This pandemic thing has stretched our series on the Top 10 Traits of Successful Contractors longer than planned. As a reminder, we’re comparing traits of highly successful contractors, as opposed to mistakes made by those who are just barely making it, or in some cases, no longer around.

This newsletter puts us back on track with Terrible Mistake #2, “Avoiding Unpleasant Surprises”. The most unpleasant surprise for most contractors is finding out that the project you thought was moving along fine and would produce the profit you expected all of a sudden becomes a loser. All along, the monthly reports are showing this project is just fine, and then the final billing is completed and …what happened??!!

The impact of being continually misinformed about the actual status of your projects may be hidden until it is WAY too late to fix. And as we have seen all too often, it only takes one really bad project to severely impact the bottom line for the entire year.

So how do you avoid these unpleasant surprises? The first step is one that you are most likely doing, but missing a key element. That is, reviewing your Work in Process (WIP). Most of the contractors we work with spend time reviewing their WIP, sometimes in great detail. But we find very few who are willing to put in the effort and training necessary to get good projected cost from the field.

Why? Because it can be hard to do. Every-one is busy, project managers are juggling estimates, subs, procurement and associated expedited tasks. So when the costs come in at 50% of the original estimate, the job is probably about 50% complete, right? The time and effort to understand what the real % complete is may not be worth it – that is, until too many end of project surprises crop up.

Example: Estimated cost is 100,000, actual cost is 50,000. What if we are only 35% complete?

So what is the ideal situation? A project budget should be set up to mirror how it was estimated, in phases with estimated unit productivity for each phase. Hours and project progress should be reported daily (weekly can work, but will be less accurate). If reported production is under budgeted goals, the project manager and foreman then get together and figure out a plan to catch up, before it really gets out of hand. For this to work, here’s what you need:

  • An accurate, fairly detailed budget with productivity estimates built in
  • Reporting by each segment of hours and unit production, ideally daily

The system usually breaks down when either hours or production are misreported – often put to the wrong category, or production is too optimistic.

Both of these issues can be solved with better training and daily attention to results for a few weeks until everyone has it down.

Some units of work production are very difficult to quantify. In those cases, an informed % of completion could be used instead. ideally, there is enough detail at this level to allow for these types of estimates on no less than a weekly basis.

The other important aspect of avoiding surprises is getting a handle on purchase orders and subcontracts, if you have them. I’m always surprised how many companies issue purchase orders when the vendor invoice arrives, as a “necessary” part of the payable process. That clearly removes the real purpose of using purchase orders, which is to confirm quantities, pricing and other important aspects of the purchase from the vendor, and to add the commitment of expenditures to the job cost, so that no matter how long it takes to get the vendor invoice, the committed cost has been allocated.

Subcontracts serve the same purpose and then some, as this special type of purchase order typically has more detail about the scope of work to be included for the price quoted, which is really important for identifying what is or is not a change order. Subcontracts don’t always get billed as quickly as materials, leaving more room for potential late “surprises” if they are not recorded as issued.

Staying on top of actual work progress with timely reporting, and having a handle on committed costs, are two of the most important aspects to knowing how a job is really performing.

Stayed tuned for the #1 Mistake in our next edition. If you’d like to see a recap of the first eight Mistakes, check out our blog at cssworks.com/news