I’ve discussed investigating your losses, but sometimes it’s equally important to investigate where you are making money. You don’t want to find later that where you thought you were profitable you actually aren’t, and there were in fact errors with your report.
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What mistakes have you encountered on construction project cost reports?

​This article was first published on the ClockShark website. 
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