Viewpoints

Construction Companies Must Monitor All Projects

Steven Terrigino

Originally Published In:
August 2007
Author: Steven Terrigino, CPA

If you’re a racecar fan like me, you know there’s plenty of evidence that a strong start does not guarantee a victory.  Properly monitoring and reviewing a job throughout the entire project will generally allow the project to make a “strong finish.”

In an upcoming Viewpoint, I’ll be discussing the complexity surrounding the bid process and the necessity behind having a bid that is accurate and takes several variables into consideration.

However, the management phase of a project is as equally challenging, and that’s the focus of my podcast today.  So, how do you successfully manage a project?  Simple:  Monitor the job from start to finish, and here are some suggestions to guide you.

PLANNING THE JOB

Select a project manager. This is the first critical step in commencing a job.  Compare this process to hiring an employee.  Consider the credentials of your prospective project managers as they relate to the specific engagement.  Use some of the same general questions you would during an interview.  What is their prior experience?  Have they previously managed a job of this size or complexity?  What is their past success rate of projects managed? 

A successful manager must have the ability to properly plan, organize, lead and control a project.  Assigning the appropriate project manager could mean the difference between a profitable job and a loss job.

Review the contract. Being knowledgeable about the details of the contract will allow the project manager to identify when work is performed beyond the scope of the initial proposal.  Modifications to a job generally require a change order.  Obtaining a signed change order will formally document the approval for the modification as it relates to the scope as well as the price of the work being performed.   Documenting modifications in the form of a written memorandum to the owner is also a good practice.  This process will formalize and document any verbal communications. 
Without a signed change order, you create the risk of not being paid for the additional work you performed.  Moreover, the more formal documentation a project manager has, the better positioned he may be in the event of questions or litigation upon the project’s completion.

Revisit the bid. Reviewing the original bid allows the project manager to become familiar with all of the anticipated time and material needs, the estimated costs of that time and material, projected profit, etc.  Basically, the bid details the budget for the job. 

Accordingly, it is the benchmark the project manager will use when comparing planned results to actual results.  Revisiting the bid prior to commencing the work will ensure original estimates were realistic.  Updates to the original bid may be necessary, as more concrete or additional information has become available.

Investigate material suppliers. Although an estimated cost of materials is determined in the bidding phase of a contract, there still may be an opportunity for the project manager to ascertain the best price for the materials.  To the extent better pricing or even payment terms can be negotiated, it may allow for enhanced profitability on the project.  Fully utilize your choice of suppliers to ensure their pricing is competitive.

Map out the schedule. The schedule will determine deadline dates when certain phases of the project need to be completed.  Missing deadlines can result in financial penalties to the contractor.  Additionally, the payment schedule will outline the timing of when bills for the percentage of work performed can be submitted.  Cash flow is vital for any organization and timely submission of progress billings is necessary to avoid the interruption of cash receipts.

EXECUTING THE JOB

Stay organized. Organization promotes effectiveness and efficiency.  A project manager should use specific resources to promote organization in order to better manage and run the project. There are several software programs available to track a construction project from a cost and production standpoint.  New information should be updated as frequently as it is made available.

Work with your accounting department. Typically, the accounting department will be responsible for inputting information and generating job cost reports.  These reports will provide critical data to the project manager in terms of material cost, labor dollars as well as percentage of completion.  Accordingly, the project manager should specify what types of reports are useful and the frequency by which the data will be needed.  Current and accurate data is a necessity if you want to have the ability to make timely decisions, which could positively affect a project’s outcome.

Compare actual to budget. Although managers ensure they receive reports, too frequently they fail to properly understand and utilize the reports.  Actual amounts in the job cost report should be compared to budget.  Major variances should be immediately identified and reconciled.  This is the project manager’s opportunity and responsibility to make modifications, if necessary.  If too much time elapses before major variances are identified and corrected, it may be too late to make an adjustment to get the job back on course.

Visit the job site. Routinely make job site visits and talk to job foremen.  This provides managers with the ongoing opportunity to compare their job cost reports to actual production and to stay informed.  Upon review of the construction site, managers can determine the accuracy and feasibility of their job cost report.  A job cost report, for example, may indicate the job is 35 percent complete.  However, a site visit may prove the job is either more or less complete.  Again, this gives the manager the opportunity to make a timely adjustment.

AFTER COMPLETION

Often, there are minor loose ends that need to be tied up, despite the job being substantially complete.  Although the company’s workforce has moved on to the next job, be careful not to neglect to complete the “punch list.”  These finishing touches may include final construction fixes, receiving all invoices from your suppliers and related lien releases. 

Completing these items will also expedite the receipt of your retainage.  Be sure to revisit the job’s true financial performance when all of these open items are closed.  Not only will this provide you an accurate picture of the job’s true performance; it will assist you when bidding on future jobs. 

SUMMARY

A job has to be monitored and reviewed for timeliness, accuracy, and consistency from the beginning of the project to the very end.  Your project manager is primarily responsible for this role.  Accordingly, the project manager may be the most important tool you use to execute the job.

Disclaimer: The Bonadio Group provides the information in Viewpoints for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in Viewpoints are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.