Article posted on ConstructionExec.com
For a job to be deemed a success from a completion and a profit standpoint, collaboration must occur between field personnel (project managers) and office personnel (financial officers).
Project managers (PM) walk sites and visually gauge project progress; however, this measurement may not align with the actual progression of a project from a cost perspective. PMs who focus on delivering jobs to the specifications of the contract also need to be cognizant of time and budget. They need continual feedback from the accounting team to monitor the progress of each specific project on all key metrics. The two departments cannot be successful and remain independent of one another.
PMs are accountable to the budget to show a profit. Accounting is reportable to management on the profitability of individual projects and the company as a whole. Both departments must be mindful of each other’s roles when making decisions in order to avoid potentially negative consequences.
Accounting teams should be in the practice of providing to PMs, on a set schedule, the following reports:
- Detailed costs incurred, by cost codes;
- Committed cost to actual cost;
- Work-in-process schedule; and
- Cash flow status.
DETAILED COSTS INCURRED, BY COST CODES
This report provides all activity incurred to date on a project. The PM should review the report for accuracy. The importance of this is to track actual costs incurred versus costs estimated to occur for that stage of the project. This information assists the PM to evaluate remaining costs yet to be incurred as well as costs-to-budget.
In addition, the PM reviews the activity to ensure that costs are being charged correctly. Costs charged to the wrong cost accounts or projects will jeopardize the profitability of the job and accountability of all parties involved.
COMMITTED COST TO ACTUAL COST
Once a contractor enters into a contract with its customer, the contractor will then enter into contracts with the necessary subcontractors needed to complete the project, locking in all relative materials prices. The contract with the subcontractor and the associated costs for materials are considered committed cost in the contractor’s accounting system. The committed cost can now be tracked to ensure that the actual cost incurred by a subcontractor or material supplier does not exceed the amount to which the contractor has committed. This practice ensures that the contractor is not billed by the subcontractor in excess of the agreed amount. PMs rely on this cost system when preparing an estimate of cost–to-complete for the project.
The work-in-process schedule (WIP) is a report that provides data related to how a project is performing, based solely on information obtained from the contractor’s accounting system. The schedule is also used to calculate the percentage of completion on a project, based on the ratio of cost incurred to total estimated cost expected. This percent complete should be consistent with a PM’s estimated percent complete, based on the PM’s expertise and experience. If the two measures seem inconsistent, this indicates an issue that needs investigating.