Setting the Stage
As a cost estimator, working for a large construction corporation or for a small contracting firm are two very different things. Most likely, the large construction firm has a cost estimating department led by an Estimating Manager, they have procedures and policies in place, learning and career growth opportunities, etc. All the good stuff. The cost estimator does not have to reinvent the wheel. All he/she has is to learn the system that is already in place and become very good at it.
The small contracting business accounts for a very significant construction market volume, so the chances are that one of us works or will work for a small contractor. The story of a cost estimator who works for these companies is different.
A small contractor often starts a business going from being a trade person into running his/her own business. While they are very good at their trade, they do not necessarily have a keen eye for measuring and analyzing costs within the company. Yes, they know what crew size they need for a particular job, how long it might take to do the work, how much material is needed, what equipment is required, etc. This is not enough to keep a company on the safe side and optimize profit. This is why I believe that the cost estimator should campaign the implementation of a cost control system if one is not in place already.
Cost control is maybe the most important factor in the success of a small business. Things must be properly planned, measured and adjusted for the next cycle.
How is cost control related to cost estimating? The cost estimate is the basis of each project budget.
Most small contractors, particularly trade contractors, base their cost estimates on unit rates, compared to the larger contractors who base their work on production rates. The problem with using unit rates to estimate cost is that it does not provide the information required to develop the labour and equipment productivity for estimating future work. A unit rate represents a fixed crew size and production rate. It is almost impossible to track costs during the execution of a project based on a unit rate cost estimating method.
Implementing a Cost Control System
Benefits:
- Controls the project budget during execution;
- Provides productivity for labour and equipment information for pricing future work;
- Provides material waste information for pricing future work.
Steps to implementing a cost control system:
- Develop the project cost system. Each cost code in the project cost system would have a configuration that is meaningful to the company, easily archived, and within an accounting code. What to include in a cost code:
- Digits that identify the project number are unique for each project.
- Digits that identify the project area, geographical area, or area within the project.
- Digits that identify the work type; this is the activity code within the cost estimate.
- Digits that identify the distribution code; this is the type of cost as in labour, material, equipment, and sub-contractor.
- Develop the cost codes system.
A contractor’s account system should have its own code designation to identify and classify costs. Construction Specification Institute and the Uniform Construction Index are the most common codes system used.
- Implement the practice of charging the project expenses where they are incurred.
- Train all company personnel in the usage of appropriate cost codes. There is no benefit to implementing a cost control system if the expenses are not reported to the appropriate cost code. This is a challenging one to implement in a small company. Usually, there is an adversity to “paperwork”, as it is seen as just another time-consuming task.
- Accounting cost reports should be produced regularly, preferably monthly. The cost report is checked against the project budget so cost overrun can be identified soon enough while there is still time to apply corrective action.
- Upon project completion, the cost estimator should request a final, detailed project cost report from the accountant. The cost estimator will use this information to update the company’s internal cost-estimating database.
- A project post-mortem analysis should be done to analyze the cost overrun and how to address them in the future: by adjusting the estimating rates, or by improving the site management and supervision, better training the tradesmen, etc.
- The cycle is now closed.
I am a big believer in the fact that “if something is not measured, it cannot be improved”. A cost control system is a must for a contractor to survive and thrive in today’s economy. When done properly, it can pay big dividends for the small contractor.
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