9 terrible mistakes and how to fix them

Copyright 2008 ComputerEase Software, Inc.All rights reserved.12/4/2008

ComputerEase Software, Inc.6460 Harrison Ave., Suite 200Cincinnati, OH 45247

The text of this publication, or any part thereof, may not be reproduced or transmitted in any form or by any means,electronic or mechanical, including photocopying, recording, storage in an information retrieval system, or otherwise,without the prior written permission of ComputerEase Software, Inc.

Willful violation of this Copyright law of the United States can result in civil damages up to $50,000 (US) perinfringement (17 USC 506; reasonable attorney fees may be awarded (17 USC 505); and copyright infringements canbe a criminal offense. (17 USC506).

All names, products and services mentioned are the trademarks or registered trademarks of the respective vendorsor organizations.

PublisherComputerEase Software

Founder and owner ofComputerEase, Bob Mattlin, camefrom a family background inconstruction and a personalbackground as a CPA for anational accounting firm.

As computer technologies becameincreasingly available in the earlyeighties, Mr. Mattlin had a visionof using this technology to pulltogether his accounting andconstruction-industry knowledgeto improve the way contractorsmanaged their businesses.

Twenty-five years later, he ownsthe industry-leading company inconstruction managementsoftware solutions and continuesworking to improve contractors'business practices.

Construction is a competitiveindustry, and ComputerEaseprovides contractors with theedge they need to stay strongand productive.

Bob Mattlin, CPA A Brief Background

5Contents

5

Table of Contents

Introduction 2

Terrible Mistake #1 4

................................................................................................................................... 4Company profits are misstated and misleading-THEY AREWRONG!!!

................................................................................................................................... 4 Company profits are misstated.

................................................................................................................................... 5EXERCISE #1:


................................................................................................................................... 7Project managers are under the false assumption that all is welland the job is progressing nicely and making money.

................................................................................................................................... 7 Project managers could be misled in thinking the job is goingalong fine based on actual hours to date.

................................................................................................................................... 8EXERCISE #2


................................................................................................................................... 10Without projected costs, percent complete analysis isimpossible.

................................................................................................................................... 11Project managers need an early warning system to measure jobstatus before it is too late.

................................................................................................................................... 11EXERCISE #3


................................................................................................................................... 13The estimator is out of touch with job performance and has noidea where his estimate stands until the job is over.

................................................................................................................................... 14Estimator has to stay involved throughout the job.

................................................................................................................................... 14EXERCISE #4:

Terrible Mistake #5 16................................................................................................................................... 16Job billings are out of sync with job costs.................................................................................................................................... 17Job Billings on the Balance Sheet are incorrect.................................................................................................................................... 17EXERCISE #5:


................................................................................................................................... 19The contractor’s CPA is required to make large and surprisingadjustments to the year end financial statements.

................................................................................................................................... 20CPAs should not have to make large and surprising adjustmentsat the end of the year.

................................................................................................................................... 20EXERCISE #6:

9 Mistakes6

ComputerEase Software, Inc.


................................................................................................................................... 23No one knows the job schedule has fallen behind until it’s toolate to make up the lost time.

................................................................................................................................... 24Job schedules are wrong using the cost-to-cost method.

................................................................................................................................... 24EXERCISE #7:

Terrible Mistake #8 26................................................................................................................................... 26Can’t measure unit productivity without projected costs.

................................................................................................................................... 27Cannot compare estimated unit productivity with actual unitproductivity.

................................................................................................................................... 27EXERCISE #8:


................................................................................................................................... 29Without projected costs, “fade and gain” comparisons are notpossible.

................................................................................................................................... 30Without projected costs, PM’s cannot get a handle on week toweek performance.

................................................................................................................................... 30EXERCISE #9:

How To Fix the Nine Mistakes Using ProjectedCosts 32

................................................................................................................................... 32Cost-to-Cost Method: Don’t use it!!

................................................................................................................................... 33Projected Cost methods used to solve problems brought on bycost-to-cost method

.......................................................................................................................................................... 33Percent Complete Method

.......................................................................................................................................................... 34Estimating the total cost remaining method to complete an item

................................................................................................................................... 34Measuring the “fade” or “gain” in projected cost

................................................................................................................................... 35Using labor hours to calculate percent complete

................................................................................................................................... 36“Stripping” the estimators magical market price

................................................................................................................................... 37Calculating the “fade” or “gain” in the revised estimate usinghours

................................................................................................................................... 37Using Hours to calculate “fade” or “gain” in the revised estimate

Measuring unit productivity is the best way toproject percent complete 39

................................................................................................................................... 39The “fade”/“gain” analysis is a good weekly benchmark whenusing productivity per hour

................................................................................................................................... 40Answers

Reports 42................................................................................................................................... 42Sample - Percent Complete................................................................................................................................... 43Sample - Percent Complete................................................................................................................................... 44Sample - Work In Progress

7Contents

7

................................................................................................................................... 45Sample - Profit Variance

................................................................................................................................... 46Sample - Labor Analysis

................................................................................................................................... 47Sample - Unit Cost Report

................................................................................................................................... 48Sample - Schedule

................................................................................................................................... 49Sample - Unit Productivity Report

Introduction

Introduction 2

9 Terrible Mistakes

Introduction

Most contractors start out with the owner serving as the “project manager” on jobs. The

owner visits the job sites every day and has a keen sense of what is going on. He is

hands-on and can quickly see when things are going wrong. With the owner managing jobs,

they usually come in on time and on budget. But in time, growth brings more and larger jobs

and the owner can no longer keep up with them. The owner finds he needs new tools to

measure job progress.

We will discuss the measuring tools available to owners, estimators and project managers to

assist them in determining accurate job costs before the job is over. The methods discussed

will greatly improve how job costs are reported. Using these methods will forewarn the

construction team of any problems before they get out of hand. The worst thing that can

happen to a contractor is to find out that a job lost money after it was completed. The most

important purpose of using a projected cost system is to prevent this from happening.

The first section of this report starts off with “NINE Terrible Mistakes.” This section discusses

the serious problems caused by not knowing where the job stands at all times. After learning

the problems that come about by not projecting job costs, we discuss ways to prevent them

from happening.

Let’s start with those NINE Terrible Mistakes….

Terrible Mistake #1


9 Terrible Mistakes

Terrible Mistake #1

Company profits are misstated and misleading-THEY AREWRONG!!!

A construction company has no idea where it stands without an accurate projection of job costs.

The example shown on the next page clearly illustrates that the financial statement cannot be

correct if a revised estimate is not calculated based on remaining costs and actual costs. Work

in progress on the balance sheet is misstated because a true picture is impossible without

projected costs. The illustration shows how using a cost-to-cost method of computing percent

complete can distort the financial statements.

Several problems are highlighted on the next exhibit:

o Profits are misstated

o Estimated tax payments are incorrect

o Cash flow analysis is difficult with the wrong profit

o Bonding companies are given wrong financial statements

Company profits are misstated.

Here is an example of how the cost-to-cost method distorts the financial statements:

ABC Financial Statement

Cost to Cost Projected Cost

Contract $125,000 $125,000

Estimated Cost $100,000 $100,000

Billed Revenue-50% $ 62,500 $ 62,500

Costs to date $ 50,000 $ 50,000

Projected costs to complete $ 50,000 $150,000

Revised Estimate $100,000 $________

Percent Complete 50% 25%

Profit (Loss) $ 12,500 $________

Federal Income Tax Estimate $ 4,000 $________

(40%*$125,000-50,000)

Over(Under) Billed None $________

9 Mistakes5


EXERCISE #1:

Calculate the following for the Projected Cost column:

1. Revised Estimate ______________

2. Profit or Loss _______________

3. Tax ________________

4. Over(Under) Billed _________________

Terrible Mistake #2

9 Mistakes7


Terrible Mistake #2

Project managers are under the false assumption that all is welland the job is progressing nicely and making money.

The project manager has no idea where he stands on a job without making regular estimates

of projected costs. The estimator has the responsibility to give the PM a break down of the

hours and units he used in his estimate. For example, without an estimate, the PM can’t

know that he used 500 hours to complete 500 square feet when he should have completed

1,000 square feet with that amount of hours. The PM needs to know how many hours he has

used and how many hours he has left to finish the bid item. Without estimated hours he

cannot know where the job stands.

Project managers want to be informed on how well they are doing on their jobs. There are

many studies that prove project managers are very frustrated by not having benchmarks to

measure the performance on their jobs. The PM wants to know desperately where he stands

on a job. Like everyone, he wants recognition for a job well done. Using projected cost

calculations is the only way for him to know the status of his jobs.

Project managers could be misled in thinking the job is goingalong fine based on actual hours to date.

If the estimator provides both units and hours to the PM, a labor analysis report similar to the one

below can be used by the PM to measure job progress.

Actual Hour Method Unit Production Method

Estimated

Hours

Actual

Hours

%

Complete

Remaining

Hours

Estimated

Hours

Estimated

Units

Actual

Hours

Actual

Units

%

Complete

Remaining

Hours

1,000 250 ______ ______ 1,000 2,000 250 200 _______ _______


9 Terrible Mistakes

EXERCISE #2

Calculate the following:

1. Actual Hour Method % Complete ______________________

2. Actual Hour Method Remaining Hours ______________________

3. Unit Production Method % Complete _______________________

4. Unit Production Method Remaining Hours ______________________

Terrible Mistake #3


9 Terrible Mistakes

Terrible Mistake #3

Without projected costs, percent complete analysis is impossible.

Without using percent complete calculations, the PM finds out too late that a bid item is in

trouble. If the PM knew he used 50% of the hours but only completed 25% of the work, he

can focus on turning things around early and prevent having to wait until the end of the job to

find out that he lost money.

The cost-to-cost method will not show the PM that a bid item is falling behind. The longer the

work continues off budget, the worse the job losses become. It is very difficult to make up for

the losses on a bid item once they have fallen behind.

A percent complete analysis provides the information needed to produce the work in

progress report. Without a percent complete analysis, the WIP report cannot be produced.

Bonding companies and banks rely more on a construction company’s work in progress

report than any other analysis. The WIP report is used by management as the starting point

of job analysis.

The percent complete report alerts the PM of problems at the bid item level. The WIP report

is used for total job status and is calculated using the individual bid item analysis from the

percent complete report. In accounting terms, the percent complete report is the sub ledger,

or detail work up of the WIP report. Learning which jobs are in trouble from an over all

perspective is one thing, determining which bid items are causing the problems is another. If

the PM doesn’t calculate what expected remaining costs are, the WIP report and the percent

complete report are useless.

9 Mistakes11


Project managers need an early warning system to measure jobstatus before it is too late.

Using cost-to-cost, here is a sample job which highlights the distortion:

Work Item %Complete

Contract EstimatedCost

Cost toDate

CostRemaining

RevisedEstimate

EstimatedProfit (Loss)

Projected Profit (Loss)

Excavate 100 12,000 10,000 10,000 0 10,000 2,000 2,000

Form 50 12,000 10,000 5,000 5,000 10,000 2,000 2,000

Pour 25 12,000 10,000 2,500 7,500 10,000 2,000 2,000

WIPReport

58 36,000 30,000 17,500 12,500 30,000 6,000 6,000

If the Percent Complete method is used, the same job looks like this:

Work Item %Complete

Contract EstimatedCost

Cost toDate

CostRemaining

RevisedEstimate

EstimatedProfit (Loss)

Projected Profit (Loss)

Excavate 100 12,000 10,000 10,000 0 10,000 2,000 2,000

Form 33 12,000 10,000 5,000 _______ _______ 2,000 _______

Pour 25 12,000 10,000 2,500 7,500 10,000 2,000 2,000

WIPReport

______ 36,000 30,000 17,500 6,000

EXERCISE #3

Calculate the following if the bid item “Form” is only 33% complete:

1. “Form” Cost Remaining ________________________

2. “Form” Revised Estimate ____________________________

3. “Form” Projected Profit (Loss) ________________________________

4. WIP Report % Complete _________________________

Terrible Mistake #4

9 Mistakes13


Terrible Mistake #4

The estimator is out of touch with job performance and has noidea where his estimate stands until the job is over.

The estimator is usually as surprised as anyone when the job he bid runs into trouble. The

estimator’s job requires more than just calculating a bid. He has to keep an eye on the job at all

times to make sure his estimate is being produced with the same methods he used in

developing the bid.

The PM and estimator should be in touch constantly. The PM and estimator must know how

actual costs compare to estimated costs throughout the job’s completion. The estimator can

provide valuable information to the PM as a bid item begins to show a loss. Regular project

meetings should bring the estimator and PM together to discuss problems early in the job,

before it is too late. The estimator should always be involved in calculating projected costs.

Since he bid the work, he is a valuable resource to the PM.

The estimator and PM use two methods to make sure that production in the field is ahead of the

estimate. The first method is comparing the actual unit cost with the estimated unit cost. By

providing the PM with the unit cost used in the estimate, the PM can monitor performance at

any stage of the job by comparing his unit cost of production with the estimated unit cost of

production. This gives the PM an early warning signal very early in the job’s progress. The

second method compares units of production from the field with the units of production used by

the estimator. The PM has valuable information if he knows the estimator used a productivity

rate of say 10 units per hour and compares it to his 12 units per hour. He quickly knows he is

probably doing pretty good. If there are 1000 units in the bid item, the PM knows where he

stands after only 10 are put in place. The PM has to know what his projected unit performance

is at all times.


9 Terrible Mistakes

Estimator has to stay involved throughout the job.

Estimator is given this progress report based on cost-to-cost.

Work Item EstimatedCost

ActualCost

RemainingCost

% Complete RevisedEstimate

Estimated Unit

ActualUnits

EstimatedUnit Cost

ActualUnitCost

ProjectedUnit Cost

Excavate 10,000 8,750 0 100 8,750 1,000 1,000 10.00 8.75 8.75

Form 10,000 5,000 5,000 50 10,000 2,000 1,000 5.00 5.00 5.00

Estimator is given this progress report based on an updated estimate.

Work Item EstimatedCost

ActualCost

RemainingCost

%Complete

RevisedEstimate

EstimatedUnit

ActualUnits

EstimatedUnit Cost

ActualUnit Cost

ProjectedUnit Cost

Excavate 10,000 8,750 0 100 8,750 1,000 1,000 10.00 8.75 8.75

Form 10,000 5,000 5,000 50 _______ 2,000 1,000 5.00 5.00 _______

EXERCISE #4:

If the PM reports that it will require an additional 75% of the original estimated cost to

complete the bid item “Form”, calculate the following:

1. Projected Unit Cost _________________

2. Revised Estimate ________________________

Terrible Mistake #5


9 Terrible Mistakes

Terrible Mistake #5

Job billings are out of sync with job costs.

Trouble is ahead if a job becomes overbilled or under billed due to losses. There are few things

worse than finding out late in the job that the money isn’t there to pay for the remaining work.

Billings should progress as much as possible at the same pace as the work. Front end loading

is a good option if the job is running on budget. But if the job is in trouble, front end loading can

only create problems later on in the job. Bonding companies and banks look at billings and job

cost status more than anything else. They want to make sure that future billings will cover

remaining costs. That’s why they demand accurate work in progress reports. Preparing accurate

WIP reports cannot be done without projecting future costs to complete.

The contractor suffers many problems if billings get out of whack with job costs. The problem

can be easily highlighted by an example; if the contract value on a job is $10,000, estimated

cost is $8,000 and actual cost to date is $4,000, billings at 50% complete should be $5,000. But

if the work is only 40% complete and the projected costs are now recalculated to be $10,000 at

completion, then billing $5,000 would create an overbilling situation. In this example if the work

is only 40% complete then billings should only be at 40% or $4,000. There can also be cash

flow problems if a job is under billed. If the job is 50% complete and 50% of the estimated costs

have been incurred, the contractor should be sure that 50% of the contract value is billed.

If the company bills too far ahead of job costs, the excess billings become a liability on the

balance sheet. If the job is under billed, the contractor is not taking advantage of optimum cash

flow. This is key information for banks and bonding agents. A contractor doesn’t want to be

wrong with this calculation. As far as bonding companies and banks are concerned, it is the

single most important number on a contractor’s financial statement.

9 Mistakes17


Job Billings on the Balance Sheet are incorrect.

The below report was prepared using the cost-to-cost method.

Work Item Contract Total

Billed

Cost %

Complete

Remaining

Cost

Over

Billed

Under

Billed

Excavate 12,000 12,000 8,750 100 0 0 0

Form 12,000 6,000 5,000 50 5,000 0 0

Pour 12,000 3,000 2,500 25 7,500 0 0

Total Job 36,000 21,000 16,250 12,500 0 0

EXERCISE #5:

Assume the PM reports that, based on his projections, the bid item “Form” is only 40%

complete, calculate:

1. “Form” Remaining cost _____________________

2. “Form” Over(Under) Billed amount _____________________

Terrible Mistake #6

9 Mistakes19


Terrible Mistake #6

The contractor’s CPA is required to make large and surprisingadjustments to the year end financial statements.

The percent complete calculation is what drives the values shown on the WIP report. The

percent complete numbers cannot be accurate if projected costs are not used. If the WIP

report is wrong, the CPA has to untangle the errors that were made. The adjustments the

CPA makes directly effects the profit and loss of the company. CPA adjustments would not

be necessary if the PM used projected costs to evaluate their jobs throughout the year. Every

contractor should be able to accurately calculate a WIP report without the use of a CPA. Job

analysis throughout the year is impossible without an accurate WIP report.

The owner is usually disappointed with profits after the CPA is finished adjusting the WIP

report. He cruised along during the year thinking he made more money than he actually did.

Worse yet, the company could have paid too much in estimated federal and state income

taxes based on erroneous profits. Paying taxes when it wasn’t necessary, of course, hurts

cash flow. A well managed contractor should know their projected job costs at all times.

Incorrect financial information is prevented with accurate and timely projected costs. The

bonding company and the bank do not want to be surprised with a CPA’s year end

adjustments.

The controller or accounting personnel in the company must demand an accurate WIP report

from the PM and estimator before he prepares any financial statement. He has to understand

job costs and projected costs and must work hand in hand with the PM in developing future

job costs. Without a job analysis, his financial statements are of little value.


9 Terrible Mistakes

CPAs should not have to make large and surprising adjustmentsat the end of the year.

Below is an abbreviated WIP report highlighting the problems caused by improper

estimates of percent complete:

Work Item Contract Total

Billed

Cost %

Complete

Remaining

Cost

Revised

Estimate

Projected

Profit

Over

Billed

Under

Billed

Excavate 12,000 12,000 8,750 100 0 8,750 3,250 0 0

Form 12,000 6,000 5,000 50 5,000 10,000 2,000 0 0

Pour 12,000 3,000 2,500 25 7,500 10,000 2,000 0 0

Total Job 36,000 21,000 16,250 12,500 28,750 7,250 0 0

Work

Item

Contract Total

Billed

Cost %

Complete

Remaining

Cost

Revised

Estimate

Projected

Profit

Over

Billed

Under

Billed

Excavat

e

12,000 12,000 8,750 100 0 8,750 3,250 0 0

Form 12,000 6,000 5,000 60 3,333 8,333 ______ _____ _____

Pour 12,000 3,000 2,500 25 7,500 10,000 2,000 0 0

Total

Job

36,000 21,000 16,25

0

10,833 27,083 ______ _____ ______

EXERCISE #6:

The above WIP report is handed to your CPA at the end of the year. After a careful review

with the PM, the CPA determines the bid item “Form” is actually 60% complete based on

projected cost analysis. Calculate the following adjustments:

1. “Form” Over(Under) Billed _______________________________

2. Job Over(Under) Billed ________________________

9 Mistakes21


3. Sales Adjustment _____________________

4. Is Under billed shown as an asset or liability on the Balance Sheet?

Terrible Mistake #7

9 Mistakes23


Terrible Mistake #7

No one knows the job schedule has fallen behind until it’s too lateto make up the lost time.

The cost-to-cost method of measuring job progress will eventually cause an incorrect job

schedule. If a bid item is on the critical path and assumed to be 50% complete when it is

actually only 25% complete, the schedule will have to be adjusted at some time. It is better to

know of adjustments to the schedule as soon as possible. Customers, bonding agents, bankers

and subcontractors do not want to be surprised by a job falling behind. Job progress reporting

based on a percent complete method will assist in finding early scheduling problems. Any bid

item on the critical path has to be monitored closely and kept current as to percent complete.

During initial job planning, the PM will usually schedule less hours than the estimated hours.

This is his built-in cushion for performance. For example, if the estimator “gave” him 1000 hours

to complete a task, he might initially try and schedule only 800 hours. The PM knows if he can

bring the job in within 800 hours he will make a profit beyond the estimated profit. The 800

hours, not the 1,000 hours becomes his benchmark.

The PM realizes that to hit the 800 hours the job has to run efficiently. There can be no work

stoppages, all subs must show up when needed and finish on time, materials must be delivered

to match manpower on the job and crews must be on the job when needed. Without projecting

job costs, the PM can be surprised by events causing a change in schedule. He needs to know

well ahead of time of any job schedule changes. If he assumes he is 50% complete because he

has used 50% of the hours, his schedule can become unwieldy if in fact he is only 30%

complete.


9 Terrible Mistakes

Job schedules are wrong using the cost-to-cost method.

The following example demonstrates how cost-to-cost can distort a schedule.

Work

Item

Estimated

Hours

Actual

Hours

%

Complete

Hours

Remaining

Revised

Hours to

Schedule

Excavate 1,000 920 100 0 0

Form 1,000 500 50 500 ______

Pour 1,000 250 25 750 ______

EXERCISE #7:

If “Form” is 70% complete and “Pour” is 10% complete, calculate the Revised Hours to

Schedule:

1. Form _________________________

2. Pour __________________________

Terrible Mistake #8


9 Terrible Mistakes

Terrible Mistake #8

Can’t measure unit productivity without projected costs.

One of the more important measurements to track job progress is comparing actual unit

production with estimated unit production. Without projected costs, it is impossible to

compare actual unit productivity against estimated unit productivity. The calculation of unit

productivity is easy to make if four things are known:

Estimated hours and estimated units to be complete per hour

Actual hours and actual units put in place.

If the estimate was to complete 500 units in 500 hours and the project manager met this rate

of production, it can be assumed the job is on target. The real advantage of this method is

the PM and the estimator can tell where bid item stands when only 50 units are complete. If

he used 20% of the hours (100) to put 10% (50) of the units in place, he is producing only ½

unit per hour and not the estimated 1 unit per hour.

The estimated units per hour of production must be provided by the estimator. Not only must

he provide the PM with estimated unit costs, but he must show how he came up with those

costs. He has to provide what productivity rate per hour he used to come up with his overall

unit cost. The PM is left in the dark if all he has to measure is unit costs. He knows he must

match the rate of productivity per hour with the estimate. And he needs to know early in the

jobs progress.

By projecting the 100 hours used above to complete the first 50 units, the problem is clearly

highlighted. The PM sees that it will take 900 hours to complete the remaining 90% (450) of

units. Perhaps something can be done in time to recapture some of the losses incurred.

Using the projection is much better than waiting until the end of the job and finding out it took

1000 hours to install 500 units. If the hourly cost rate for the company is $100, that is a

$50,000 loss!

9 Mistakes27


Cannot compare estimated unit productivity with actual unitproductivity.

This report was prepared using the cost-to-cost method.

Units Units Work Proj Actual Actual Projected

Work Item Est Compl % % Hours Units Per Hour Units Per Hour

Excavate LS 1000 1000 100 100 200 5.00 5.00

Form SFT 1000 500 50 50 500 1.00 _____

Pour Cu Yds 1000 250 25 25 200 1.25 _____

EXERCISE #8:

Assume that the PM reports that bid item “Form” will require 750 more hours to

complete and “Pour” will require 300 more hours:

What is the Projected Units per Hour?

1. FORM_____________________

2. POUR_____________________

Terrible Mistake #9

9 Mistakes29


Terrible Mistake #9

Without projected costs, “fade and gain” comparisons are notpossible.

Fade and gain analysis measures the differences in projected costs from one week to the next. By

comparing the week to week change in projected costs the PM is provided an important trend

analysis as to where his job stands. If estimated projected costs decreased during a week it will

show up as a “gain.” If the PM has to increase his estimate of projected costs, it means he suffered

a “fade.” If for example the PM last week projected job costs to be $115,567, and this week

projected $105,567, he gained $10,000. The gain represents more production with less cost for that

week. Since the job starts off with projected costs equaling the estimated cost, the PM is looking for

week to week gains with hopefully no fade. This is a simple and fast method to compare job

performance from week to week.

The above example calculated the fade/gain for the complete job. The PM needs to take another

step and review the fade/gain on each bid item. The $10,000 gain above will be the net number after

all bid items are taken into consideration. Some bid items will have week to week gains and some

will fade week to week. As an example, the bid item “Form” could have gained (projected cost

decrease) by $20,000, while the bid item “Pour” faded by $10,000 (projected costs increased). The

PM will work diligently to try and get some of the fade back for next weeks reporting.

In analyzing fade and gain changes, PM’s are working more and more with unit productivity

measurements. Comparing actual unit performance against budgeted unit performance is the most

accurate method of projecting job costs. If the PM produced 50% of the items with 60% of the labor

hours for the week, he will have a revised estimated cost of 120% representing a fade in projected

cost for that week of 20%. His goal will be to place the remaining 50% of the units with only 40% of

the original labor budget-thus gaining back the 20% fade and completing the task at 100% of the

original budget. It is easy to see with the fade/gain projected cost analysis, the PM has a better

handle on week to week job performance.


9 Terrible Mistakes

Without projected costs, PM’s cannot get a handle on week toweek performance.

Cost to cost fade/gain calculation

Week 1 Week 2

Contract amount 12,000 12,000

Estimated cost 10,000 10,000

Actual cost 2,000 5,000

Remaining estimate 8,000 5,000

Projected total cost 10,000 10,000

Job income 2,000 2,000

(Fade)/Gain -0- -0-

Percent Complete fade/gain calculation

Week 1 Week 2

Contract amount 12,000 14,000

Estimated cost 10,000 11,000

Actual cost 2,000 6,000

Remaining estimate 8,000 ?

Projected total cost 10,000 ?

Job income 2,000 ?

(Fade)/Gain -0- ?

EXERCISE #9:

For Week 2, if the task is 40% complete calculate the following:

Remaining estimate ______________

Projected Cost __________________

Job Income ____________________

Job income fade/gain_____________

How To Fix theNine Mistakes

Using ProjectedCosts

How To Fix the Nine Mistakes Using Projected Costs 32

9 Terrible Mistakes

How To Fix the Nine Mistakes Using Projected Costs

Forecasting job costs creates the opportunity to correct job losses before they get out of

hand. Measuring the difference between estimated costs and actual costs cannot be fully

accomplished without estimating projected costs. Estimating future costs on a job gives the

entire construction team an early chance to turn around a work item that is losing money

before the job is complete. Developing methods to forecast job costs are the most important

calculations a contractor can make. Most contractors will use one of five methods to calculate

percent complete and we will discuss these methods in detail:

Cost-to-Cost

Percent Complete

Estimate total cost to complete

Labor hours to complete

Unit Productivity

Cost-to-Cost Method: Don’t use it!!

The cost-to-cost method compares actual costs with estimated costs to develop the percent

complete. For example, if the work item’s estimated cost is $10,000 and $5,000 of cost has

been incurred, it is assumed the job is 50% complete. Actual completion of a work item is not

taken into account with the cost-to-cost method. It is an assumption that costs to date

represent the percent complete when compared to the estimate. There is no consideration

for what projected costs may be. All kinds of things go wrong when this method is used:

· Financial statements are misstated since the WIP report is not correct.

· Cash flow is irregular because billings don’t match costs.

· Losses continue to pile up.

· Bonding agents don’t trust the financial statements. They want to know what cash will

be available to finish the job.

· Owners don’t know where they stand.

· Scheduling becomes difficult if PM is not aware of “future” trouble.

9 Mistakes33


The cost-to-cost method produces a WIP report shown below:

Est. Actual Cost % Work % Revised Over/Under

Cost Cost Remaining **Compl Compl Est. Budget

10,000 5,000 5,000 50% 10,000 0

**Calculated by dividing actual cost by estimated cost without reference to projected costs to

complete. Just because we incurred 50% of the estimated cost does not mean we are 50%

complete.

Table 1

Projected Cost methods used to solve problems brought on bycost-to-cost method

Percent Complete Method

The percent complete method corrects the problem caused by the cost-to-cost method. An

additional step is taken by estimating the projected costs needed to complete a work item.

The picture changes drastically if projected costs are calculated based on an estimate that

the work item is only 25% complete. Instead of $5,000 to complete the work item as shown

above, the projected cost method calculates that it will take $15,000 to finish the item. In

other words, it took 50% of the estimated cost to produce 25% of the work. We know if work

continues at the same pace as the first 25%, the item will end up costing $20,000-a projected

over budget of $10,000.

By projecting job costs the WIP report shows a different picture.

Est. Actual Cost % Work % Revised Over/Under

Cost Cost Remaining Compl Compl Est. Budget

10,000 5,000 15,000 25% 20,000 10,000

Compared to the cost-to-cost report which showed a $0 over/under budget, the percent

complete method shows a projected over budget of $10,000.

Table 2


9 Terrible Mistakes

Another advantage of using the percent complete method is that it detects problems early.

Because the PM caught the problem at the 25% stage, resources can be re-directed to the

problem and perhaps recover some of the projected over budget amount. The revised

projected cost estimate of $20,000 is quite different than the $10,000 calculated with the

cost-to-cost method.

Estimating the total cost remaining method to complete an item

Most contractors would refer to this method as re-estimating the job. This method is

commonly used by contractors that are not able to use estimated labor hours or estimated

units to calculate percent complete. Unlike other methods, the PM has nothing to “hang his

hat” on. He is unable to use labor hours or units to help measure percent complete. He has

to come up with his best estimate of what it will take to complete the bid item. In our example

if the PM estimates that it will take 10,000 to complete the work item the WIP report would

look like this.

Est. Actual Cost Work % Revised Over/Under

Cost Cost Remaining **Compl Est. Budget

10,000 5,000 10,000 33% 15,000 5,000

**Calculated based on the PM’s estimate of costs remaining.

Table 3

Measuring the “fade” or “gain” in projected cost

One way to measure how effectively the PM is projecting job costs is to analyze the “fade” or

“gain” in projected cost every week. This keeps track of the difference in the revised estimate

from week to week. It is normally measured using the WIP report. For example, we will

assume in week one that the original estimate was $10,000 and the PM estimates $5,000 of

remaining costs. He projects he is 50% complete. The revised estimate stays at $10,000

because he is making the budget. Since the first week is on target with the estimate, there is

no fade or gain.

In week two, the PM estimates he has $3,000 remaining in costs to complete the bid item.

His project is projected to be 75% complete. His revised estimate is now $12,000. During

week 2 his revised estimate faded by $2,000 as shown below.

9 Mistakes35


Original Actual Remain Revised

Bid Costs Costs % Compl Estimate Fade

$10,000 $10,000

Week One 10,000 5,000 5,000 50% 10,000 -0-

Week Two 10,000 9,000 3,000 75% 12,000 (2000)

Table 4 Calculating fade.

Using labor hours to calculate percent complete

Comparing estimated labor hours against actual labor hours gives the PM a more precise

way to predict future costs. Most labor oriented subcontractors use this method. While it is

better than estimating total costs to complete a work item, it also has it weaknesses. The PM

normally is “tuned in” to labor hours. If the estimator “gives him” 1000 hours to complete a bid

item, he may schedule only 800 hours. He knows if he gets the work done in 800 hours he

has made money-he beat the budget with a margin. It is a simple way for him to keep track of

how well he is doing on the job

.

Example of PM scheduling less than estimated.

Revised

Est hours Schedule hours Actual hours % Hours

1,000 800 400 50% 800

Table 5 Using the PM’s cushion to calculate revised hours.


9 Terrible Mistakes

“Stripping” the estimators magical market price

The estimator should always give the PM the number of hours he estimated before the job

starts. The estimate is the beginning of job forecasting. Accurate percentage complete

calculations cannot be made without an estimate. Most estimators use a “market price” in

their bid which can be tough to break out the hours.

Let’s take an example of concrete flat work being estimated at $4.00 per sq ft. The $4.00 per

sq ft is the rate the “market” has established for bidding purposes. The estimator is pretty

much locked into this number. He obviously won’t get much work if he uses $6.00 a sq ft

when his competition is bidding it at $4.00 sq ft. Of course, the estimator has to take into

account the type of slab it is and any unusual factors. A slab on the 6th floor will be quoted

differently than a basement slab for example.

The market price of $4.00 per sq ft needs to be broken down for the PM. The all inclusive

estimated unit cost of $4.00 does him little good. His key to making money is managing

labor. He needs to know the hours remaining to complete the bid item. He asks the estimator

to “strip” the estimate of all costs except for labor. It turns out the estimator already made the

labor calculation. In putting his bid together, he wanted to check his market price before

submitting the bid. He estimated it would take 40 hours to complete 1,000 sq ft of slab.

Here is his calculation. Remember, he used the market rate for the estimate and didn’t know

what the labor factor was in the $4.00.

Estimated cost $4,000 ($4 sq ft X 1,000 sq ft)

Less material cost -1,500

Less sub cost -500

Total Labor $2,000 / $50 (labor rate with O.H.) = 40 hours

Table 6 Stripping the estimate to determine labor.

9 Mistakes37


Calculating the “fade” or “gain” in the revised estimate usinghours

Let’s assume the PM used 4 hours to complete 100 sq ft of the concrete pour in the first

week and he projects it will take 36 hours to finish the remaining 900 sq ft. Since he did 10%

of the work and used 10% of the hours, his revised estimate is the same as the original

estimate, 40 hours. He is on track.

In week two, the PM runs into some problems and needed 8 hours to pour another 100 sq ft.

He calculates his remaining time to be 30 hours. His revised estimate has changed to 42

hours (adding the 30 hours to the 12 hours he has used).

His revised estimate went from 40 hours to 42 hours. The 42 hours becomes the new basis for thecalculation of the fade

Using Hours to calculate “fade” or “gain” in the revised estimate

Units in Hours Remain Revised

Place Used Hrs Estimate Fade

Original Bid 1,000 sq ft 40 40 40 hrs 0

Week one 100 sq ft 4 36 40 hrs 0

Week two 100 sq ft 8 30 42 hrs -2 hrs

In week three, the PM hopes to reduce his revised estimate below the original estimate.

Table 7 Calculating the “fade” or “gain” in the revised estimate using hours.

Measuring unitproductivity is thebest way to projectpercent complete

9 Mistakes39


Measuring unit productivity is the best way to projectpercent complete

Measuring job performance is best derived by calculating how many units per hour were

installed compared to the estimated rate of production. In the above example, the estimator

calculated a production rate of 25 sq ft per hour (1,000 sq ft / 40 hours estimated). This

becomes the project manager’s measure of performance.

Using the unit productivity method to calculate percent complete results in early detection of

the production per hour rate. Measuring unit productivity per hour gives the PM something to

shoot for everyday. Because he knows how many hours were used in that day’s pour, for

example, and how many square feet he poured, he knows the unit productivity at the end of

the day. He learns in the very first pour, the first 100 sq ft, how well he is doing. Best of all,

he is only 10 percent complete. Had this production rate been off, he would have time to

address the problem.

The “fade”/“gain” analysis is a good weekly benchmark whenusing productivity per hour

The “fade”/”gain”calculation in the above example gave the PM a measurement that he could

compare week to week. His first week pour was on target, he poured 100sq ft in 4 hours. His

productivity was 25 sq ft per hour, matching the estimated production per hour.

During the second week, however, he didn’t perform as well. It took him 8 hours to pour the

same 100 sq ft. His production rate for that week fell to only 12.5 sq ft per hour. It is clearly

illustrated that he had a problem and was able to find it very early in the job.

Measuring unit productivity is the best way to project percent complete 40

9 Terrible Mistakes

Answers

Exercise #1: Exercise #7:

1. $200,000 1. 214

2. ($18,750) 2. 2,250

3. $0

4. $31,250 Overbilled. Exercise #8:

1. .8

Exercise #2: 2. 2

1. 25% Exercise #9:

2. $750 1. $9,000

3. 10% 2. $15,000

4. $2,250 3. ($1,000)

4. $3,000 Fade

Exercise #3:

1. $10,000

2. $15,000

3. ($3,000)

4. 50%

Exercise #4:

1. $6.25

2. $12,500

Exercise #5:

1. $7,500

2. $1,200 Overbilled

Exercise #6:

1. $1,200 Under billed

2. $1,200 Under billed

3. $1,200

4. Asset

Reports

Reports 42

9 Terrible Mistakes

Reports

Sample - Percent Complete

9 Mistakes43


Sample - Percent Complete

Reports 44

9 Terrible Mistakes

Sample - Work In Progress

9 Mistakes45


Sample - Profit Variance

Reports 46

9 Terrible Mistakes

Sample - Labor Analysis

9 Mistakes47


Sample - Unit Cost Report

Reports 48

9 Terrible Mistakes

Sample - Schedule

9 Mistakes49


Sample - Unit Productivity Report

800.544.2530

9 terrible mistakes and how to fix them

Documents

project managers

terrible mistake

bob mattlin

company profits

copyright law

copyright infringements

registered trademarks

information retrieval