COST PLANNING

For your Construction Project, your Company will evaluate the Financial Aspects of the Project from three different perspectives.

What are those 3 Perspectives?

COST PLANNING

3 Financial Evaluation Aspects?

1. Planned Cost (Budgeted Cost)

COST PLANNING

3 Financial Evaluation Aspects?

1. Planned Cost

2. Actual Cost

COST PLANNING

3 Financial Evaluation Aspects?

1. Planned Cost

2. Actual Cost

3. Earned Value – how much money are you going to get paid

COST PLANNING

What is the simple equation for Earned Value?

– How will you determine whether your Job makes money or loses it?

COST PLANNING

What is the simple equation for profit?

How will you determine how well your Job turned out?

Profit = Revenue – Expenses $$$ In minus $$$ Paid Out

COST PLANNING

What are your Revenues on a Construction/Design Job?

COST PLANNING

What are your Revenues on a Construction/Design Job?

How much you get paid

- Your monthly + final payments

COST PLANNING

What are your Expenses on a Construction/Design Job?

COST PLANNING

What are your Expenses on a Construction/Design Job?

Everything you pay out to get the Job done

Salaries, materials, equipment expenses, overhead costs, etc.

COST PLANNING

What is the Problem with looking at a Job solely on the basis of Revenues minus Expenses?

COST PLANNING

Problem with looking at a Job solely on Revenues minus Expenses?

It has no relationship as to whether you are ahead or behind Schedule on your Activities, nor does it tell you if Activities have cost more or have cost less than planned

COST PLANNING

How did Struksnes Construction (Minot, North Dakota) determine the financial condition of their Company?

COST PLANNING

How did Struksnes Construction determine their financial condition?

If Harold Struksnes had more money in his checkbook at the end of the year than when the year started!

Ultimate Revenues minus Expenses

COST PLANNING

There are two terms that you will hear used to represent your Company’s Planned Costs for your Project -

What are those terms?

COST PLANNING

Two terms used to represent the Planned (Budgeted) Costs?

1. Bid Estimate

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Two terms used to represent the Planned (Budgeted) Costs?

1. Bid Estimate

2. “Schedule of Values”

COST PLANNING

Will the Bid Estimate be the same as the Schedule of Values?

COST PLANNING

Will the Bid Estimate be the same as the Schedule of Values?

Usually notWhy wouldn’t they be the same?

COST PLANNING

Why wouldn’t the Bid Estimate be the same as the Schedule of Values?

The Schedule of Values revises/ builds on the Bid Estimate and more accurately represents what you anticipate your Project Costs to be

COST PLANNING

Review:

What are the two main ways that Construction contracts are normally bid out?

COST PLANNING

Two main ways that Construction contracts are normally bid out?

1. Lump Sum - Commercial

2. Unit Price - Heavy

COST PLANNING

Lump Sum – Commercial Buildings Usually based on AIA (sometimes

AGC) contract format AIA format requires Contractor to

submit proposed Schedule of Values for Owner approval

COST PLANNING

Unit Price – Contractors will often break down individual Unit Price Bid Items with their own Schedule of Values for the Activities/Tasks that make up a particular Bid Line Item

This may or may not be shared with the Owner

COST PLANNING

The Schedule of Values is normally submitted to the Owner for approval with the Baseline Schedule, and is then used as the basis for the periodic payments made throughout the life of the Contract.

COST PLANNING

What is the term used to describe when a Contractor “inflates” the cost of Activities that occur early in the Schedule?

COST PLANNING

What is the term used to describe when a Contractor “inflates” the cost of Activities that occur early in the Schedule?

“Front-loading” the ScheduleIs “Front-loading” unethical?

COST PLANNING

Is “Front-loading” unethical?This is a gray areaIf an Owner challenges it, it can hurt

a Contractor’s reputationContractor’s have a substantial

initial investment in every Project that they need to recoup ASAP to maintain a positive Cash Flow

COST PLANNING

How will you track the Actual Costs of your individual Activities?

COST PLANNING

How will you track the Actual Costs of your individual Activities?

This is a function of your Company’s cost-accounting system

How you track and bill-out your actual labor, materials, supplies, and equipment utilization

COST PLANNING

How will you track the Actual Costs of your individual Activities?

Accurate, detailed data will give you better historical data to use for estimating future jobs

It takes additional time and effort to do this right on the Jobsite, but it’s an investment for the Future

COST PLANNING

What is included in your labor cost?

COST PLANNING

What is included in your labor cost?1. Salary paid2. Social Security (FICA)3. Vacation, Sick Days, and Holidays4. Health/Life Insurance5. Pension/Retirement Funds6. Worker’s Comp/Injury Insurance

COST PLANNING

Items 3, 4, and 5 are commonly referred to as your Benefits Package (G&A – General and Administrative OH) – what % of your gross pay are they?

3. Vacation and Holidays

4. Health/Life Insurance

5. Pension/Retirement Funds

COST PLANNING

Items 3, 4, and 5 are commonly referred to as your Benefits Package – what % of your gross pay will they be?

3. Vacation, Sick, and Holidays (5 – 20%)

4. Health/Life Insurance (15-25%)

5. Pension/Retirement Funds (5-15%) Around 50% of your gross pay

COST PLANNING

Benefits Package This is a substantial part of your total

salary (~35%), and graduates often don’t realize that this is negotiable when you discuss your total salary package with a potential employer

Especially paid vacation time!

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Normally – G&A costs are not applied against Overtime Hours – often making Overtime work (time-and-a-half) comparable in cost to “straight time”

COST PLANNING

How much Overtime are you going to make when you go to work for a Construction Company or Engineering Design Firm?

COST PLANNING

Additional Overtime compensation? As a salaried employee – you will be

expected to work 50, 60, 70 hours per week for your base pay without any additional compensation for working more than 40 hours per week

COST PLANNING

As hourly employees, the craftsmen and equipment operators on your Jobsite will get time-and-a-half; shift differentials; hazardous duty pay; etc

Not unusual for a craftsmen or an operator to earn a 6 figure salary

NYC Crane Operators - $70/hr

COST PLANNING

Obviously, your Actual Costs will not be the same as your Planned (Budgeted) Costs.

What is the term used for the difference between the Budgeted Cost and the Actual Cost?

COST PLANNING

What is the term used for the difference between the Budgeted Cost and the Actual Cost?

Cost Variance

COST PLANNING

What does an Activity’s Value include above-and-beyond the Activity’s Cost?

COST PLANNING

What does an Activity’s Value include above-and-beyond the Activity’s Cost?

Overhead ProfitWhat are the terms used that

include both Overhead and Profit?

COST PLANNING

What are the terms used that include both Overhead and Profit?

Mark-upMargin

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What is another term for Overhead?

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What is another term for Overhead?Indirect ExpensesWhat are “Indirect Expenses”?

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What are “Indirect Expenses”?Costs that can not be specifically

allocated against a single ActivityThey are “spread out” and allocated

against the entire Job

COST PLANNING

How will Overhead be allocated on your Job?

COST PLANNING

How will Overhead be allocated on your Job?

It dependsContractors like to use a method

that allocates their indirect costs in a consistently uniform manner

Specific to the type of work they do

COST PLANNING

Overhead allocation on your Job?

1. Percentage of gross costs

2. Percentage of labor costs

3. Percentage of equipment costs

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Will your Company pick-up be part of your Job’s Overhead Expense?

COST PLANNING

Will your pick-up be part of your Job’s Overhead Expense?

That depends on your Company’s accounting procedures.

Some Companies bill Field Overhead as a Direct Cost, some bill it as Indirect

COST PLANNING

Will your pick-up be part of your Job’s Overhead Expense?

If you are normally working on numerous Projects at one time – your Accountants may decide that it is more representative to bill your pick-up out as an Indirect HOOH cost

COST PLANNING

Review: As a % of gross income – what is a reasonable HOOH rate for:

1. Construction Company

2. Engineering Design Firm

COST PLANNING

As a % of gross income – what is a reasonable HOOH rate for:

1. Construction Company 12-15%

2. Engineering Design Firm

COST PLANNING

As a % of gross income – what is a reasonable HOOH rate for:

1. Construction Company 12-15%

2. Engineering Design Firm 150-200% This is due to the fact that most

Designers are working on many Projects at a given time

COST PLANNING

As Superintendent or Project Engineer at the Jobsite – which of these are you going to be concerned with?

1. Budgeted Costs

2. Actual Costs

3. Earned Value

COST PLANNING

As the Superintendent or Project Engineer at the Jobsite – what are you going to be concerned with?

2. Actual Costs

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What are your Responsibilities going to be in relationship to the Actual Costs?

COST PLANNING

Actual Costs Responsibilities? Monitoring (tracking) and Controlling the Actual Costs on your

Project.

COST PLANNING

How are you going to Monitor and Control your Job’s Actual Costs?

COST PLANNING

How are you going to Monitor and Control your Job’s Actual Costs?

1. Payroll labor cost data

COST PLANNING

How are you going to Monitor and Control your Job’s Actual Costs?

1. Payroll labor cost data

2. Material invoices/purchase orders

COST PLANNING

How are you going to Monitor and Control your Job’s Actual Costs?

1. Payroll labor cost data

2. Material invoices/purchase orders

3. Targeted production rates Velocity Diagrams

COST PLANNING

How are you going to Monitor and Control your Job’s Actual Costs?

1. Payroll labor cost data

2. Material invoices/purchase orders

3. Targeted production rates Velocity Diagrams

4. Trend Analysis – improving?

COST PLANNING

Any Questions on Cost Planning?

EARNED VALUE

What is the Concept of Earned Value?

EARNED VALUE

What is the Concept of Earned Value?It is combining Cost Evaluation with

your Schedule to create commonly used Values to assess the status of your Project (4D + 5D)

Another term is “Cost/Schedule Control System Criteria (C/SCSC)”

EARNED VALUE

Is being ahead of Schedule a good thing?

EARNED VALUE

Is being ahead of Schedule a good thing?

It dependsOn what?

EARNED VALUE

Is it good to be ahead of Schedule?Were you able to get ahead of

Schedule with less cost than budgeted?

Will there be cost benefits to Successor Activities due to your being ahead of Schedule?

EARNED VALUE

Bottom Line: Is it good to be under budget on your Project – compared to what you had Planned to have spent at this point in time?

If you are on or ahead of ScheduleBut not if you are behind Schedule!

EARNED VALUE

Terminology :

1. Budgeted Cost of Work Scheduled?

- BCWS

EARNED VALUE

Terminology:

1. Budgeted Cost of Work Scheduled? BCWS = Planned amount of money

budgeted to complete the work that was Scheduled to be complete through the analysis date

EARNED VALUE

Terminology:

2. Budgeted Cost of Work Performed?

- BCWP

EARNED VALUE

Terminology:2. Budgeted Cost of Work Performed? BCWP = Planned amount of money

budgeted for the actual work Scheduled and Completed to date

[Unscheduled work that has been completed ahead of schedule should not be included in this amount.]

EARNED VALUE

Terminology:

3. Actual Cost of Work Performed?

- ACWP

EARNED VALUE

Terminology:

3. Actual Cost of Work Performed? ACWP = Measure of the actual

amount of money expended in completing the work that has been accomplished to date

EARNED VALUE

Terminology: When you are doing your analyses

using BCWS, BCWP, and ACWP – you must be sure that you are comparing “apples-to-apples” – you can not compare ACWP to BCWS if ACWP contains unscheduled work

EARNED VALUE

Terminology:

4. Variance Any deviation from planned costs,

budget, or schedule

EARNED VALUE

Terminology:

5. Cost Variance (CV)

CV = (BCWP – ACWP) Positive value (+) is good Negative value (-) is bad

EARNED VALUE

Terminology:

6. Schedule Variance (SV)

SV = (BCWP – BCWS) Positive value = ahead of schedule Negative value = behind schedule

EARNED VALUE

Terminology:

7. Total Variance (TV)

TV = (BCWS – ACWP) or

TV = (CV – SV) Positive value = under budget ??? Negative value = over budget ??? Under budget if WS = WP, SV = 0

EARNED VALUE

Variances: CV = BCWP - ACWP CV = 850,000 – 1,019,000 = -169,000 SV = BCWP – BCWS SV = 850,000 – 1,890,000 = -1,040,000 TV = BCWP – ACWP TV = 1,890,000 – 850,000 = 871,000 TV = CV – SV TV = -169,000 – (-1,040,000) = 871,000

EARNED VALUE

Closing: If you want to advance in your company – the fastest way to do it is to demonstrate competency in understanding and managing the financial aspects of your Projects.

To become CEO, you have to understand what the CFO does

EARNED VALUE

One of the most Common Causes of Construction Company failures is the failure of the company leadership to truly comprehend the Company’s financial status.

Comprehensive Review of every Job’s status at least Quarterly