CHAPTER 15 COST CONTROL

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CHAPTER 15COST CONTROL
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The mobile unit and a hardhat
Digital Hardhat
Using a whiteboard
Multimedia Information or MFR
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COST CONTROL

• Digital Hardhat System The digital Hardhat (DHH)
  technology enables dispersed users to capture and
  communicate multimedia field data to
  collaboratively solve problem, and collect and
  share information
• The technology DHH is a pen-based personal
  computer (PC) running a windows operating system,
  which is used to collect multimedia information
  such as text, sound, video and images

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COST CONTROL AS A MANAGEMENT TOOL

• The early detection of actual or potential cost
  overruns in field construction activities is
  vital to management. It provides the opportunity
  to initiate remedial action and increases the
  chance of eliminating such overruns or minimize
  their impact
• An important byproduct of an effective cost
  reporting system is the information that it can
  generate for management on the general cost
  performance of field construction activities
• The determination of current project status,
  effectiveness of work progress, and preparation
  of progress payment request requires data
  generated by both project planning and cost
  control reporting system
• Project cost control data are important not only
  to project management in decision making
  processes but also to the companys estimating
  and planning departments because this data
  provides feedback information essential for
  effective estimates and bids on new projects

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PROJECT COST CONTROL SYSTEMS

• The design, implementation and maintenance of a
  project cost control system can be considered a
  multi-step process
• The five steps, shown schematically in fig. 15-1,
  form the basis for establishing and maintaining a
  cost control system
• The following questions regarding each step in
  the implementation of the cost control system
  must be addressed
• Chart of Cost Accounts what will be the basis
  adopted for developing estimated project
  expenditures and how will this basis be related
  to the firms general accounts and accounting
  functions? What will be the level of detailed
  adopted to defining the project cost accounts and
  how will they interface with other financial
  accounts?
• Project Cost Plan How will the cost accounts be
  utilized to allow comparisons between the project
  estimate and cost plan with actual cost as
  recorded in the field? How will the project
  budget estimate be related to the construction
  plan and schedule in the formation of a project
  cost control frame work?
• Cost Data Collection How will cost data be
  collected and integrated into the cost reporting
  system?
• Project Cost Reporting What project cost reports
  are relevant and required by project management
  in its cost management of the project?
• Cost Engineering What cost engineering
  procedures should project management implement in
  it efforts to minimize costs?

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Figure 15-1 Steps in Cost Control
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COST ACCOUNTS

• The first step in establishing a cost control
  system for a construction job is the definition
  of project level cost centers
• The primary function of the cost account section
  of a chart of accounts is to divide the total
  project into significant control units, each
  consisting of a given type of work that can be
  measured in the field (see fig. 15-2)
• Once the job cost accounts are established, each
  account is then assigned an identifying code
  known as a cost data
• Once segregated by associated cost centers, all
  the elements of expense (direct labor, indirect
  labor, materials, supplies, equipment costs,
  etc.) constituting work units can be properly
  recorded by cost code
• The job accounting system is essentially an
  accounting information system
• Therefore, management is free to establish its
  own chart of accounts

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Fig. 15-2 List of typical project expense (cost)
accounts
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COST CODING SYSTEMS

• A variety of cost coding systems exist in
  practice and standard chart of accounts are
  published by organization such as the American
  Road Builders Association, AGC and CSI
• In most construction firms, detailed project cost
  accounts such as those shown in fig. 15-2 are
  used. This method recognizes the fact that
  construction work is project oriented and that to
  achieve the cost management goal of maximizing
  profit, projects must be accounted individually
• One project may be a winner while another is
  loosing money. Such situations may be masked in
  the accounting system unless job cost accounts
  are maintained on every project
• The actual account descriptions or designations
  vary in accordance with the type of construction
  and the technologies and placement process
  peculiar to that construction
• Standard cost accounts published by the American
  Road Builders Association emphasize there
  accounts, while Uniform Construction Index (UCI),
  published by CSI, emphasizes building oriented
  accounts
• A breakdown of the major classifications with the
  UCI cost account system is shown in table 15-1
• A portion of the second level of classification
  is shown in fig. 15-3

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Table 15-1 Classification of Accounts Major
Divisions in Uniform Construction Index
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Figure 15-3 Detailed codes for classification
within uniform Construction Index
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PROJECT COST CODE STRUCTURE

• UCI Master format RS means 3-level detail
• Highest level major subdivisions
• 30-level account
• Next level down
• Third and the lowest level
• Large and complex projects

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PROJECT COST CODE STRUCTURE

• The UCI Master format as used by the R.S. Means
  Building Construction Cost Data identifies three
  levels of detail
• At the highest level major subdivisions with the
  work category are established
• For instance, 30-level accounts pertain to
  concrete while 031 accounts are accounts
  specifically dealing with concrete forming. In a
  similar manner, 032 accounts are reserved for
  cost activity associated with concrete
  reinforcement
• At the next level down, a designation of the
  physical component or sub element of the
  construction is established. This is done by
  adding three digits to the work classification
  two digit code. For instance, three digit code
  for footing is 158. Therefore, the code 031158
  indicates an account dealing with concrete
  forming costs for footings
• At the third and lowest level, digits specifying
  a more precise definition of the physical sub
  element are used. For instance, code of
  0311585000 can indicate that this account records
  costs for forming concrete footings of a
  particular type (see fig. 15-4)
• At this level the refinement of definition is
  very great and the account can be made very
  sensitive to the peculiarities of the
  construction technology to be used
• Large and complex projects in industrial and
  energy related construction may require cost
  codes that reflect additional information, such
  as project designation, the year in which the
  project was started, and the type of project. An
  example of such code is shown in fig. 15-5

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Figure 15-4 UCI Cost (line item) Structure in the
Master Format Code
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Figure 15-5 Classification of Accounts Typical
Data Structure for a Computerized Cost Code
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COST ACCOUNTS FOR INTEGRATED PROJECT MANAGEMENT

• In large and complex projects, it is advantageous
  to break the project into common building blocks
  for both of the cost and time
• The concept of a common unit within the project
  that integrates both scheduling and cost control
  had led to the development of the work breakdown
  approach
• The basic common denominator in this scheme is
  the work packages, which is a sub element of the
  project of which both the cost and time data are
  collected for project status reporting
• The collection of time and cost data based on
  work packages has led to the term integrated
  project management
• That is, the status reporting function has been
  integrated at the level of the work package
• The set of work packages in a project constitutes
  its work breakdown structure (WBS)
• The work breakdown structure and work packages
  for control of a project can be defined by
  developing a matrix similar to one shown in fig.
  15-6

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COST ACCOUNTS FOR INTEGRTED PROJECT MANAGEMENT
CONTD.

• The columns of this matrix are defined by
  breaking down the project into physical
  subcomponents. Thus we have a hierarchy of levels
  that begin with the project as a whole and at the
  lowest level subdivides the project into physical
  end items such as foundations and areas. As shown
  in fig. 15-6, the project is subdivided into
  systems. The individual items are further divided
  into disciplines (e.g. civil, mechanical,
  electrical). The lowest level of the hierarchy
  indicates physical end items (foundation 1, etc).
• Work packages at the lowest level of the
  hierarchy are called control accounts
• The rows of the matrix are defined by technology
  and responsibility. At the lowest level of this
  hierarchy, the responsibilities are shown in
  terms of tasks, such as concrete, framing and
  earthwork. These tasks imply various craft
  specialties and technologies
• Typical work packages thus are defined as
  concrete tasks or foundational and earthwork on
  foundations 1 and 2. This approach can be
  expanded to a three dimensional matrix by
  considering the resources to be used on earthwork
  package (see fig. 15-7)

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Fig. 15-6 Project Control Matrix
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Figure 15-7 Three-Dimensional Visualization of
Work-Package-Oriented Cost Accounts
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Figure 15-8 Basic Cost Code Structure
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Figure 15-9 Project Control Matrix with
Scheduling of Subtasks
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EARNED VALUE METHOD

• One widely accepted way of calculating progress
  on complex projects using a work or account based
  breakdown system is the earned value approach
  or cost and schedule control systems criteria
  (C/SCSC)
• This system of determining project progress
  addresses both schedule status (e.g. on schedule,
  behind schedule, etc) and cost status (e.g. over
  budget, under budget, etc)
• The idea of earned value is based upon a rigorous
  development of percent complete of the budgeted
  costs associated with individual work packages or
  line items
• Each work package has an initial budget or
  estimate which is defined as the budgeted cost at
  completion or BCAC
• As work proceeds on an individual work package or
  account, assessment of the complete is made at
  various study date
• The level of expected production is often shown
  as an S-curve plotting the cost or units of
  production (e.g. units produced, work hours
  expended, etc.) against time
• This cost/production curve is referred to as the
  baseline. At any given time (study date), the
  units of cost/production indicated by the
  baseline are called the Budgeted Cost of Work
  Scheduled (BCWS)
• The tracking system requires that field reports
  provide information about the Actual Cost of Work
  Performed (ACWP) and the Actual Quantity of Work
  Performed (AQWP)
• The earned value is the Budgeted Cost of Work
  Performed (BCWP)
• The relative values for a given work package or
  account a a given point in time (see fig. 15-10)
  provide information about the status in terms of
  cost and schedule variance

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Figure 15-10 Control Values for Earned Value
Analysis
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EARNED VALUE METHOD CONTD

• The six (6) parameters which form the foundation
  of the earned value concept are
• BCWS budgeted cost of work scheduled value of
  the baseline at a given time
• ACWP actual cost of work performed measured in
  the field
• BCWP budgeted cost of work performed
  complete x BAC
• BCAC budgeted cost at completion contracted
  total cost for the work package
• AQWP actual quantity at completion value of
  the qty. baseline as projected at a given point
• In order to put these items into context,
  consider the small project shown in fig. 15-11.
  The project consists of two control accounts A
  and B. A consists of two sub accounts A.1 and
  A.2
• The study date (e.g. September 1, etc)
  information for these work packages is given in
  table 15-2, see pg. 262-265 for the problem at
  hand
• The earned value approach requires a
  comprehensive knowledge of work packages,
  budgeting and scheduling. It is a powerful tool
• Without it, projects can quickly spiral out of
  control

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Figure 15-11 A Simple Project Hierarchy
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Table 15-2 Study Date Data for simple project
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EARNED VALUE METHOD CONTD

• In order to put these items into context,
  consider the small project shown in figure 15-11.
  The projects consists of two accounts A and
  B. A consists of two sub-accounts (A.1 and
  A.2). The study date (e.g. September 1, etc.)
  information for these work packages is given in
  Table 15-2)
• In this example, the budget is expressed I worker
  hours so the baseline for control is in worker
  hours. The estimated number or worked hours for
  this scope of work is 215 (the sum of the
  estimated worker hours for A.1, A.2, and B).
  The BCWP or earned value for a given work package
  is given as
• BCWPi PCi x BCACi
• Where i is the work package or account label,
  and PC is the percent complete as of the study
  date.
• The percent complete (PC) for work package is
  based on the ratio of AQWP divided by BQAC based
  on the latest quantity assessment.
• If we know the original quantity estimate is 100
  units but updated information indicates that a
  total of 120 units will be required to complete
  the work, completion of 50 units would indicate
  50 complete. The correct PC would be 50/120
  (e.g. AQWP/BQAC)

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EARNED VALUE METHOD CONTD

• Based on the information in table 15-2, the PC
  for each package in the small project would be
• PC (A.1) 35/105 0.333
• PC (A.2) 60/77 0.780
• PC (B) 100/125 0.8
• Then BCWP (Project) 0.333(100)0.78(50)0.8(65)
  124.3
• Project PC (PPC) Total BCWP/Total BCAC
  ECACi
  Estimated Cost at Completion for work packagei
  ACWPi/PCi
• Therefore, the project percent complete (PPC)
  for the small project is
• PPC 124.3/215 x 100 57.8
• This simple example illustrates several points
• The PC for a given package is based on the ratio
  of the AQWP/BQAC
• The PPC is calculated by relating the total BCWP
  (i.e. earned value) to the total BCAC for the
  project scope of work.
• The total work earned is compared to work
  required. The values of units to be earned are
  based on the originally budgeted units in an
  account / work package and the percent earned is
  based on the latest projected quantity of units
  at completion

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EARNED VALUE METHOD CONTD

• Worker hours are used here to demonstrate the
  development of the PPC. However, other cost
  control units may be used according to the needs
  of management.
• It is very important to know that the schedule
  and cost objectives are being achieved. Schedule
  and cost performance can be characterized by cost
  and schedule variances as well as cost
  performance and schedule performance indices.
  These values in C/SCSC are defined as follows
• CV BCWP - ACWP
• SV BCWP - BCWS
• CPI BCWP/ACWP
• SPI BCWP/BCWS
• Figures 15-2 a, b, and c plot the values of BCWP,
  ACWP and BCWS for the small project data given in
  Table 15.2. If any given study date management
  will want to know what are the cost schedule
  variances for each work package

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Fig. 15-12 States of Control Account for Single
Project
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EARNED VALUE METHOD CONTD

• The variances can be calculated as follows
• CV (A.1) BCWP (A.1) - ACWP (A.1) 33.3 -
  40 -6.7
• CV (A.2) BCWP (A.2) - ACWP (A.2) 39 - 35
  4
• CV (B) BCWP (B) - ACWP (B) 59 - 50 2
• Since the CV values for A.2 and B are positive,
  those accounts are within budget ( i.e. the
  budget cost earned is grater than the actual
  cost). In other words, less is being paid in the
  field that was originally budgeted. The negative
  variance for A.1 indicates it is overrunning the
  budget. That is, the actual cost is greater than
  the cost budgeted.
• This is confirmed by the values of the CPI for
  each package
• CPI (A.1) 33/40 lt1.0 A value less that
  1.0 indicates cost overruns of
  budget
• CPI (A.2) 39/35 gt1.0
• CPI (B) 52/50 gt1.0 A value greater
  than 1.0 indicates actual cost is
  less than the budgeted cost

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EARNED VALUE METHOD CONTD

• The schedule variances for each package is as
  follows
• SV (A.1) BCWP (A.1) - BCWS (A.1) 33.3 - 50
  -16.7
• SV (A.2) BCWP (A.2) - BCWS (A.2) 39 - 32
  7
• SV (B) BCWP (B) - BCWS (B) 52 - 45 7
• The positive values for A.2 and B indicate that
  these items are ahead of schedule. The negative
  value for A.1 indicate a scheduling problem.
• The scheduling values will confirm this
  assessment. Overall, it can be stated that A.2
  and B are ahead of schedule and below cost while
  A.1 is behind schedule and over cost.
• Six scenarios for performance, ACWP, BCWP, and
  BCWS are possible as established in the test.
  The various combinations are shown in figure
  15.13 and Table 15.3

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Fig. 15-13 Scenarios for permutations between
ACWP, BCWP and BCWS
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Table 15-3 Values of CPI, CV, and SPI, SV for the
Six Scenarios
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LABOR COST DATA COLLECTION

• The purpose of the payroll system is to
• Determine the amount of and disburse wages to
  labor force
• Provide for payroll deductions
• Maintain records for tax and other purposes
• Provide information regarding labor expenses
• The source document to collect data for payroll
  is a daily or weekly time card for each hourly
  employee similar to that shown in fig. 15-14
• The flow of data from the field through
  preparation and generation of checks to cost
  accounting and earnings accumulation is shown in
  15-15

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Figure 15-14 Foremans Daily Labor Distribution
Report
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Figure 15-15 Payroll Data Structure
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CHARGES FOR INDIRECT and OVERHEAD EXPENSE

• Contractor incurs expenses associated with the
  construction of a given facility relate to
• Direct Cost consumed in the realization of a
  physical sub element of the project (e.g. labor
  and material costs involved in pouring a slab)
• Production Support costs incurred by the project
  related support resources or required by the
  contractor (e.g. superintendents salary, site
  office costs, various project related insurances)
  costs associated with the operation and
  management of the company as a viable business
  entity (e.g. home office overhead, such as the
  costs associated with preparation of payroll in
  the home office, preparation of the estimate,
  marketing, salaries of company officers)
• The production support costs are typically
  refereed to as project indirect costs
• The home office charges are normally referred to
  as home office overhead
• All these costs must be recovered before income
  to the firm is generated
• The home office overhead or general and
  administrative (GA) expense, can be treated as a
  period cost and charged separately from the
  project (direct costing)
• On the other hand, they may be prorated to the
  job and charged to the job cost overhead accounts
  and the work-in-progress expense ledger accounts

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PROJECT INDIRECT COSTS

• Job related indirect costs such as these listed
  in the labor cost report of fig. 15-16 (e.g. haul
  trash) are typically incurred as part of the
  on-site related cost associated with realizing
  the project. A such, they are charged to
  appropriate accounts within the job systems
• Many contractors prefer to handle these charges
  by adding a flat rate amount to cover them
• Contractor calculates the direct costs and
  multiplies these charges by a factor to cover
  both project indirects and home office fixed
  overhead
• To illustrate, assume direct cost to be 200,000.
  If the contractor applies a fixed factor of 20
  to cover field indirects and home office
  overhead, the required flat charge would be
  40,000
• If he adds 10 profit, his total bid would be
  264,000
• Fig. 13-3 establishes line items for indirects,
  calculates them on an item-by-item basis (rather
  than applying a flat rate)

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Figure 15-16 Labor Cost Report (some typical line
items)
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FIXED OVERHEAD

• Where as the project indirect charges are unique
  to the job and should be estimated on a
  job-by-job basis, home office overhead is a more
  or less fixed expense that maintains a constant
  level not directly tied to individual projects
• In this case, the application of a rate to
  prorate or allocate home office to a given
  project is and accepted practice
• The calculation of this home office overhead
  allocation factor is based on
• GA (home office) expenses incurred in the past
  year
• Estimated sales (contract) volume for the coming
  year
• Estimated gross margin (i.e. markup for the
  coming year)
• See example on page 270 and 271 for home office
  overhead

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CONSIDERATIONS IN ESTABLISHING FIXED OVERHEAD

• In considering costs from a business point of
  view it is common practice to categorize them as
  variable costs or fixed costs
• Variable costs are costs directly associated with
  the production process
• In construction they are direct costs for labor,
  machines and materials as well as the field
  indirect costs (i.e. production support costs).
  These costs are considered variable since they
  vary as a function of the volume of work
  underway.
• Fixed costs are incurred at a more or less
  constant rate independent of the volume of work
  in progress
• In order to be in business, a certain minimum of
  staff in the home office, space for home office
  operations, telephones, supplies and the like
  must be maintained and costs for these items are
  incurred. These administrative costs are
  generally constant over a given range of
  sales/construction volume
• As described in section 15-11, the level of GA
  costs can be estimated by referring to the actual
  costs incurred during the previous years
  operation

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CONSIDERATIONS IN ESTABLISHING FIXED OVERHEAD
CONTD.

• Since, the fixed overhead incurred in the
  previous year is typically available as a
  percentage of the previous years total sales
  volume, a simple conversion must ne made to
  reflect it as a of the total direct cost. See
  formula for this conversion on page 271
• If for instance, 800,000 is incurred as home
  office GA expenses in a reference year in which
  total volume billed was 4,000,000, the P value
  would be 20. The calculated to be added to
  direct costs estimates for the coming year to
  cover GA fixed overhead would be 25
• If the direct cost estimate (e.g. labor,
  materials, equipment and field indirects) for a
  job is 1,000,000, 250,000 would be added to
  cover fixed overhead. The profit would be added
  to the total of field direct and indirects plus
  fixed overhead
• The fixed (variable) costs plus the fixed
  overhead (GA) charge plus profit yield the bid
  price
• If the profit is 10 the total bid price would be
  1,375,000
• Certain companies prefer to include a charge for
  fixed overhead that is more responsive to source
  of overhead support. The assumption here is that
  home office support for management of certain
  resources is greater or smaller, and this effect
  should be included in charging for overhead

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CONSIDERATIONS IN ESTABLISHING FIXED OVERHEAD
CONTD.

• For instance, the cost of preparing payroll and
  support for labor in the field may be
  considerably higher than the support needed in
  administering materials procurement and
  subcontractors
• Therefore, a 25 rate for fixed overhead is
  applied to labor and equipment direct cost, while
  a 15 rate on materials and subcontract costs is
  used
• If differing fixed overhead rates are used on
  various subcomponents of the field (variable)
  costs in the bid, the fixed overhead charge will
  reflect the mix of resources need. This is shown
  in table 15-4
• It can be seen that the fixed overhead amounts
  using 15/15 approach are smaller on jobs 101 and
  102 than the flat rate of 20
• This reflects the fact that the amount of labor
  and equipment direct cost on these projects is
  smaller than the materials and subcontract cost
• In the example given (i.e., the 25/15 rate vs.
  20) the 20 flat rate would yield a lower
  overall charge for fixed overhead on labor and
  equipment-intensive jobs