Don't make these 10 mistakes with your cost reports

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​Project cost reports are useful and can supply contractors with valuable information. Last week I published a post ’10 Reasons why you should prepare project cost reports’. Readers seemed to agree that project cost reports were essential.

Unfortunately some cost reports can be complex and time consuming to prepare. I’ve known some companies with cost reports that took several days to prepare. You couldn’t find the Project Manager for two days as he was locked away in his office trying to complete his report before month end. This meant that things went unattended on the project while the cost report took priority. Then when the report was completed nobody bothered to read it because it was too lengthy and difficult to interpret. 

Furthermore contractors sometimes make errors in their cost reports which then provide the wrong information. Occasionally management ignores the cost report and doesn’t take action to figure out why the project is incurring losses or they misinterpret what the cost report is showing. In extreme cases I’ve known managers instruct that losses shouldn't be shown.

Some Project Managers leave the preparation and interpretation of the cost report entirely to their Quantity Surveyor or Contract Administrators and pay scant attention to the end report. They view it as just another document produced for their senior managers.

Don't make these 10 mistakes with your construction project cost reports

I’ve found the following problems with costs reports:

1. The reports take too much time to prepare. This is either because:
   1. The information isn’t readily available.
   2. The cost report is too complex to fill in.
   3. The cost report breaks items down into too much detail making it difficult and time consuming to track down the costs and revenue.
2. The reports deal with historical data – often a month or more after the fact. This means by the time we detect a problem it may be too late to take corrective action, or the problem may already have become worse than that reported. The more up to date the cost report the more useful it is to the project construction team. We need to understand the historical nature of the information and adapt our actions accordingly.
3. The reports take into account claims and variations which haven’t been approved and which might be too optimistic. I’ve had managers instruct me to add in variation claims to our revenue, even though these claims hadn’t been accepted by the customer. As long as the customer hasn’t approved a claim it is in doubt, and may be rejected, or the final agreed valuation may be less than what we claimed. I don’t like trading on claims which haven’t been approved since it’s dangerous. I would rather show a loss, and at least the project team is reminded to resolve the outstanding claim as soon as possible.
4. The reports don’t include all of the project costs. This may be because:
   1. Subcontractors or suppliers are late with their invoices
   2. Not all of the costs have been captured by the company's accounting system
5. They aren’t comparing revenue against the correct costs. Although the overall result may be correct the report may indicate we are making money on some items while losing items on others. This is normally because costs and revenue haven’t been allocated to the correct cost codes.
6. The revenue used is incorrect. This is usually because:
   1. The information hasn’t been entered correctly into the cost report
   2. The monthly valuation or claim is incorrect and includes an over claim
   3. Often the preliminaries are claimed each month according to a set percentage. However the costs associated with the preliminaries are usually not incurred at the same rate. These costs usually vary depending on the stage of the project.
7. The reports aren’t used or the information in the report is disregarded. Some project teams don’t like to show a loss and will manipulate the cost report to show a profit. Of course ultimately the truth will come out. Unfortunately I’ve never found a project making a loss to suddenly turn around and become profitable unless action was taken to stem the loss and reduce costs or uncover additional revenue.
8. The report has arithmetic errors or 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.
9. We assume the wrong reason or cause for a loss. I’ve previously written about a 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 mix design and asked for higher cement content which we would claim later. Yes, this did contribute to the loss, but when we eventually uncovered the real cause which was that cement was being stolen from the project and we had lost over a half million dollars. Sometimes the project construction team is quick to blame the estimating team for losses on the project when in fact the main contributing factors are something else. some Reasons why projects lose money
10. The cost report doesn’t take into account the costs to completion. Often construction projects appear to be profitable (their cost reports show a profit) until the last few months when things suddenly go wrong. This is especially the case with projects that run past their completion dates. Invariably the costs of remaining on the project beyond the scheduled completion date haven’t been allowed for. Project teams regularly underestimate the costs of completing punch-lists (snag-lists), completing project documentation, and handing over the construction project. ​

Cost reports are a valuable tool for contractors when they are done correctly.

Regular construction project cost reports are invaluable and can provide much useful information. However cost reports with the incorrect information can give the project team a false sense of security. It’s essential that cost reports are kept relatively simple and also that companies have accounting systems which quickly and easily provide accurate data to support the cost 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. Financial checks and controls on construction projects

Like any useful system the information produced from a cost report must be easy to interpret. This information must be used correctly to uncover losses and either recover the money or at least prevent further loss.

The CONSTRUCTION project MANAGER'S financial duties

What errors have you uncovered in your cost reports?
​Do you believe everything on your cost reports?

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