Project Cost Control Procedure

Project Administration, Procedure No: 1 PROJECT COST CONTROL

SECTION 1 - INTRODUCTION General 1.

Three distinct tasks are required to achieve effective cost control of a project. These are:a. Planning and Organising the project. b. Recording and Reporting Costs during the execution of the project. c. Taking Corrective action if the cost reports indicate such action is necessary. The greatest control of costs is achieved at the planning and organising stage of any project, more so if the design of permanent or temporary works is involved. Effective cost control is achieved at this stage by means of close analysis of alternative designs (permanent and temporary works), the realistic pricing of alternatives, analysis of alternative methods of construction, realistic pricing of these alternatives, detailed planning of the task, proper purchasing procedures, organising resources, etc, etc.

2. This procedure deals with the Reporting task involved in the project cost control process, and also covers some aspects of the Corrective Action task. 3. This procedure consists of the following sections : Section 1 This introduction. Section 2 Cost Code Numbering system and the Estimate Split Summary. Section 3A Labour (Manhour reporting). 3B Labour (Cost reporting). Section 4 Plant Cost Reporting. Section 5A Commitment Reports. 5B Historical Cost Reports. 5C Escalation. 5D Project Assessment & Summary. Section 6 Variations and Extras. Section 7 Exceptional items. 4.

This introductory section of the Project Cost Control procedure discusses the philosophy of the standard cost reporting system, but the details are covered in the other sections above. The system applies in principle to all types of contract, i.e., lump sum, schedule of rates and cost reimbursable, although the details and requirements will vary.

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Project Administration, Procedure No: 1 PROJECT COST CONTROL 5.

The procedure describes a manual method of project cost control reporting. “Company Name” objective is to use payroll data, financial and estimate figures for project cost control reporting system based on the manual method. This procedure has a number of draft report formats that "Company Name" intends to implement, and are attached to this procedure marked “Attachments”. For the purpose of putting in place the “COMPANY NAME”. Project Cost Control Procedure, it shall be refered to as the “manual method” where it may be necessary to set up the reports in appropriately designed spreadsheets to suit manual entry of data obtained through “COMPANY NAME”’s Financial and Payroll Systems.

Overview of Cost Control Reporting System 6.

In outline, the key elements of an effective cost control reporting system are:a.

Proper design of an effective cost code numbering system and correct allocation of alloweds into this system.

b.

Prompt accurate reporting of commitments and/or costs against alloweds, taking realistic account of escalation, variations, etc.

c. Intelligent analysis of reports leading to specific action plans for improvement. d. Implementation of the action plans. (Note that in effect items b, c and d form a continuing cycle.) 7.

The emphasis of the cost control reporting system is to report at the earliest stage of incurring cost. For many items, this can be achieved by reporting at the time of placing an order i.e. at commitment. For such a system to succeed it is essential that expenditure is not incurred without the issue of a properly costed order signed by an authorised person. However, with certain items it is impractical to report costs at the time of commitment. The cost control reporting system provides alternative methods for reporting these items, which include labour and miscellaneous materials etc.

Effective Cost Control Reporting 8.

The principles for effective cost control reporting are:a. Concentrate on the "critical few" rather than the trivial many. b.

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Project Administration, Procedure No: 1 PROJECT COST CONTROL c. Be sure that like is compared with like. d.

Differentiate between items with “ single- decision “ costs, e.g. supply of structural steel and those with “recurring-decision” costs, e.g. oxygen and acetylene.

e.

Identify "one off" items where cost reporting is ineffective and short term planning is the only effective way of controlling costs.

a.

Use "rule of thumb" estimates to check actual costs and seek explanations for those that do not check. It will often lead to errors in coding or incorrect allocation of costs.

Terminology 9.

Attachment 1A lists the terms and definitions that are relevant within the "Company Name" manual method in the context of cost control and reporting and financial aspects. Terms used within the reporting system must be consistent to avoid errors and misunderstandings. Abbreviated terms, particularly when used in reports, must be fully understood to avoid errors in reporting.

The System 10.

The cost control reporting system is based on two distinct types of reporting method:a. Reporting at commitment and b. Reporting using historical (invoiced) costs. At the stage of establishing the cost control report documents it is necessary to determine those items that are best reported at commitment and those that are best reported using historical cost. The items should be clearly separated and controlled accordingly.

11. Those items that are best reported at commitment include: •

Major materials, the cost of which are known at the time of ordering and where the gain or erosion of margin can be predicted providing wastage is as expected. Thus after the initial "single-decision" the only effective control is on wastage.

•

Subcontracts, the cost of which are known at the time of ordering and again the gain or erosion of margin can be predicted.

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Project Administration, Procedure No: 1 PROJECT COST CONTROL •

12.

Plant (including all hired items), where the hire rate is known at the time of ordering. In the case of Plant, however, the commitment can only be accurately assessed in most instances for the period that the plant has been on the project, and forecasting the commitment to completion is not as accurate as when assessing commitments for major materials and subcontracts. Thus Plant control is best based on a system that measures commitments to date rather than forecast commitments to completion. For this reason a different reporting system is proposed for Plant when the plant component of a contract is significant.

Those items that are best reported using historical costs are:•

Minor materials, notably small tools, consumable, formwork, scaffolding (unless hired), temporary materials etc., where, because they are ordered piecemeal, it is virtually impossible to make a reliable prediction of the total final commitment and hence forecast the gain or erosion of margin. It therefore becomes necessary to review the costs for these items each month, and compare them with an assessment of alloweds for the costs recorded, as a basis for control action.

•

Labour, where up-to-date accurate costs are known (from payroll) but reliable predictions of the total final costs are virtually impossible due to the usual uncertainties associated with labour. For the Labour component of a contract, measurement of performance, production rates, etc., becomes more important, and this often requires a more frequent rate of cost reporting than for other items controlled by historical cost means. For this reason a different reporting system for Labour is proposed when the Labour component of a contract is significant. Other items that are often included in historical cost control reporting methods are:

•

Small material and subcontract items, that although suitable for commitment type reporting can be more readily and satisfactorily reported by historical costs means. This is particularly so if these items are combined with other historical cost type items. Examples include subcontracts and materials for site establishment.

•

Freight charges, office running expenses, items not normally covered by orders (e.g.. telephone accounts), Staff charges.

13. It is possible for any item to be reported by either the commitment or historical cost method. The final choice of method must be determined from the above guidelines and factors such as the administrative task involved, the value of any particular item, the likelihood of major variations or variances necessitating close control, and the availability of documentation such as orders.

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Project Administration, Procedure No: 1 PROJECT COST CONTROL

Production of Cost Control Reports 14. Commitment reports will generally be produced monthly giving details for each cost code. 15. Historical cost reports will similarly be produced monthly giving details for each cost code. 16.

For projects with a significant component of Labour requiring separate Labour reports it would be expected to produce Labour Manhour and Cost reports weekly to coincide with payroll closing dates.

17. For projects with a significant component of Plant necessitating separate Plant Cost reports it would be expected to produce Plant Cost reports weekly, or as required to suit the desired level of control. 18.

The relationship between the various reports that make up the cost control system is illustrated in the flow charts in Attachments # & #.

Treatment of Escalation 19.

The system is designed on the basis of comparing actual costs with escalated alloweds. The procedure for escalating the alloweds is detailed in section 5C.

Guidelines for analysis of cost control reports 20. Cost reports must be analysed as soon as as they are available and action taken as necessary. 21.

In Labour Manhour Reports it will usually be adequate to:a. Study each "critical few" item in depth. b. Scan other items to identify those where the variance exceeds a predetermined figure, say 10%.

22.

The Labour Cost Report must be studied to verify that actual manhour rates line up with current alloweds manhour rates. If they do not line up, the reason, e.g., excessive overtime, bonuses, must be sought and found.

23. In Plant Cost Reports, each "critical few" item must be similarly studied and reasons for variances determined. 24. For Commitment items the reports are more in the nature of a recording system than a principal cost control instrument. This is because if wastage (in the case of materials) is kept under control, the end result costwise is decided at the time of placing the order. Thus these cost reports are studied to detect October 2007

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Project Administration, Procedure No: 1 PROJECT COST CONTROL anomalies; i.e. materials not invoiced, variations for which orders have not been placed, uncontrolled expenditure, etc. 25.

For Historical Cost item, the cost reports do form a principal cost control instrument provided that adequate care has been taken with the calculation of alloweds used, and recorded costs are up-to-date.The reports must be studied to identify significant variances.

Guidelines for development of corrective action plans 26.

Generally it is in the area of labour and plant that the project staff are able to apply the most effective corrective action. And starting with the critical item which is showing the worst variance, the situation must be analysed as follows: a. Has the cost coding of time sheets or invoices been correctly carried out? b. Is the actual method being used exactly what was intended? c. If not, why not? d. Apply work study techniques to the method looking for the elimination of unnecessary work, idle time, inefficient techniques, etc. Call in assistance if required. e.

Is the Supervisor motivating his crew as well as possible?

f. Is access and working space adequate and safe? g. Are materials supplies adequate? h. Are plant breakdowns causing too much lost time? i. Are any other site factors holding down productivity? 28. The answers to the above questions will usually indicate at least one possible course of action, and thus provide the basis for a plan to be made. 29. The plan must be communicated to all concerned in an effective manner. 30. In the areas of wastage of permanent materials, and control of variations and extras on subcontractors, the corrective action is usually more readily seen, decided upon, and acted upon. 31. The control of historical cost items, such as temporary materials and consumables is usually much more difficult and in most cases the solution lies in more detailed and effective planning, or better stores control.

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Project Administration, Procedure No: 1 PROJECT COST CONTROL

ATTACHMENT 1A TERMS AND DEFINITIONS The following terms and definitions are relevant within the Group in the context of cost control and reporting and financial aspects. 1.

"Labour" includes the workforce directly employed by "Company Name" plus the Supervisor plus any labour hired on an hourly basis from another employer (usually referred to as external labour). Note that labour hired on an output basis from another employer is treated as a sub-contractor, e.g.. labour-only Riggers/Scaffolders being paid an agreed amount per hour. (However, in a contractual context all externally hired labour, on an hourly or output basis, should be treated as a sub-contractor).

2.

"Plant" includes the main items of plant and equipment hired by the project whether from "Company Name" or elsewhere and it could also include hired equipment such as buildings, scaffolding and formwork if the estimate split and cost codes have been established accordingly. The dividing line between "plant" and "small tools and equipment", which are treated as "historical cost" items, is left to be defined by the Project Manager, at the time of producing the estimate split and cost code system, in such a way as to provide effective control with minimum effort.

3.

"Subcontracts" include all agreements whereby persons or firms undertake to perform specified work on the project site with or without related work off-site. Labour hired on an hourly basis is not considered as sub-contract. Usually the work covered by a subcontract is permanent work, or closely related there to, such as formwork and does not include work related to overhead items such as installation of services.

4.

"Materials" includes all other items not covered by "labour", "plant" or "subcontractors". "Permanent" materials are those materials required for the permanent works, and "temporary" materials is used to describe all other materials.

5.

"Cost" means the amount in dollars that we are obligated to pay for labour, plant, materials or sub-contracts.

6.

"Direct Cost" means a cost related to and readily identifiable with an item of work specifically required by the Contract.

7.

"Indirect Cost" means a cost related to the overall running of a contract but not obviously identifiable to a direct work item.

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Project Administration, Procedure No: 1 PROJECT COST CONTROL 8.

"Commitment Control", (also known as "Committed Cost") refers to a control system in which the emphasis is on controlling materials and sub-contract costs (and other costs if desired) at the time of making the commitment, i.e. placing the order, rather than using invoiced costs as prime data in the control system.

9.

"Manhours" means the number of actual hours worked (inclusive of normal non-productive time, e.g.. teabreaks) by each employee and includes the sum of such hours for several employees.

10.

“Manhours Actual” means the amount in manhours that has been expended on an item of work.

11.

"Manhour Rate" means the average dollar cost per manhour, averaged out over a pay period. It includes the effects of overtime penalty rates, bonus and other on-costs and can be either "allowed" or "actual".

12.

"Allowed" means the amount in dollars or manhours, as relevant, allowed in the estimate (adjusted for any post tender negotiations included in the 'contract') for the quantity of work to which it refers.

13.

"Actual" means "cost", "manhours actual", or "manhour rate" as appropriate to the sense.

14.

"Variance" means the difference between the allowed and the actual for the same item or quantity of work.

15.

"Tender price, quantity, rate, etc". means the price, quantity, rate etc. nominated in the tender. Note that whilst normally these will be the same as those in the contract, this is not necessarily so, e.g.. where post-tender negotiations are incorporated in the contract.

16.

"Estimate" means the documents, e.g.. summaries, costing sheets, programmes, schedules, method statements and quotations on which the tender was based.

17.

"Estimate amount, quantity, rate etc". means the amount, quantity, rate etc. shown in the estimate.

18.

"Variation" & "Extra" means a change to the specified quality, quantity, method or time of work specified in the contract or on the contract drawings. However, changes solely in quantity in a Schedule of Rates contract are not included, nor are escalation amounts treated as variations.

19.

"Variation Submission" means a submission for approval of price for a Variation or Extra.

20.

"Progress Payment Claim" or "Progress Claim" means a claim for a regular progressive payment in accordance with the contract conditions for work done

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Project Administration, Procedure No: 1 PROJECT COST CONTROL in an agreed period. In relevant cases, it also includes material on site. 21.

"Variation Payment Claim" means a claim for payment in respect of the stated variations and extras.

22.

"Escalation Payment Claim" means a claim for payment as reimbursement of the effects of wage and materials price increases since the date of tender, such reimbursement being calculated in accordance with the contract conditions. Such claims may relate to progress payment and variation payment either separately or together.

23.

"Retention" means an amount in dollars withheld from a payment claim.

24.

"Margin" means the amount of money added in an estimate to cover Branch overheads, Head Office overheads and Group profit. It also is equal to the difference between contract receipts and contract costs.

25.

"Estimate Split" is the activity of allocating allowed in the estimate to appropriate cost codes.

26.

"Estimate Split Summary" is the final document resulting from the estimate split and summarises the allowed dollars from the estimate that have been allocated to selected cost codes.

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Project Administration, Procedure No: 1 PROJECT COST CONTROL

SECTION 2 –COST CODES & ESTIMATE SPLIT INTRODUCTION 1. The principles for effective cost control are stated in section 1 of the procedure. The key framework around which cost control is built is the project Cost Code numbering system. 2. This section covers the following steps involved in the design of the cost code numbering system and in splitting the estimate. a. Examine the Estimate. b. Determine cost code block names. c. Select cost codes d.

Allocate alloweds from estimate to cost codes.

e. Prepare estimate split summary. f. Check totals with estimate. g. Review cost codes and estimate split Summary. h. Publish cost code list.

Cost Code Numbering System 3. The following points must be taken into account when designing the system: a. Each cost code on any project will have the same number of digits. The number of digits will be 4. b. The numbering system should comply with the following general standard unless strong reasons exist to the contrary, when approval should be obtained from the Branch/Division/General Manager. 1000 2000 3000 5000 6000 9000

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- 1999 - 2999 - 4999 - 5999 - 8999 - 9999

Indirect Costs - Non recurring. Indirect Costs - Recurring. Labour Costs. Plant Costs. Materials & Subcontracts. Contingencies, Provisional Sums, Insurance claims etc.

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Project Administration, Procedure No: 1 PROJECT COST CONTROL 4.

“COMPANY NAME”. TREATS COST CODES 3000 - 4999 AS LABOUR, i.e.. THESE NUMBERS ARE USED TO SEGREGATE LABOUR MANHOUR AND LABOUR COST REPORTS. “COMPANY NAME”. TREATS COST CODES 5000 - 5999 AS PLANT, I.E.. THESE NUMBERS ARE USED TO SEGREGATE PLANT COST REPORTS FOR ALL PLANT USED ON A PROJECT. “COMPANY NAME”. TREATS ALL OTHER COST CODES AS EITHER (A) "COMMITMENTS" OR (B) "HISTORICAL COSTS" TYPE.

Examining the Estimate 5.

Before selecting cost codes examine the estimate to identify the critical few that will determine the structure of the cost code system. In particular examine the labour items of the estimate and, if the value of labour warrants the use of separate labour cost reports, list those items:a.

which have the largest dollar amounts alloweds.

b. Where the risk of error (e.g.. quantity, productivity, manhour allocation,) could cause significant variation. c. where the concentration of labour will be high. 6.

Examine the plant items of the estimate and, if the value of plant warrants the use of separate plant cost reports, list those items:a.

which have the largest dollar amounts alloweds.

b. where the risk of error could cause significant variances. c. where plant productivity depends on factors such as survey or inspection. 7. Examine the estimate and identify the major materials and subcontract items of the estimate that will be controlled on a commitment basis. 8. Examine the estimate and identify the temporary materials, consumables etc. that will be controlled on an invoiced cost basis.

Determining Cost Code Block Names 9. After examination of the estimate, the next step is to determine names or titles for blocks of cost codes. These block names will be those as reported in the final cost report i.e. the Project Assessment Summary. Block names may reflect the physical nature of the project e.g.. Building A, Building B, etc. Alternatively block names may be used to reflect the trade to which the cost codes apply e.g. civil, building, mechanical, etc. October 2007

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Project Administration, Procedure No: 1 PROJECT COST CONTROL If the Labour and Plant reports are being considered then Labour and Plant block names will be required.

Selecting Cost Codes 10.

Having named blocks of cost codes, a list of cost codes should be prepared. It is unlikely that the final list will be established first time and it will require revision as the estimate split progresses and cost control documents are finalised.

11.

The following points must be taken into account when selecting cost codes:a.

Within the series 1000 - 2999, the allocation of numbers should relate to the sequence used in the estimating check list, (refer procedure Estimating and Tendering). A suggested standard cost code system is given in Attachment #.

b. Within the series 6000 - 9999, the direct work can be split either by trade, (mainly applicable to building work), or by area (more applicable to engineering work). c. A separate single cost code number should be allocated to each major supplier or subcontractor to facilitate comparisons between cost reports, forecasts and accounting documentation. d. If the Client requires cost reporting as for example in a cost reimbursable contract, the system must cater for his requirements. e.

Cost codes should be kept to a minimum consistent with effective control. As a guide any cost code should not represent less than 0.5% of the contract value.

f.

Cost codes must relate to identifiable activities, e.g.. if it is not simple for a Supervisor to decide how many hours a rigger has been erecting beams or erecting purlins, don't give them separate cost codes.

g. Cost codes must distinguish between those that are to be controlled as “commitment” items, i.e. controlled at time of writing order, and those that are to be controlled by “historical costs”, i.e. controlled by invoiced cost method.

Splitting the Estimate and Preparing the Estimate Split Summary 12.

Having prepared a cost code system the next step is to split the estimate and allocate estimate alloweds against each cost code. This is done by annotating the estimate to show the relevant cost code for every item. Summarise the estimate in order of cost code numbers. Refer to Attachment # for a typical "Estimate Split Summary" in order of cost codes. Note that for the purposes of this exercise, the expression "estimate" is used to cover either the original estimate or a revised estimate as appropriate.

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Project Administration, Procedure No: 1 PROJECT COST CONTROL 13. In summarising the estimate for the non-critical items that have been grouped together under a single cost code (to minimise proliferation of cost codes), each estimate item should be shown separately even though they are grouped under one cost code. This will allow measurement of work done for each cost code to be more readily ascertained later. 14. Check that the totals and sub-totals still conform with the tender estimate.

Reviewing the Cost Codes and Estimate Split Summary 15. Having prepared the estimate split summary it may be necessary to review the cost code system to be sure that the requirements of para 11 above have been met. 16. Review all allocations to check conformity with the principles for effective cost control. 17. Again check that totals and sub-totals still conform with the tender. The estimate split summary becomes the base document for the preparation of the various reports in the cost control system. It is also the document that will be regularly referred to as the contract progresses to establish value of work done, effects of method changes, etc. The original estimate split summary should be kept intact and any changes made on duplicate copies. THE BASE DATA TOTALS MUST EQUAL THE TENDER/ESTIMATE TOTAL.

Publication of Cost Code Numbering System 18.

A list of the cost codes allocated with their individual descriptions must be prepared and published for all project staff who are involved in cost reporting and recording or in financial forecasting, and relevant Head Office personnel. The list should have separate sections for:a. Labour b. Plant c. Materials and Subcontracts.

19.

The description against each cost code should contain both a brief title and some explanatory remarks as to what is included or excluded. A suggested format is given in Attachment #.

20. It is usually advisable to spend time with each member of the project staff to explain the system and as far as possible resolve ambiguities etc. 21. The published list must be reviewed regularly and updated to include any changes due to variations, method changes etc.

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Project Administration PROJECT COST CONTROL

Attachment #A SUGGESTED STANDARD COST CODES FOR INDIRECT COSTS The following sets out a standard cost code numbering system for indirect costs. In many cases it will not be necessary to utilise all these numbers; e.g. all "Utilities and General Services" could be grouped into one number, "1500"; in other cases it may be desirable to split further. If the administration costs (22** series) are subdivided, the numbers should as far as possible correspond with “COMPANY NAME” Administration ,cost code numbers. 1000 Non Continuous Costs 10**

Project Staff - Removal add Resettlement Costs

11**

Supervision and General Labour - Removal and Resettlement Costs

12**

Administration Costs - Non recurring or Lump Sum (includes Bonds, Insurance, Fees etc.)

13**

Site Buildings - Establish and Remove

14**

Camp and Housing - Establish and Remove

15**

Utilities and General Services 150* 151* 152* 153* 154* 155* 156*

16** 17** 18** 19**

Establish and Remove

Power Water Sewerage Air Heating and Air Conditioning Site Roads and Drainage Security Fences, signs and lights

Special Temporary Works - Mobilise and Demobilise General Plant, including vehicles - Mobilise and Demobilise Special Services - Non recurring or Lump Sum (Spare)

2000 Continuing Costs 20**

Project Staff - Salaries, allowances and oncosts

21**

Supervision and General Labour - Wages, allowances and oncosts

22**

Administration Costs - Continuing Costs

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Project Administration PROJECT COST CONTROL 23**

Site Buildings - Operate and Maintain

24**

Camp and Housing - Operate and Maintain

25**

General Services - Operate and Maintain 250* Power 251* Water 252* Sewerage 253* Air 254* Heating and Air conditioning 255* Site Roads and Drainage 256* Security fences, signs and lights 257* General Supplies 258* General Transport

26**

Special Temporary Works - Operate and Maintain

27**

General Plant, including vehicles - Operate and Maintain

28**

Special Services - Continuing Costs

29**

(Spare)

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Project Administration PROJECT COST CONTROL

Attachment #A ESTIMATE SPLIT SUMMARY Prelims and Overheads 1300 (A) Mobilise and demobilise site offices. Mobilise Plant Furniture Power Water Demobilise Plant 2200 (A) Office running cost (consumables) 2900 (A) Small tools & protective clothing.

7600 800 2000 3000 1000 800 3900 3200

Pipe slings Tools (Area1) Tools (Area 2)

2000 600 600

Labour 3010

Mobilise and demobilise offices etc. Mobilise Demobilise

3060

Supervision. Area 1 Supervisor 16 weeks Area 2 Supervisor 18 weeks

12000 13500

3070 4000 4100

Crane operator. Construct foundations. Erect Steel Area 1

14 weeks 170 m2 560 Tonnes

10500 41040 15280

4200

Erect Steel Area 2

1020 Tonnes

21845

4500 4500

9000

25500

Plant 5000

Sheds.

4 No.

for 24 weeks

12240

5100

Mobile crane.

14 weeks

26600

5200

Prime Mover.

12 weeks

15960

Materials & Subcontracts 6000 (A) Concrete consumables.

4950 Formwork

7000 (P) Foundation materials. Concrete Mesh

1550

Oil, chairs etc. 3400 51 m3 10% waste 170 m2

5720

4590 450 680

7010 (P) Steel supply Area 1.

560 tonnes

170000

7020 (P) Steel supply Area 2

1020 tonnes

306000

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Project Administration PROJECT COST CONTROL 8000 (P) Protective Coating Area 1 S/C. 560 tonnes 8010 (P) Protective Coating Area 2 S/C 1020 tonnes

22900 41700

8020 (P) Design & Draftings S/C. Area 1 8030 (P) Design & Draftings S/C. Area 2

8500 17000

4 weeks 8 weeks

Sub total Margin & Contingency TOTAL (A) = Actual Costs (Invoices)

769435 90000 859435

(P) = Committed (Purchase Order)

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Project Administration PROJECT COST CONTROL Attachment #

PROJECT COSTCODE LISTING PROJECT:

PROJECT NUMBER:

PROJECT MANAGER: COST DESCRIPTION

TENDER

QTY

VARIATIONS

DATE: TOTAL $

CODE

$ ALLOWED

UNIT

ESCALATED UNESCALATED

ALLOWED

R&F FORMULAE COMMITS

ALLOWEDS

1300

MOBILISE &DEMOBILISE SITE OFFICES

(A)

7600

7600

n/a

A

2200

OFFICE RUNNING COSTS (Consumables)

(A)

3900

3900

n/a

A

2900

SHALL TOOLS & PROTECTIVE CLOTHING

(A)

3200

3200

n/a

A

3010

MOBILISE & DEMO & SITE OFFICES

3060

9000

4 WEEK

9000

SUPERVISION

25500 34 WEEK

25500

3070

CRANE OPERATOR

10500 14 WEEK

10500

4000

FOUNDATIONS

41040 170m2

41040

4100

ERECT STEEL AREA 1

15280 560 TONNES

15280

4200

ERECT STEEL AREA 2

21845 1020 TONNES

21845

5000

SHED HIRE

12240 24 WEEK

12240

5100

CRANE HIRE

26600 12 WEEK

26600

5200

PRIME MOVER HIRE

15960 14 WEEK

15960

6000

CONCRETE CONSUMABLES

7000

FOUNDATION MATERIALS

7010

.

(A)

4950

4950

n/a

A

5720

5720

n/a

A

STEEL SUPPLY AREA 1

170000

306000

01

A

7020

STEEL SUPPLY AREA 2

306000

170000

n/a

A

8000

PROTECTIVE COATING SUB-CONTRACT AREA 1

22900 560 TONES

56100

n/a

A

8010

PROTECTIVE COATING SUB-CONTRACT AREA 2

41700 1020 TONNES

8500

n/a

A

8020

DESIGN & DRAFTING SUB-CONTRACT

8500 4 WEEKS

25500

n/a

A

8020

DESIGN & DRAFTING SUB-CONTRACT

17000 8 WEEKS

25500

n/a

A

$

October 2007

769435

0

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0

769435

Project Administration, Procedure No: 1 PROJECT COST CONTROL

SECTION 3A – LABOUR ( MANHOURS) INTRODUCTION 1. The purpose of the labour cost control reports is to control those components of the estimate that have been allocated to labour cost codes, i.e.. cost codes 30004999. 2. Whilst labour reports must ultimately be expressed in dollars, it is preferable to report labour in two stages, firstly manhours in detail and then dollars in total. 3. This procedure covers the setting up and routine production etc. of two reports, namely: a. Labour Manhour (productivity) report. b. Labour Cost Report. 4.

Each of these reports provides a comparison between the actual expenditure, in manhours and then dollars, and the alloweds for the same amount of work done.

5.

The Labour Manhour Report provides a detailed comparison for each relevant cost code. Details are reported in manhours because this unit is the most readily understood, measured, controlled and forecast by the staff having direct control of labour, namely the Supervisor. Reporting in manhours does not reflect the effects of excessive overtime, bonuses, labour on-costs or other factors affecting pay rates and thus in itself does not provide adequate overall control.

6.

The Labour Cost Report provides an overall comparison in dollars for total labour. The comparison is between the actual labour cost in dollars and the alloweds dollar amounts, such alloweds dollars amounts being adjusted to take account of escalation as explained later in this procedure. This report, read in conjunction with the Labour Manhour Report, will direct attention to excessive overtime, high bonuses or other factors. It provides a safeguard against unwarranted (and dangerous) complacency in the situation where the Labour Manhour Report shows favourable trends but the Labour Cost Report shows an adverse dollar comparison, due to the actual manhour rate being higher than the alloweds manhour rate for any reason.

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Project Administration, Procedure No: 1 PROJECT COST CONTROL

LABOUR MANHOUR REPORT Initial Set-Up 7.

The layout of the standard report form is shown in Attachment #. This is the report layout as produced by “COMPANY NAME”.

8. Standard Project Information such as the project name etc. are inserted on the form, and Base Data is entered into columns 1, 2, 3, 4, 5, 6 and 7 from the estimate split summary. (Refer Section 2 of Project Cost Control procedure.) In entering this information onto the form it is advisable to include provision for subtotals if required. Also provision should be made in the form of a spare line for each cost code, or additional pages, for items such as variations, miscellaneous sales, insurance repairs etc. as explained later. 9. Columns 3 and 7 must be checked against the estimate split summary. If errors are found, further detailed checking is carried out until all errors are eliminated. 10. Once this base data is established there should be no need to change it except for the effects of variations, change in work methods, or similar. Source of Data 11. Data to produce the Labour Manhour Report is obtained from the following records which must be regularly maintained: a.

Actual manhours expended for each cost code, either for the period or to date. This information is recorded on Time Sheets and is usually summarised in the Labour Costing Report from the payroll. This applies to direct hire labour and external hire labour also.

b. A schedule of measured total quantities completed to date for each cost code. The tendency is to measure quantities for the period for convenience, however this should be avoided as any errors will compound over a period of time. Completing the Report 12.

Refer to Attachment # for details as to how to complete the Labour Manhour Report and the calculations required.

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Project Administration, Procedure No: 1 PROJECT COST CONTROL

Treatment of Contract Variations and Extras 13. Refer to Section 6 of Project Cost Control Procedure - Variations, Extras and Delays. 14. Where a variation or extra is to be costed against existing cost code numbers, Cols. 3, 5, and 7 will have to be amended for each cost code affected and Cols. 3 and 7 for the total and relevant sub-total. Also Col. 6 may require amendment. 15. Where a variation of extra is to be costed against new specially allocated cost codes, details shall be added in Cols. 1, 2, 3, 4, 5, 6 and 7 and the total and relevant subtotals shall be amended in Cols. 3 and 7. 16. When using manual control methods a very methodical approach is required when amending base control documents. Preferably enter only those variations that have been approved to avoid unnecessary alterations at a later stage. Regularly check totals and ensure that these are carried through to all other related control documents.

Treatment of Method Changes 17.

The Labour Manhour Report could become invalid as a relevant document if changes in plan are not reflected in the alloweds in the report. Such a change in plan could be a change in the construction method or a decision to use a subcontractor for some of the work instead of using direct labour, or vice versa.

18. The general procedure for reflecting such changes in all reports is outlined in Section 7 of this procedure.

Treatment of Back Charges and Insurance Work 19.

Work done by “COMPANY NAME”. labour for subcontractors or others and for which we can charge them should be allocated to a cost code number or numbers entitled "Misc. Sales ....".

20.

Work done by “COMPANY NAME”. labour on reinstatement of damage for which it is intended to submit a claim under an insurance policy should be allocated to a cost code number or numbers entitled “Insurance Repair…….”

21. These cost code numbers are grouped at the end of the report immediately after a subtotal, which thus shows the position for the contract work only. 22.

To avoid negative variances distorting the Labour Manhour Report (and subsequently the Labour Cost Report), alloweds can be made to equal actual (i.e.. Cols. 12 and 13 respectively).

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Project Administration, Procedure No: 1 PROJECT COST CONTROL This is technically incorrect however as backcharges etc. do not increase alloweds, but are normally credited to costs. The preferred method is therefore to balance negative variances by forecasting negative manhours to complete, (which will then appear as future credit to costs in the labour cost report). When the invoice for backcharges, or claim, is finally paid and labour costs have been credited with the due amount, the respective cost code(s) should be deleted in its entirety from the Labour Manhour Report. Any adjustments necessary between hours incurred and hours paid will be automatically taken care of in the Labour Cost Report. Refer to Section 7 for further details of administering Backcharges and Insurance Work. 23. Special care must be taken in forecasting manhours as with any other forecasting exercise. When forecasting manhours to complete, the following points must be taken into account: a. Assess the productivity rate to complete any item by reviewing the average productivity rate for the cost code item for the last period versus the productivity rate for the past 2-3 periods, and consider any factor that may influence production in the future. (Productivity curves are sometimes useful here.) b.

Make allowance for clean up tasks on completion if they have not been alloweds in another cost code.

c. Make allowance for any time extensions that may affect the duration of the cost code item. Any other contingency items for unscheduled circumstances, such as possible industrial action, should be assessed at the Project Assessment stage.

Regular Production and Distribution 24. The Project Manager shall determine the required frequency of regular Labour Manhour Reports. This will usually be weekly unless the labour component of the contract is minor and cannot significantly affect the financial outcome of the contract. 25. The Project Manager shall determine the timing for the production of regular Labour Manhour Reports. Completion of the report should be achieved within two days of the end of the pay week if the Report is to have any benefit to the users. 26.

The Project Manager shall determine the required distribution of the regular Labour Manhour Report. This distribution will usually be such that at least the senior Supervisors will receive those subsections of the report that cover their work. The distribution will include the General Manager, Project Accountant or Estimator (but this would not be usual).

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Project Administration, Procedure No: 1 PROJECT COST CONTROL

SECTION 3B- LABOUR (COSTS) Labour Cost Report 1.

The layout of the standard form is shown in Attachment #. This is the layout as produced by “COMPANY NAME”. Note that this report is a summary report and does not report against individual cost codes. The number of categories of labour used in the Labour Cost Report should be as small as possible in order to minimise the workload. A category of "Supervision" should always be used. It will generally be sufficient to group all other labour categories into the one classification of "Other". However if unusually highly paid tradesmen are a significant part of the labour force, a separate category should be established for them. “COMPANY NAME”. REQUIRES A MAXIMUM OF 4 CATEGORIES OF LABOUR, THE FOURTH CATEGORY BEING "ALL OTHER LABOUR".

2.

Standard Project Information such as project name is entered on to the form etc. and Base Data entered into col. 3 which is obtained from col. 7 of the Labour Manhour Report.

3.

Col. 6 is completed using the average dollars per manhour of the relevant category of labour as used in the estimate. Note that it is important to total the manhours (Col. 3) x Estimate alloweds dollars per manhour (Col. 6) to ensure that it equals the total alloweds dollars for labour as per the estimate split summary.

Source of Data 4. Data to produce the Labour Cost Report is obtained from the following records: a. The Labour Manhour Report. b. The Weekly Labour Costing Report from the payroll, summarised to show the total cost for each category of labour. Completing the Report 5.

Refer to Attachment # for details as to how to complete the Labour Cost report and the calculations required.

Treatment of Escalation 6.

The labour cost escalation factor entered in Col. 7 should be the escalation factor as determined from the Head Contract escalation formula if there is one. There may be circumstances when an alternative factor is desirable that truly represents the cost increase in labour. This may achieve a more accurate picture of the cost of labour compared to the estimate but will give an inaccurate Project Assessment if totals using these fictitious factors are carried forward.

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Project Administration, Procedure No: 1 PROJECT COST CONTROL

7. If an escalation factor other than that generated by the Head Contract formula is used it would be usual for the Project Manager to specify the basis of calculation of the factor in the form: Escalation 8.

Factor

=

Tender

average rate + average Tender average rate

increases

If the contract makes no provision for adjustment of contract price on the basis of wage increases, the Escalation Factor shall be 1.0. If a contingency amount was alloweds in the estimate to cover wage increases the Project Manager should follow para. 7 and keep the total escalation included in the alloweds under review against the contingency amount alloweds.

Treatment of Contract Variations and Extras 9.

No special treatment is required because the details have already been included in the totals transferred from the Labour Manhour Report. However if any variation has been priced with an alloweds manhour rate that is not the same as the estimate alloweds manhour rate, then the alloweds man hour rate in the labour cost report will have to be adjusted accordingly. Alternatively labour associated with variations could be costed separately.

Treatment of Method Changes 10.

No special treatment is required because the details have already been included in the totals transferred from the Labour Manhour Report. It is important, however, to check the alloweds manhour rates following any adjustments for method changes.

Treatment of Back Charges and Insurance Work 11. No special treatment is required because the details have already been included in the totals transferred from the Labour Manhour Report. 12. These items may be costed separately in the Labour Cost Report for the reason explained under Variations and Extras above. Forecasting 13.

Forecasting of the final cost of labour is done using the Forecast Final Labour Cost Report, refer Attachment #. Forecasting of labour manhours to complete the contract will have already been carried out in the Labour Manhour Report. These manhours are entered into Col. 3 of the Forecast Final Labour Cost Report. To forecast the final cost of labour the current average actual man-hour rate for each category of labour is used. (The current average actual manhour rate should be

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Project Administration, Procedure No: 1 PROJECT COST CONTROL carefully assessed and should not necessarily be based on the last payroll alone.) Refer to Attachment # for details of how to complete the Forecast Final Labour Cost Report and the calculations required. Regular Production and Distribution 14. The Project Manager shall determine the required frequency and timing of regular Labour Cost Reports. This will normally be the same as the frequency of the Labour Manhour Reports. 15.

The Project Manager shall determine the required distribution of the regular Labour Cost Reports. This will usually be only to the Project Manager himself but may also include the General Manager/Company Acountant.

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Project Administration, Procedure No: 4

PROJECT COST CONTROL

SECTION 4 – PLANT (HIRED ITEMS) PLANT Introduction 1. The purpose of the Plant Cost Reports is to control those components of the estimate that have been allocated to plant cost codes, i.e.. cost codes 5000 5999. 2. Plant Cost Reports provide a comparison between the costs of plant used in doing work and the alloweds for the same amount of work done. Refer Section 1 for the definition of what is included as "plant". 3. This section of the procedure covers the setting up and routine production etc. of Plant Cost reports. Intial Set-Up 4.

The layout of the standard report form is shown in Attachment #. This is the report layout as produced by “COMPANY NAME”.

5.

Standard Project Information such as the project name etc.. as inserted on the form, and Base Data is entered into columns 1, 2, 3, 4, 5 and 6 from the Estimate Split Summary. In entering this information onto the form it is advisable to include provision for sub-totals if required. Also provision should be made in the form of a spare line for each cost code, or additional pages, for items such as variations, miscellaneous sales, insurance repairs etc.. as explained later.

6.

Note that the units used in Col. 3 should as far as possible be measurable units of work, not units of time. This point should be checked before the entries in Cols. 4, 5 and 6 are finalised, realising that the figures in Col. 6 should not be changed substantially and that the total of all Col. 6 figures must not change at all.

7. Once the base data is established there should be no need to change it except for the effects of variations, change in work methods or similar. Source of Data 8. Data to produce the Plant Cost Report is obtained from the following records which must be regularly maintained: a.

October 2007

Weekly Hired Plant Time sheets, (refer Attachment #). These time sheets are used to record hired plant on site for the period; estimated costs obtained from orders placed for the respective item of plant, or from plant hire rate schedules; and finally the cost for the period for hired plant for each cost code. Adjustment should be made progressively for actual costs obtained from invoices and the Cost Ledger if these do not match the estimated costs recorded on the time sheets. Page: 1 of 5

Project Administration, Procedure No: 4

PROJECT COST CONTROL b. A schedule of measured total quantities to date for each cost code. The tendency is to measure quantities for the period for convenience however this should be avoided as any errors will compound over a period of time. Completing the Report 9.

Refer to Attachment # for details on the method of completing the Plant Cost Report and the calculations required.

Treatment of Contract Variations and Extras 10. Refer to section 6 of this procedure, Variations, Extras and Delays. 11. Where a variation is to be costed against established cost codes Cols. 4 and 6 will have to be amended for each cost code involved and Col. 6 will have to be amended for the total and relevant subtotals. Col. 5 may also require amendment. 12. When a variation is to be costed against new specially-allocated cost codes, details shall be added in Cols. 1, 2, 3, 4, 5 and 6 and the total and relevant subtotals shall be amended in Col. 6. 13. When using manual control methods a very methodical approach is required when amending base control documents. Preferably enter only those variations that have been approved to avoid unnecessary alterations at a later stage. Regularly check totals and ensure that these are carried through to all other related control documents.

Treatment of Method Changes 14.

The Plant Cost Report could become invalid as a relevant control document it changes in plan are not reflected in the alloweds in the report. Such a change in plan could be a change in the construction method or a decision to use a subcontractor for some of the work instead of using direct labour, or vice versa.

15. The general procedure for reflecting such changes in all reports is detailed in Section 7 of of this procedure. 16.

The Plant Cost Report is adjusted as above in respect of Plant alloweds etc.

Treatment of Back Charges and Insurance Work 17.

Work done by plant owned, or hired, by “COMPANY NAME”. for subcontractors or others and for which we can charge should be allocated to a cost code entitled "Misc. Sales ".

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Project Administration, Procedure No: 4

PROJECT COST CONTROL 18.

Work done by plant owned or hired by “COMPANY NAME” on reinstatement of damage for which it is intended to submit a claim under an insurance policy should be allocated to a cost code(s) entitled “Insurance Repair….”.

19. These cost codes are grouped at the end of the report immediately after a subtotal, which thus shows the position for the contract work only. 20.

To avoid negative variances distorting the Plant Cost Report, alloweds can be made to equal actual (i.e.. Cols. 10 and 11 are completed using same figures as in Cols. 12 and 13 respectively). This is technically incorrect however, as backcharges etc.. do not increase alloweds, but are normally credited to costs. The preferred method is therefore to balance negative variances by forecasting negative costs to complete (i.e.. forecast a credit to costs). When the invoice for backcharges, or claim, is finally paid and plant costs have been credited with the due amount, the forecast cost should be corrected back to zero value. This will then automatically adjust the report for any variation between costs incurred and costs paid. Refer to Section 7 for further details of administering Backcharges and Insurance Work.

Escalation Factor 21. The Escalation Factor to be entered in Col. 9 should be the escalation factor as determined from the Head Contract escalation formula if there is one. There may be circumstances when an alternative factor is desirable that truly represents the cost increase in plant. This may achieve a more accurate picture of the cost of plant compared to the estimate but will give an inaccurate Project Assessment if totals using these fictitious factors are carried forward. 22. If a factor other than that produced by the Head Contract Formula is used the following guidelines should be used in arriving at a suitable factor: a. In contracts of short duration, or where the plant cost content is relatively low, it will normally be acceptable to keep the Escalation Factor at 1.0 throughout the contract. b. In other cases, if the majority of plant is hired at fixed rates, the Escalation Factor should be kept at 1.0. c. If however, plant cost rises become significant, the Escalation Factor should be applied to the relevant plant items and should be based on the actual increases in hire rates. (Note that this applies both to Group plant and to external plant).

Forecasting 23. The October 2007

Plant Cost report provides space in Cols. 18 and 19 for figures for Page: 3 of 5

Project Administration, Procedure No: 4

PROJECT COST CONTROL forecasting the costs to complete each cost code item. Col. 18 is the total outstanding alloweds calculated by multiplying the alloweds quantity yet to be completed by the alloweds rate escalated by the current escalation factor. Col. 19 is the Project Manager's forecast of the cost required to complete the cost code item. If the outstanding work can be completed as estimate then cols. 18 and 19 will be the same. 24. Special care must be taken in determining the forecast plant cost as with any other forecasting exercise. In the case of the Plant Cost Report, when forecasting the following points must be taken into account: •

Assess the productivity rate to complete any item by reviewing the average productivity rate for the cost code item for the last period with the productivity rate for the past 2-3 periods and consider any factor that may influence productivity in the future. (Productivity curves are sometimes useful here).

•

Allow for clean up tasks on completion if they have not been alloweds in another cost code.

•

Allow for any time extensions that may affect the duration of the cost code item.

25. The forecast final cost is the total of the actual dollars to date (col. 12) and the forecast to complete (col. 19). This total is carried forward to the Project Assessment. Reconciliation with Project Cost Ledger 26. The Plant Cost Report is a form of control by commitments, since data is obtained from the Weekly Hired Plant Time Sheets which record commitments as a result of orders for hired plant. This provides a more up-to-date report than having to wait for actual costs from the Project Cost Ledger. 27. Actual costs can differ from commitments recorded on the Weekly Hired Plant Time Sheets, however, due to a variety of reasons. It is therefore necessary to periodically reconcile the plant costs recorded in the Project Cost ledger with the costs recorded in the Plant Cost Report and may any necessary adjustments. Regular Production and Distribution 28. The Project Manager shall determine the required frequency of regular Plant Cost Reports. This will usually be weekly unless the plant component is minor and cannot dramatically affect the financial outcome of the contract. 29.

The Project Manager shall determine the required distribution of the regular Plant Cost Report. This distribution will usually be such that at least the senior foremen receive those subsections of the report that cover their work. The distribution could include the General Manager, Accountant or Estimator (but this would not be usual).

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Project Administration, Procedure

No: 1

PROJECT COST CONTROL

SECTION 5A – COMMITMENT REPORTS Commitment Reports

Introduction 1. The purpose of the commitment reports is to control those components of the estimate that have been allocated to cost codes other than for labour and plant, and also are appropriately controlled at the time of commitment i.e.. placing the order. 2.

Commitment reports provide a comparison between the recorded commitments (orders placed) and the alloweds for the same goods and services covered by the commitments.

3.

Commitment reports should be maintained for those cost code items where the alloweds dollars can be specifically identified in the estimate, (and can be similarly identified in the estimate split summary), which then can be directly compared with any commitment made in respect of that item. Where it is impractical to determine from the estimate the specific alloweds dollars for any item for which an order is placed, then the items concerned should be controlled by historical cost reports, (refer later).

Initial Set Up 4.

Commitment reports are set up in the form of a Commitment Allocation Record for each cost code and the layout of this record is shown in Attachment #. This is the layout as produced by “COMPANY NAME”. If a manual method of cost control is employed a Spreadsheet record as per Attachment # may be preferred.

5.

The record is divided into three broad areas. On the left, space is provided to record current alloweds, including the original alloweds as per estimate, changes in alloweds due to variations plus any change in alloweds due to escalation. In the centre, commitments (i.e.. purchase orders) are recorded, together with additional commitments due to variations, and escalation due on the commitment. To the right of the record the alloweds committed corresponding to each purchase order are recorded together with the proportion of escalation due on the committed alloweds. Finally in the right hand column actual costs as per the project cost ledger are recorded. Space is provided at the bottom of the record for forecasting calculations.

6.

Standard Project Information such as the project name etc.. is entered on the record, and Base Data from the estimate split summary is entered in location 1, i.e.. the original alloweds for the cost code item.

7.

A Commitment Allocation Record is established for each appropriate cost code. Alternatively each cost code is entered on the alternative layout as per Attachment #. The total of all alloweds entered into the commitment records must

October 2007

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Project Administration, Procedure

No: 1

PROJECT COST CONTROL be checked with the estimate split summary. If an error is found further detailed checking is carried out until all errors are eliminated. Source of Data 8. Data to complete the Commitment Allocation record is obtained from the following records: a. Purchase orders identifying purchase order number, date, vendor description of services, total value of order. A system must be maintained to ensure all orders written on, or for, the project are entered into the Commitment Allocation Record. The Estimate Split Summary to identify the alloweds corresponding to the commitment made. b.

Completing the Commitment Allocation Record 9.

Refer to Attachment # for details as to how to complete the Commitment Allocation record.

Treatment of Contract Variations and Extras 10.

Details of the change in alloweds for any particular cost code due to a variation is obtained from the Variations - Cost Code Split (refer section 6) and entered into the Commitment Allocation Record under alloweds.

11.

Details of additional commitments due to variations, such as change orders, are entered into the Commitment Allocation Record.under commitments. The corresponding amount of alloweds for each change order is entered into the alloweds committed column.

12.

Refer to Attachment # for details as to how to complete the Commitment Allocation Record to account for variations.

Treatment of Escalation 13.

The method of calculating escalation is covered in detail later in this Section of the procedure. If manual cost control methods are being used it is normally impractical to adjust the alloweds by spreading the changes generated by the Head Contract escalation formula over all the appropriate cost codes. Instead it is easier to include such changes in alloweds as a single line entry in the final Project Assessment Summary. Location 18 on the Commitment Allocation Record will therefore remain blank in manual control systems.

14. If any purchase order (commitment) is subject to an escalation formula, the escalation due is entered under commitments at location 19. The method of calculating escalation on commitments is discussed later in Section 5c. 15.

The corresponding proportion of total escalation due on alloweds committed to date is entered at location 20. This is calculated as follows:

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Project Administration, Procedure

No: 1

PROJECT COST CONTROL Alloweds committed to date (locn 11) ------------------------------------------Total all'ds inc. var'ns (locn 9)

x Escalation on all'ds (locn 18)

16. The subtotals and totals are recalculated. Treatment of Method Changes 17.

The Commitment Allocation Records could become invalid as a relevant document if changes in plan are not reflected in the alloweds. Such a change in plan could be a change in the construction method or a decision to use direct labour instead of a subcontractor.

18. The general procedure for reflecting such changes in all reports is outlined in Section 7 of this procedure. 19.

The Commitment Allocation Records are adjusted in respect of the estimate alloweds for each cost code.

Reconciliation with Project Cost Ledger 20.

The Record provides for recording monthly Cost Ledger amounts to compare actual costs with current commitments. The accounting month and Cost Ledger amount is entered at Loc'n 21 (refer Attachment #). The monthly totals are totalled at Loc'n 22.

21. In the case of Commitment Allocation Records the actual costs recorded have no significance except that total actual costs should not exceed the total commitments (loc'n 13). If the total actual cost does exceed the total commitment it could be due to one or many of the following reasons: a. Incorrect cost code allocation of costs. b. Commitments not recorded. c. Variations paid but not recorded under commitments. d. Escalation on commitments.

commitments

paid

but

not

accounted

for

under

The reason must be investigated and corrective action taken as appropriate. Forecasting 22. The Commitment Allocation Record provides space for figures for forecasting the final commitment for each particular cost code. Refer to Attachment # for details of how to complete the record when forecasting. 23. Special care must be taken when forecasting as with any other forecasting October 2007

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Project Administration, Procedure

No: 1

PROJECT COST CONTROL exercise. When forecasting outstanding commitments on the Commitment Allocation Record the following points must be taken into account and included in the forecast yet to complete: a.

Any items included in the alloweds that have yet to be committed.

b.

Any commitments yet to be made in respect to variations shown on the record under alloweds.

c.

Any future forecast escalation due on a purchase order or subcontract shown under commitments, for which an allowance has been calculated in the alloweds.

d. Any as yet undocumented future claim e.g.. for delays, likely from a supplier or subcontractor.

Regular Production and Distribution 24. As discussed earlier Commitment Allocation Records are not an effective control document. Their main purpose is to assist in forecasting the financial result of the project. 25. Commitment Allocation Records should be updated monthly and should be reviewed monthly by the Project Manager. Further distribution is not required except in exceptional circumstances.

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Project Administration, Procedure

No: 1

PROJECT COST CONTROL

SECTION 5B – HISTORICAL COSTS REPORTS HISTORICAL COSTS REPORTS 1. The purpose of the historical cost reports is to control those components of the estimate that have been allocated to cost codes other than for labour and plant, and are not suitable for controlling by means of commitment reports. 2.

Historical cost reports provide a comparison between the recorded costs from the Project Cost Ledger, and the alloweds for the same goods and services covered by the costs.

3.

Historical cost reports should be maintained for those cost code items where the alloweds dollars corresponding to an order cannot be specifically identified in the estimate, (and similarly cannot be identified in the estimate split summary), and/or costs are incurred without orders necessarily having been placed (e.g.. telephone charges). Initial Set Up

4.

Historical cost reports are set up in the form of a Cost Allocation Record for each cost code. Using the “COMPANY NAME”. manual method of cost control a spreadsheet is employed to record data as per Attachment # accepted layout required.

5. The Cost Allocation Record is identical to the Commitment Allocation Record. The method of completing the record is exactly the same as for the Commitment Allocation Record except as detailed below. YOU SHOULD CREAT THE SAME RECORD FOR BOTH COMMITMENT ALLOCATION RECORDS AND COST ALLOCATION RECORDS. IT SHOULD BE TITLED COMMITMENT/COS.T ALLOCATION RECORD. WHEN SETTING UP EACH COST CODE FOR PROJECT COST CONTROL. YOU HAVE TO IDENTIFY THE COST CODE AS A COMMITMENT TYPE (P) FOR PURCHASE ORDER OR HISTORICAL COST TYPE (A) FOR ACTUAL COSTS. THESE SHOULD BE SHOWN ON ALL THE REPORTS. Source of Data 6. Data to complete the Cost Allocation Record is obtained from the following: •

The Estimate Split Summary to assess value of alloweds completed for each period. THE COST ALLOCATION RECORD SPREADSHEET HAS IN THE BOTTOM RIGHT HAND CORNER A SUMMARY OF THE ESTIMATE SPLIT FOR THE PARTICULAR COST CODE FOR EASY REFERENCE.

• October 2007

The Project Cost Ledger to obtain recorded costs for each cost code for each period. Page: 1 of 4

Project Administration, Procedure

No: 1

PROJECT COST CONTROL Completing the Cost Allocation Record 7.

8.

Refer to Attachment # for details as to how to complete the cost Allocation Record. The method is identical to completing the Commitment Allocation Record except as follows: •

No details of purchase orders are entered into the commitment section of the record.

•

For each period an amount is entered in the alloweds committed section of the record. The alloweds for the period is assessed on quantity, or percentage of work done, or time, or similar, corresponding to the costs recorded for that period. Note that Project Cost Ledgers usually record the costs as at one month prior to the time that the record is updated. This must be taken into account when assessing the alloweds.

•

The variance between alloweds and costs is then calculated, not alloweds and commitments as with the Commitment Allocation Record.

Refer to Attachment # for further details as to how to complete the Cost Allocation Record. Treatment of Contract Variations and Extras

9.

Variations and extras are treated exactly in the same way as in Commitment Allocation Records. The alloweds for each period must be assessed taking into account the effects of any variation, and whether or not the variation has been paid for and the costs included in the Cost Ledger. Treatment of Escalation

10.

Escalation is treated exactly the same way as in the Commitment Allocation Records. However with manual control methods any escalation due under the Head Contract formula will not be entered under the alloweds section of the record. Also since commitments are not recorded there will be no entry for escalation on commitments.

11. Any increase in cost, due to escalation, of historical costs cost code items will show up as actual costs in the Cost Ledger. A negative variance will result which will be balanced by any revenue from the Head Contract formula when entered in the Project Assessment Summary. THE SPREADSHEET SHOULD BE SET UP TO AUTOMATICALLY CALCULATE THE PROPORTION OF THE TOTAL CHANGE IN ALLOWEDS DUE TO ESCALATION THAT IS ATTRIBUTABLE TO A PARTICULAR COST CODE, AND ENTER IT AT LOCATION 18. THE SPREADSHEET SHOULD ALSO AUTOMATICALLY CALCULATE THE ESCALATION DUE ON THE ALLOWEDS COMMITTED AT LOCATION 20 (REFER PARA 14 SECTION 5A FOR METHOD OF CALCULATION). Treatment of Method Changes October 2007

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Project Administration, Procedure

No: 1

PROJECT COST CONTROL 12. Refer to Commitment Allocation Records. Forecasting 13.

The Cost Allocation Record provides space for calculating the forecast final cost for each cost code. Refer to Attachment # for details of completing the record when forecasting.

14. Special care must be taken when forecasting as with any other forecasting exercise. When forecasting the final cost to complete a historical costs cost code the following must be considered: •

Assess any trends that can be determined from an analysis of costs over the past say 2-3 periods compared to the average cost for all periods, and assess any factors that may affect trends in the future.

•

Make allowance for any time extensions to the contract that may affect the duration of the cost code items.

•

Allow for any likely increase in costs of goods and services that are not covered by any Head Contract Escalation formula.

•

Allow for any other foreseen item, such as variations, claims, that will affect the final cost. (It may be worth perusing orders placed and not yet paid for to identify exceptional orders that could upset trends established in a. above).

Regular Production and Distribution 15. As for Commitment Allocation Records.

ALTERNATIVE METHOD FOR HISTORICAL COST REPORTS 16. Project Cost Ledgers are a historical document in so far as they are produced at least one month after an order is placed. Therefore the Cost Allocation Records do not provide as accurate a report as do Commitment Allocation Records. 17.

To treat Historical Costs in a similar fashion to Commitments, i.e.. record all orders placed, is impractical as Historical Costs normally consist of a large number of small orders. To record every one as a Commitment would be an onerous administrative task.

18.

One solution is to collect all the orders for historical cost items for a period, add them together and show them as a single line entry in the form:"Miscellaneous orders for the month of ……

October 2007

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The Historical Cost record could then be completed in the same manner as a Commitment record. The difficulty with this concept however is that it requires every miscellaneous purchase to be covered by an order and every order must be priced. Experience shows that this is impractical. Many items e.g.. fuel, are subject to a blanket order at the commencement of the contract and a separate order is not written out for each delivery. A system of this nature therefore requires very strict administrative controls which experience has shown are difficult to achieve. 19. Another alternative is to record invoices for the period before passing them on to accounts for payment. Totals of invoices are calculated for each cost code and entered into the Historical Cost record under commitments as a single line entry in the form: "Invoices for miscellaneous items for month

"

The Historical Cost record is then completed in a similar manner to the Commitment record. By this means the problem of using historical data is overcome and the records present a more accurate picture of the current situation. 20.

IF EITHER OF THE ABOVE TECHNIQUES ARE USED THEN AS FAR AS “COMPANY NAME” IS CONCERNED HISTORICAL COST RECORDS ARE THE SAME AS COMMITMENT RECORDS. EACH HISTORICAL COSTS COST CODE SHOULD BE IDENTIFIED AS A COMMITMENT TYPE (P) FOR PURCHASE ORDER). ALSO IF EITHER OF THE ABOVE TECHNIQUES ARE USED A VERY METHODICAL APPROACH TO THE COLLECTION AND RECORDING OF ORDERS OR INVOICES MUST BE ADOPTED.

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SECTION 5C - ESCALATION ESCALATION 1. Many contracts provide for adjustment of the contract value as the cost of labour and materials increase during the course of the contract. Adjustment to the contract value is usually calculated using a formula defined in the contract documents. This formula has been referred to as the Head Contract Escalation Formula throughout this procedure. (Also known as Rise and Fall formula, price variation formula etc.) 2. Escalation formula come in many forms but the most common, expressed in its most simple form, is: Factor for adjustment to Contract Value for period = Indices (for labour and materials) for period -------------------------------------------Indices as at date of tender The indices used are normally calculated (for labour) or as published by the ABS (materials). 3. Furthermore the formula usually splits the contract into categories, e.g.. labour, material and fixed, and applies a different indice for each category. Hence a typical rise and fall formula would appear as:Factor for adjustment of contract value for period = LI(period) MI(1)(period) 35---------+ 25 ----------------LI(tender) MI(1)(tender)

MI(2)(period) ) + 30 ---------------- + 10 ) / 100 MI(2)(tender) )

LI, MI(1), MI(2) etc. represent the indices for various categories of labour and material. 35, 25, 30 etc. are the proportions of the contract value corresponding to the particular indice. In the above 10 represents the fixed portion of the contract value not subject to an escalation factor. “COMPANY NAME” CALCULATES ESCALATION BASED ON THE ABOVE FORM OF FORMULA. IT WILL ACCOMMODATE A FORMULA WITH UP TO 10 ELEMENTS WHERE AN ELEMENT IS LABOUR, MATERIAL(1), MATERIAL(2), ETC. Calculation of Escalation due under Head Contract Formula 4.

Escalation due under the Head Contract Formula is calculated using a calculation sheet shown in Attachment #. This calculation sheet is as produced by “COMPANY NAME” and is called the Escalation Detailed Listing.

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PROJECT COST CONTROL 5. Standard Project Information, such as project name etc., is entered on the sheet. Base Data including formula base date, formula elements, proportions, and base indices are then entered. The indices are updated for each period and the contract value, (subject to escalation by the Head Contract formula), and payment for the period entered. (Note that certain items in the Head Contract may not be subject to escalation, or may be subject to a different escalation formula as in the case of nominated subcontracts. These must be excluded in the contract value amount, and payment, for the period). Refer to Attachment # for further details of completing the Escalation Detailed Listing and the calculations required. Forecasting using the Frozen Indices Principle 6.

Attachment # also shows the calculation of escalation due on the balance of the contract at any particular period. This forecast is done using the indices for the last period. No attempt is made to forecast future indices. BY USING A SPREADSHEET SPECIFICALLY SET UP THE CALCULATION OF ESCALATION EASY, IT IS POSSIBLE TO FORECAST ESCALATION USING FORECAST INDICES. THIS IS DONE BY ENTERING PROVISIONAL(P) INDICES FOR FUTURE PERIODS AND FORECASTING CONTRACT VALUES FOR EACH FUTURE PERIOD. THE PROVISIONAL INDICES ARE ADJUSTED LATER WHEN PUBLISHED. THIS CAN BE VALUABLE ON A MANAGEMENT TYPE CONTRACT TO ASSIST THE CLIENT IN DETERMINING FUTURE CASH REQUIREMENTS IF ESCALATION IS A MAJOR FACTOR.

Spreading Escalation over Cost Codes 7. For concise cost reporting it is ideal to be able to spread the escalation due under the Head Contract Formula over the cost code items that are covered by the formula. With manual cost control methods this is impractical due to the nature of the task. Instead the escalation will appear as a single line entry in the Project Financial Summary and will be balanced by negative variances in each cost code due to the costs, or commitments, having included in them the effects of escalation. THE SPREADSHEET IS SET UP WHERE IT SPREADS OVER EACH APPROPRIATE COST CODE THE TOTAL ESCALATION CALCULATED FROM THE ESCALATION DETAILED LISTING (TO DATE AND BALANCE). THIS TOTAL ESCALATION IS SPREAD IN PROPORTION TO THE CURRENT ALLOWEDS FOR EACH COST CODE (INCLUDING VARIATIONS IF DESIGNATED AS SUBJECT TO ESCALATION). THESE PORTIONS OF THE ESCALATION APPEAR IN THE COMMITMENT/COST ALLOCATION RECORDS, OR THE PROJECT ASSESSMENT SUMMARY AS IN THE CASE OF LABOUR AND PLANT.

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PROJECT COST CONTROL 8. If there are other Head Contract Formulae for items such as nominated subcontracts a separate Escalation Detailed Listing is maintained for each formula. The calculations etc. are exactly as above except that the contract value and payments for any period would relate to only those items of the estimate covered by the particular formula. Escalation on Commitments 9. If any particular commitment, such as a major material order or subcontractor, is subject to escalation an Escalation Detailed Listing must be maintained for each separate order or subcontract. Providing the escalation formula for the commitment is similar to the form of the Head Contract Formula the procedure is exactly as above except that the contract value and payment for the period relates to the value of the order or subcontract. 10.

The values of escalation for each commitment (to date and balance) are entered into the Commitment Allocation Record as shown in Attachment #. THE FACILITIES FOR COMMITMENT ESCALATION FORMULAE ARE SIMILAR TO THOSE FOR THE HEAD CONTRACT FORMULA. AGAIN THE REPORT SHOULD AUTOMATICALLY CALCULATE RESULTS INTO THE APPROPRIATE COMMITMENT ALLOCATION RECORD.

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SECTION 5D – PROJECT ASSESSMENT Project Assessment Introduction 1. One of the requirements of the cost control system is to produce a financial summary that gives Group management an accurate forecast of the final financial status of the contract. 2. It is part of the Group's standard reporting system that the following two financial reports are submitted by each project each month: • •

Project Assessment Summary. Costs and Claims Forecast.

The following relates to the preparation etc. of the Project Assessment Summary. Refer to Procedure # for details on the Costs and Claims Forecast. Project Assessment Summary 3. The two page Project Assessment summary provides data relevant to: a. Forecast Final contract value. ) Forecast Final costs.

)

For each block of cost codes

c.

Codes as defined earlier.

)

as defined earlier, including

d.

Forecast Final margin.

)

labour and plant if used.

b.

e. Forecast Final completion times/dates. f. Sundry other summaries. If costs have been recorded accurately and allocated correctly, if quantities of work done have been properly evaluated, if all commitments have been recorded and the corresponding alloweds correctly assessed, if progress claims have been lodged in the maximum permissible amounts and if the forecasts to completion have been carried out realistically, the information shown on the Project Assessment Summary should be mutually consistent. If, however, some of the information is discordant with the rest, it will indicate that one or more of the above conditions has not been met and thus investigation is needed to identify and remedy the cause of the discrepancy. I 5. Most data entered in the Project Assessment Summary comes either directly from the cost reports (labour and plant) and the commitment and historical costs allocation records. The remainder comes as explained in the following. 4.

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PROJECT COST CONTROL 6.

The format of the Project Assessment Summary is as per Attachment #. This format is as produced by “COMPANY NAME”. An alternative format, may be preferred where manual methods of cost control are used. (Refer attachment J).

7.

The method of completing the financial aspects of the Project Assessment Summary (Page 1) is noted in detail in Attachment #.

8. An interim step may be necessary, to complete the Project Assessment Summary, depending on the number of cost codes used. This interim step involves the collection of data from the Commitment and Cost Allocation Records and sub-totalling into cost code blocks. A record lay out identical to the Project Assessment Summary can be used for this purpose. Additional Summary Information 9.

Refer to Attachment # for additional details required to be submitted as part of the Project Assessment Summary (page 2). Reviewing the completed Assessment Summary

10. On completing the Project Assessment Summary, and before distributing it, it is good practice to review it as follows to be sure that there are no inconsistencies that throw doubt on the accuracy of the document.

October 2007

•

Have any Client contingencies or provisional amounts been included in the current alloweds? As explained in Section 7 Client contingencies, or provisional amounts for work that may not be done, should be balanced by a negative variation at the start of the contract and progressively introduced as variations if and when the Client issues the appropriate variation order. If this is not done the contract value can be exaggerated as the contract progresses especially if the Client does not use the contingency.

•

Do the variations allow for future known costs for Client provisional sums and provisional amounts? If not the final contract value will be underestimated particularly since such provisional sums often occur towards the end of the contract.

•

Has there been a significant change in any of the totals since the last reporting period? Such changes may have a straightforward explanation, on the other hand it may show up an error in forecasting or similar.

•

Has the actual commitment to date changed since the last period? If it hasn't, either no orders have been placed or the commitment records are not being maintained.

•

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Has the forecast final cost changed during the past period? If not when did it last change? Is this because the forecast hasn't changed or is it because a proper forecast hasn't been done for some time?

•

Does the calculated final commitment vary substantially from the forecast final cost? If it does a reasonable explanation is required particularly if the contract is say more than 50% complete. As the contract progresses, actual commitment (which equals actual cost in the case of historical cost codes and commitments in the case of commitment cost codes) should equal the forecast final cost. Any discrepency can only be due to commitments not being recorded, or alloweds being incorrectly assessed.

•

Does the claim to date less the costs to date confirm the forecast final margin? At the start of the contract this is unlikely due to establishment costs, the effects of learning curves etc., or alternatively claims may be inflated due to claim items being front loaded. However as the contract progresses the claim less costs figure should start to confirm the final margin as forecast by the Project Manager.

•

Is the percentage complete by time comparable to the percentage complete by alloweds? If the percentage complete by time is greater than the percentage complete by alloweds it suggests that the project is behind schedule. Have time extension costs been alloweds in the forecasts, or instead acceleration costs if necessary?

•

Do the current original alloweds (col. 2 Attachment #) equal the original contract value (col. 1)? If not, why not?

Timing and Distribution 11.

The Project Assessment Summary is a key document in “COMPANY NAME”’S control system and thus it warrants careful attention. Even though some detail (e.g.. materials and subcontracts actual costs) cannot be entered until a few weeks after the close of the relevant accounting period, much of the detail can and should be entered earlier in the month. In particular, project managers should schedule their time so that the work of forecasting the final situation is done at a time clear of the pressures of end-of-month reporting. If the actual costs of materials or subcontracts contain any surprises, the effects on the forecast final figures can still be brought in at the last moment. Note that a system based on commitments should minimise the risk of such surprises and should facilitate forecasting of final results.

12. In respect of manual cost control systems all dollar amounts in the Project Assessment Summary should be in full. Figures relating to firm data shall not be rounded off, but those relating to forecasts should be rounded off to the nearest $1,000.

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13.

Does the calculated final commitment vary substantially from the forecast final cost? If it does a reasonable explanation is required particularly if the contract is say more than 50% complete. As the contract progresses, actual commitment (which equals actual cost in the case of historical cost codes and commitments in the case of commitment cost codes) should equal the forecast final cost. Any discrepency can only be due to commitments not being recorded, or alloweds being incorrectly assessed.

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SECTION 6 – VARIATION, EXTRAS & DELAYS VARIATIONS, EXTRAS & DELAYS Introduction 1. It is vital that variations, extras and delays to any contract be recognised, measured, priced, claimed, approved and paid for with minimum delay. This is necessary to preserve a proper profit situation and proper cash flow. 2. This section of the cost control procedure sets out the standard method of controlling variations. It does not cover aspects of pricing, claiming etc. nor aspects relating to extensions of time, both of which are covered in other procedures. 3. In cases where the Client specifies detailed control procedures for the handling of variations, extras and delays, this procedure may need to be modified accordingly. General 4. As discussed in the procedure on administration of variations the action steps in processing a variation are: a. b. c. d. e. f. g. h. i. j.

Identification. Notification of Intention to Claim. Obtaining Client recognition. Measurement. Pricing. Claiming and obtaining Client approval. Treatment of escalation. Cost control. Payment. Filing and recording.

During this process any variation can have the following status:a. Not yet submitted (but costs may well be being incurred). b. Submitted to Client for approval but not yet approved by him. c. Approved. The method of control of a variation does not vary according to its status. However it is important to identify within the control documents the status of a variation since until such time a variation is approved the final value is not known. Hence the alloweds for a submitted variation, and included in the control documents, may have to be adjusted when the variation is finally approved. 5. The other factor that influences the method of control is whether of not the October 2007

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PROJECT COST CONTROL variation is subject to escalation. When a variation is priced and submitted, it will usually be stated as being one of the following:a. not subject to escalation. b. subject to escalation with effect from the date of the submission of the price for the variation. c. subject to escalation with effect from the same date that is used for calculation of escalation under the Head Contract escalation formula. 6. The choice between the above three must take account of the Client's stated requirements if any. From the point of view of convenience in cost control either a. or c above are preferred. Cost Control 7. As soon as a variation has been identified, a decision must be made as to whether the labour, plant, materials and subcontracts involved will be costed to new specially-allocated cost codes or to numbers within the established system. In addition to the factors normally considered during design of a cost control system, account must be taken of the expected amount of backup information that the Client may require in substantiation of the claim for the variation. 8. To avoid a proliferation of cost codes, small variations may be lumped together under a code termed "miscellaneous variations". 9. Foremen, Accounts and other associated personnel must be advised when a new cost code is raised. 10. When the estimate of a variation has been completed it shall be split into the alloweds for the relevant labour, plant, materials and sub-contract cost codes as decided in accordance with the above. 11. The split of this estimate into its various cost codes together with margin and total is then entered on the form as per Attachment 6A "Variations - Cost Code Split". The labour dollars alloweds should be based on the estimate labour rate and these amounts are those to be allocated to each cost code number as relevant. The difference between the above labour dollars alloweds and the amounts in the labour part (at current rates) of the estimate of the variation should be shown in the column "Escal. incl.". Note that this form also makes provision for recording the amounts finally approved by the Client. If these are different from those submitted, the Project Manager shall decide whether the difference is of sufficient significance to warrant adjustment of cost control documents, etc. 12. The split of estimate as entered on the "Variations - Cost Code Split" should be transferred to the relevant cost control documents at the time appropriate to the maintenance of proper cost control. For example, details of a major variation shall be transferred immediately before costs are to be incurred even though it may still have a status of not submitted. Details of minor variations should be transferred on a regular basis, e.g.. monthly. However, if costs are not being October 2007

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PROJECT COST CONTROL incurred in the meantime, it is preferable not to transfer variations to the cost control documents until they have been approved. This minimises the effort of having to update the documents in the event that the approved variation does not equal the submitted variation. Each item on the "Variation - Cost Code Split" shall be ticked when transferred to the cost control documents. 13.

When variations and extras become numerous, there may be a need to keep a record of the changes made to the value of each cost code. A system is suggested in Attachment # which can also be used as a summary to date of the project's alloweds.

14.All costs incurred (labour, or extra material and subcontract) in carrying out a variation shall be debited against the cost codes used in the "Variations - Cost Code Split". It is important to ensure that those responsible for writing and check in time sheets fully understand what cost codes are to be used. Reporting Variations in the Project Assessment 15. Once variations data is transferred into the cost control documents their influence on the contract value etc. will automatically flow through to the Project Assessment Summary except as follows:a. Extra over margin generated by variations must be added to the original contract margin in the Project Assessment Summary. b. Escalation on variations must be carefully examined if of significance. When variations are not subject to escalation, or are subject to escalation as per the Head Contract, then inclusion of the variations in the payment for the period as per the Escalation Detailed Listing will effectively allow the correct escalation amount in the Project Summary. Variations subject to a different basis of escalation must be calculated separately and included separately in the Project Assessment Summary if of significance. 16. When controlling variations it is essential to be realistic as to the amounts that the Client is expected to approve. Do not include contentious claims for variations, or any other similar forms of claim, in the control documents. Leave these for comment by the Project Manager in the space provided at the end of the Project Assessment Summary - sheet 2. PROJECT COST CONTROL AND VARIATIONS 17.

VARIATION DATA IS FED INTO PROJECT COST CONTROL AFTER THE "VARIATIONS - COST CODE SPLIT" STAGE.

18.

VARIATIONS SHOULD SHOW THE STATUS OF APPROVED, SUBMITTED OR NOT SUBMITTED. THIS DOES NOT INFLUENCE THE METHOD BY WHICH THE VARIATION IS CONTROLLED BUT GIVES THE ABILITY TO PRINT VARIATION REPORTS FOR THE CLIENT, OR THE PROJECT'S, USE ACCORDING TO THEIR STATUS.

19.

A VARIATION IN “COMPANY NAME”. PROJECT COST CONTROL SHOULD BE IDENTIFIED AS BEING EITHER FIXED OR SUBJECT TO ESCALATION AS PER THE HEAD CONTRACT FORMULA. ESCALATION CALCULATIONS. THE

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PROJECT COST CONTROL SPREADSHEET DESIGN SHOULD BE SUCH THAT THE VARIATIONS ARE AUTOMATICALLY CALCULATED AS DATA ON ESCALATION IS FED INTO THE SYSTEM PROVIDING THE PAYMENT FOR THE PERIOD CONCERNED INCLUDES THE APPROPRIATE VALUE OF VARIATIONS INCLUDED IN THE PAYMENT. 20.

THE CONTRACT MARGIN SHOULD BE AUTOMATICALLY ADJUSTED WHEN VARIATION MARGIN IS ENTERED AFTER THE “VARIATION COST CODE SPLIT’ STAGE

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SECTION 7 – EXCEPTIONAL ITEMS EXCEPTIONAL ITEMS Introduction 1. This section of the procedure discusses different types of contracts, and particular contract items, that require either a modified cost control procedure, or a method of control that has not been discussed in detail in the previous sections. SCHEDULE OF RATES CONTRACTS 2. Confusion sometimes occurs in Schedule of rates contracts due primarily to the fact that at the start of the contract quantities of work required are not firm (in contrast to the situation in a Lump Sum contract). As the work proceeds the estimates of quantities become firmer and firmer, usually involving changes from the original estimated quantities. Such changes are not variations in the accepted contractual sense. However, true variations can occur in a Schedule of Rates contract, as for example when the specified quality of work is altered or changes in method are necessitated as a result of a requirement or action by the Client or if the Client changes the programme logic or schedule timing requirements. 3.

True variations on a schedule of rates contract are treated in accordance with Section 6 of this procedure.

4.

A further difficulty with Schedule of Rates contracts is that the schedule is usually much condensed compared to the estimate. In other words, changes in one schedule item will usually require changes in several of the project cost code items. For example changes in rock excavation quantities will influence not only direct, labour and plant involved but also miscellaneous costs for explosives, steels, etc. Also the Indirect Costs and margin amounts included in the tender amount for rock excavation will be affected.

5. The following general approach is described as a guide to the Project Manager who shall detail the procedure to be used taking account of the particular characteristics of the project including any unbalancing of tender rates and inclusion of establishment items. a.

When preparing the Estimate Split Summary a more detailed summary is required to record the various cost code items to which each schedule item has been allocated and the corresponding alloweds. A format similar to Attachment # "Variations - Cost Code Split" would be appropriate for the purpose.

b. When initially setting up the labour, plant, commitment and miscellaneous costs reports, enter the original contract quantities and related alloweds as if these were firm. Wherever practical, use units and quantities which appear in the Schedule. For example, for items such as explosive and drill October 2007

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PROJECT COST CONTROL steels which depend on rock excavation quantities, use the rock excavation unit and quantity against explosives and drill steels. It may be desirable to include explanatory notes in the description column. c.

Operate the cost reporting system as normal as far as possible. This applies particularly to items where the quantity of work done can be accurately identified. Where cost code items cannot be readily associated with specific work items, e.g.. typically, supervision, it will usually be adequate to devise and use a percentage complete type assessment of "alloweds" based on realistic groups of specific work items. Alternatively a percentage complete based on the ratio of total claim to date to final contract value may be appropriate. This approach should identify areas where productivity rates are below estimate. Note that if the quantities of work done exceeds the original quantities alloweds, this should merely be noted at this stage and the actual quantities should be used in the cost reports.

d.

The Project Manager shall decide when to adjust the "total quantity alloweds" figures and the relevant dollar amounts. This will depend on the details of the work, how predictable quantities are, etc. However, in general, when the final quantity for a particular item is known fairly definitely, the adjustment should be made.

e. Whilst the above should provide a regular spotlight on current performance, it will not provide much indication of the forecast final result. Thus it is necessary to carry out a separate assessment of the overall situation, broadly as follows: i. Based on the latest forecast of final quantities, calculate the forecast final income, including escalation, variations, etc. Based on the same quantities as above, calculate the quantities of work still be performed and estimate the costs of doing this work using up to date productivity information.

ii.

iii. Add the recorded costs to date to the above estimate to complete. iv. like.

Review the above to ensure that like is being compared to

MANAGEMENT CONTRACTS (PROJECT AND CONSTRUCTION) 6. The majority of Project Management and Construction Management contracts consist of: •

A fee for management. The fee is often a lump sum, or based on a percentage of the direct cost.

•

A sum for direct costs in the form of a budget, or provisional amounts for subcontracts, or a guaranteed maximum price based on a budget etc. This sum can vary significantly, or at least the items within the sum can, as orders

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PROJECT COST CONTROL are progressively placed. 7. To control these types of contracts separate control documents should be prepared for the fee and the direct costs. Project Costs Ledgers should be similarly maintained as if they were two separate contracts. The fee component of the contract is controlled in the normal manner. Any changes to the fee resulting in a change in the scope of the direct work should be fed into the control documents as variations. The direct cost component of the contract should be similarly controlled with the alloweds being the provisional sums, or budget estimates, for the various items in the contract. Most contracts of this type require all direct work to be subcontracted so it is relatively easy to identify subcontract packages and control them accordingly. MAJOR MATERIALS WITH WASTAGE 8. As discussed earlier in this procedure major material supplies should be controlled by means of Commitment reports. Providing wastage is controlled, and providing quantities supplied match quantities measured and paid for, no further control is required. 9. The technique is illustrated by the following example of concrete purchased for a contract. •

The estimate alloweds for 1000 m3 of concrete at a price of $75.00 per m3. The estimator also assumed 5% waste and hence alloweds for a total of 1050 m3 to be supplied.

•

A Commitment Allocation Record is established for the supply of concrete. The total alloweds is $78,750 (1050 m3 x $75).

An order is placed on a supplier for 1000 m3 of concrete at $73 per m3. The total commitment of $73,000 is recorded. Thus the variance assuming no wastage occurs is +$5,750. A second dummy order is entered under commitments for concrete wastage, i.e.. $3,650 (50 m3 x $73). The variance including allowance for wastage is now + $2100 (78,750 - (73,000 + 3650)). •

From now on control should be centred on ensuring that wastage is kept within the 5% alloweds. This is where the foreman's daily record of concrete pours is relevant. Also as the contract proceeds progressive totals of concrete placed should be compared to the estimate quantities to ensure that they are the same. If not there may be cause for a variation, or it may show up as an error in the estimate.

•

If the wastage varies from the 5% then a variation should be made to the dummy

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PROJECT COST CONTROL order for waste concrete. If the actual quantities vary from those alloweds in the estimate a variation order should be placed on the supplier. In both cases the variance should be adjusted accordingly. CONTINGENCY (“COMPANY NAME”.) 10. Any contingency alloweds in the estimate should be highlighted as margin until such time the contingency is used up through costs occurring for the reason that the contingency was there in the first place. Contingencies should not be put into alloweds as they become buried, lost, and their original purpose forgotten. CONTINGENCY (CLIENT) 11. The Client usually specifies a contingency in a contract to cover unforseen costs and to provide money for likely variations. Such contingencies should not be considered as part of the Final Contract Alloweds until such time they become a variation. Client contingencies should be included in the original estimate alloweds to ensure that the alloweds balance with the tender. A dummy negative variation should then immediately be generated equal to the value of the contingency. This will avoid the contingency being carried forward into Project Assessments and inflating the Final Contract Alloweds. PROVISIONAL SUMS, AMOUNTS, QUANTITIES 12. Provisional sums, amounts, quantities etc. appear in contracts in a variety of forms. The description of the provisional item in the contract must be studied carefully to determine how best to treat it in the control documents as described below. 13. One common form of provisional sum is for nominated subcontracts. The exact value of the nominated subcontract is not known at the time of tender and a provisional sum is nominated in its place. Even though it is a provisional sum the feature of this type of provisional sum is that there is no doubt that the work covered by the provisional sum will be done, unlike some other forms of provisional sums. This form of provisional sum is treated like any other alloweds in the control document. The alloweds (provisional) amount is subsequently adjusted when the Client issues a variation order when the nominated subcontract is finalised. 14. Other provisional sums often allow for items that may never be carried out under the contract. They are in fact another form of contingency for specific items that may or may not eventuate. An example might be "Allow the provisional sum of $x for dewatering, if required, to be carried out under separate contract". Sometimes they are in the form of provisional quantities that have had to be priced at the tender stage. An example of this type is "Disconnection and removal of uncharted services encountered during excavation - Provisional Quantity 10 No." With this type of provisional sum a variation order, or Client instruction, is required at the time of doing the work. The method of controlling these provisional sums, or quantities, is the same as for Client contingencies. They are included in the original alloweds in the control October 2007

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PROJECT COST CONTROL documents to balance with the tender. They should then be negated by dummy variations. If and when the work is eventually done the alloweds are adjusted by the variations that the Client should issue for such provisional items. This avoids the Final Contract Alloweds being over-inflated as the contract draws to a conclusion due to the provisional items having been overlooked. PC SUMS 15. PC sums are often nominated in the contract for items which had not been completely specified at the time of tender. They are another form of provisional sum although contractually they are sometimes interpreted differently. Items subject to PC sums are not normally subject to being deleted from the contract. They will have to be supplied eventually, it is just a matter of what price is finally paid for them. PC sums are normally the subject of some form of variation order which contains details of the precise item to be purchased. The PC sum is included as an alloweds in the control documents and is subsequently adjusted as result of the variation order if the change in value warrants such adjustment. METHOD CHANGES 16. The various reports and records in the cost control procedure could become invalid as a relevant control document if changes in plan are not reflected in the alloweds in each report. Such a change in plan could be a change in the construction method or a decision to use a subcontractor for some work instead of using direct labour or vice versa. 17. The general procedure for reflecting such changes in all cost reports is: a. Make an estimate of the changed method and allocate cost codes (new or existing as considered most appropriate). b. List the items in the various reports and records which are redundant due to the adoption of the changed method. c. Check that the total cost in a. is equal to or less than the total cost in b. and if relevant decide whether to treat the difference as extra margin or to show it somewhere in the cost reports as a contingency. d. Amend the various reports and records by deleting all items listed in b. and inserting all items in a. and adjusting totals and relevant subtotals. BACKCHARGES, MISCELLANEOUS SALES AND INSURANCE WORK 18. The usual accounting procedure is to treat revenue for backcharges, miscellaneous sales and insurance work as a credit to costs, not as an increase in alloweds. New cost codes should be allocated for backcharges etc. and labour, plant reports and commitment, costs records modified or established accordingly. The reports or records are maintained in the usual manner. As costs are incurred for October 2007

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Project Administration, Procedure

No: 1

PROJECT COST CONTROL backcharges etc. negative variances will result which will distort the period and to-date reports and records. Two alternative methods are possible for control of this type of cost, these being by the adjustment of alloweds, or the forecast cost. 19. Adjusting the alloweds to equal the costs to date will overcome the distortion of to-date and period reports due to negative variances. When invoices for backcharges, or claims for insurance work, are finally paid and credited to each respective cost code, the alloweds for each cost code has to be adjusted back to zero value. Any difference between monies invoiced, or claimed, and monies paid will then be automatically taken care of. If in the meantime, however, the alloweds have been carried forward to the Project Assessment the final contract value will be incorrectly overstated. 20. Alternatively, instead of adjusting the alloweds, the negative variances can be "corrected" by forecasting a future negative cost (i.e.. a credit). When invoices for backcharges, or claims for insurance work, are finally paid and credited to each respective cost code, the forecast yet to commit/spend for each cost code is adjusted back to zero value. Any difference between monies invoiced, or claimed, and monies paid will then be automatically taken care of. This is the preferred method since it correctly reflects the situation of costs being incurred resulting in negative variances, ultimately offset by revenue that reduces the cost, hence variance, without adjustment of the alloweds.

October 2007

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