Is your Construction project making money or losing money?
With a little research, I found that we had paid $500,000 extra for cement – effectively we had paid $500,000 for cement we hadn’t used! Further investigation revealed that the drivers of the cement trucks were discharging, and selling 30% of each load of cement before they ever reached the project.
Over several months the cement truck drivers had stolen half a million dollars of cement. This resulted in a shortage of cement because the project wasn’t receiving all the cement they were supposed to get, which delayed the project.
The above example illustrates the importance of monthly cost reports. Without them, these problems could have gone undetected. Forever.
But, cost reports are useful in other ways. For example, one company I worked at built several cooling towers, and each time we lost money. No matter how we priced or planned these projects we always lost money. We never seemed to have the right price or construction methods. We eventually decided we couldn’t make money on these projects and avoided pricing them again.
Sometimes we have to accept that we’re not particularly good at some construction projects and we should leave these projects to other contractors.
Why are construction project cost reports vital?
- They can uncover theft and fraud on the project.
- They could highlight when materials are being wasted.
- Cost reports provide a check that all work and materials have been correctly claimed by the client.
- They highlight problems with productivity – when people and equipment aren’t being used efficiently.
- Losses could indicate that the project has grown in scope and that the additional work hasn’t been claimed.
- Knowing a project is losing money allows company management to put in place mitigating actions to ensure there’s sufficient finance to cover for the impacts on the company’s cash flow, finances, and profitability.
- Cost reports provide feedback to the estimating department. It allows estimators to increase or decrease rates when they price the next projects. Decreasing rates may improve the chance of winning another project while increasing rates could prevent future losses.
- Cost reports also provide valuable ratios which can be used to check estimates for future projects. We gathered several important ratios for project overheads, equipment costs and labor costs, which provided quick checks on our prices, enabling us to uncover errors in our prices before we submitted them.
- Project cost reports provide targets for the project team to aim for. It’s an indication of how well the team is managing the project. Sure, there are sometimes projects that are badly priced, or which hit unexpected snags, so they don’t make money. But then the team needs to justify the losses and the reasons for the losses. But often a project that’s losing money is a project that has other problems.