Category: Cost Control

Damn Site Instructions

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Why on earth do site foreman/managers issue site instructions to subcontractors to carry out works which are contained within the original subcontract scope. It happens all the time and the larger the project the more it occurs. If they understood what is contained within the subcontract the amount of site instructions would decrease and of course the resultant trade cost over runs would be less.

There may be mechanisms for approval of site instructions by the project and commercial manager, but often the site foreman has issued a verbal instruction to the subcontractor and the argument about the validity of the instruction takes place after the works are complete. A case of trying to close the stable door after the horse has bolted.

Sometimes it falls to an inexperienced site based contract administrator to approve site instruction based variations in the subcontractor’s monthly progress claim. If all the boxes are ticked ie the site instruction is signed and issued, the subcontractor has submitted a full cost break up, then the dollars are approved and the subcontractor paid.

If after the payment some hawk eye spots that the paid for works were in fact part of the subcontractor’s original scope, then we begin the process of clawing the money back. We tell the subcontractors that variations are paid “on account” and that payment for a variation does not mean it has been approved. We then go into battle with a subcontractor who we need to finish his trade package. The smart ones may go legal and we get into arguments about Estoppel, deceptive and misleading conduct etc etc.

The worst case is when site instructions are issued after the work has been carried out. There is simply no excuse for this and in my view this is the time for badges and guns to be handed in and the first available window seat is to be organised.

The way to stop money going down the drain is to have a strangle hold in the issuing of site instructions and the only person who can issue them is that rare site based individual – someone who really does know what they are building.

http://gkeating.com

image courtesy of dreamtime.com

Lost Profit

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It is often said “we learn from our mistakes”. But why, in the construction industry, do we keep making the same mistakes? When will we have truly learnt our lessons? How many times does a project not deliver the profit that was envisaged when we signed the contract?

There are many reasons for not achieving the target profit but there is a common thread. That is poor commercial management. For some reason builders focus so much on delivery of product without putting as much emphasis on the delivery of profit.

It sounds simple but there are three key issues

  1.  If the project team did what it set out to do
  2.  Got paid for everything it was entitled to
  3.  Only paid out what it was obliged to pay

1         If the project team did what it set out to do

We build to the drawings, specification and scope of works. Therefore, we purchase subcontracts, consultant services, and materials in the same manner. But we do not. We allow consultants to over design and under deliver. Subcontracts have gaps between trades. Materials such as concrete and reinforcing always exceed what was in the cost plan. The reasons for this is inexperienced staff, who simply do not fully know how to build and manage subcontractors and/or consultants.

2         Got paid for everything it was entitled to

We sign a contract so why don’t we understand it, use it, and extract every cent out of it. Often the member of the project team responsible for the day-to-day management of the finances is a relatively junior, young and less experienced individual. The big guns from head office only get involved when the project is starting to haemorrhage substantial dollars. The inexperienced site based contract administrator often does not want to “take on” the client or has not been given the authority to do so. They are reluctant to highlight potential/actual losses and can be overruled or intimidated by an over bearing wily project manager.

3         Only paid out what it was obliged to pay

If we start with the premise that the project team does not grasp these three key issues we need to have in place some method of monitoring them and being able to take corrective action before it is too late. That means setting projects up with robust reporting protocols. That does not mean head office go through the monthly report and try to act like the Spanish Inquisition with the project team. It means identifying before we start on site the areas where we know there will be issues. We need to ask the simple question: is this project team really up for this job to maximise our profit or is it a simple case of this team will deliver a good project but yes they are commercially weak.

I have lost count of the amount of times I have had to explain to people responsible for project profit what the terms committed cost, certified cost, margin on revenue, margin on cost, work in progress, accruals, discounted cash flow, aged trial balance. I have even had to explain the difference between a certificate and an invoice; revenue and profit; forecast cost to complete and forecast final cost.

So we need to train these young “Harry Potters” who peer at their computer screens all day, send off curt circulatory emails to all and sundry, but they hardly walk the job, engage with subcontractors and generally live their lives in a bubble. If you want to manage costs you have to be able to manage people.

by Gerry Keating

http://gkeating.com

How to Burn the Budget

Let’s assume at the start of the project we know the budget is going to be exceeded. We know the design is incomplete, the cost planner was not in touch with reality, the program was prepared by a Primavera zealot and the project team are as motivated as a retiring politician. So the premise is that the budget will be blown, heads will roll and the project manager will develop a persecution complex.

How do we prevent it? By going back to basics and following a few simple rules:

  1. Don’t manage the design team – control them, make them earn every cent and get them to deliver what they are paid to deliver and by the date it is due
  2. Let 80% of the trade packages within 20% of the contract period.
  3. Assign the best people to the project team and pay them what they are worth.
  4. Have minimal internal reviews. Every time there is a new review or set of eyes someone feels they have to add to the debate.
  5. Make sure the program is prepared by someone who actually knows what to build, pin it up on the site office wall and status it daily.
  6. Ban spreadsheets for cost reporting
  7. Treat subcontractors as equals not servants
  8. Listen to experienced, practical site managers/foremen
  9. Keep hard copies of every email, site instruction, time sheet, order, site instruction and delivery docket if they back up a variation or EOT
  10. Open every meeting with a “safety share” and encourage all to contribute

Ok it is not rocket science, but we are not building space stations. Before we get carried away with BIM, CPA, benchmarking, discounted cash flows, IRRs, pivot tables, delivery strategies etc etc, consider delivering what we set out to, by the time allowed, to the required quality and with no harm to anyone.

 

by http://gkeating.com

No Subcontractors Thank You

CranesI recently struck up a conversation with a stalwart of the construction industry here in Brisbane. He had worked for the same company for over forty years. He started out as an apprentice, became a leading hand, foreman, site manager, and now a senior member of the construction management team. So we did what most of us construction survivors do, we exchanged war stories.

A common theme soon developed – most construction companies have forgotten how to be builders. Forty years ago we had a stream of apprentices who were the company’s future. Senior managers rose from the ranks based on ability and experience.

But the key point was that builders used to employ their own tradespeople to carry out the work with a very few specialist subcontractors. Nowadays a project manager is measure on how he can organise a rabble of subcontractors. If he is inefficient and disorganised, it costs the subcontractor. Using your own labour means if you are not organised it costs a fortune. To be organised you need to know how to build.

It could be argued that most construction companies set up a project with the minimum of their own staff, subcontracts out every trade, hire the cranes, hoists, scaffold, and they don’t even own a wheel barrow.

Of course the reason is simple. The client pushes the risk on the construction company, and in turn they push it on to the subcontractor. You cannot back charge your own labour force but it is easy to do it to the subcontractor. This style of project management is run on the same format as a shepherd herding sheep. As long as they are all moving in the right direction, just leave them to it. So the project manager herds the subcontractors and they build it.

This may be the norm in commercial and residential construction but is not the same story in the resources sector. Companies on mine sites tend to employ more of their own labour to carry out what would be subcontract trades. This is mainly due to the control exercised on the construction companies by the mine owners. However, due to the magnitude of these resources projects, there may be several joint venture construction companies who find themselves being treated by the mine companies in the same way a construction company would treat their subcontractors. They don’t like it, because being a subcontractor these days is the end of the food chain, having the biggest risk of not being paid but with all the responsibility that goes into a two hundred page subcontract.

So back to the construction stalwart. He is disillusioned with the industry he has given forty years to, he despises the short slightness of people who won’t employ apprentices, he shakes his head at Google Glass wearing, iPad toting project managers, wants to punch the light out of the Harry Potter lookalike who pays the subcontractors. But he still is cheerful as he can always look at his mark on the landscape that is he can take his grandchildren to see and touch not the jobs he managed but the buildings that he built.

by Gerry Keating

https://gkeating.com/

Busy Going Broke

redundancy250It is symptomatic of our industry that often companies assume being busy equates to making money. All too often it just means acceleration towards bankruptcy. Increased activity does not necessarily mean making greater profit. Nobody hold a gun to our heads to force us into signing a contract, yet we still sign up for projects with unrealistic programmes, inadequate budgets, and risks which we believe can be overcome. It is plain and simple delusion.

The warning signs begin with the tender process. In order to save development costs, clients do not put the required resources into preparing tender documentation. They work under the false illusion that “the market” will determine the best price and the contract will save them from a “switched on” builder. The reality is that “the market” consists of builders who know their game and as long as they understand activity versus profit, the tenders will reflect the completeness of the tender documentation.

Some years ago I delivered a large coal infrastructure project in Kalimantan for an Indonesian client. To keep costs down the client believed he could set the tenders up with minimal documentation, unproven consultants and a catch-all contract. What it would have cost for proper tender documentation was less than 5% of what it cost in contractual claims, delayed production, legal fees and lost profit.

The next twelve months here in Australia will be difficult fr the construction industry, especially for employees who have never experienced really bad times. Yes I am old enough to have gone through Arab oil embargos and three day weeks. It won’t be as bad as that but large contractors will shed staff, salaries will continue their decline and there will be lack of confidence generally. The difference will be contractors will not win work at any price and make cuts in overheads earlier.

Seek.com will be in most people’s favourite bar, LinkedIn will continue its exponential growth, as we all brace ourselves for a bumpy ride.

Value Management – the great con trick

thinkers_cartoonHow many times in the design development phase, do we fool ourselves that dollars will fall out of the project budget due to astute value management. Some call it value engineering, so it is known as VM or VE. As builders we review architect‘s scribblings and start off withe the preconception that we know better. We can find a way, with our vast construction expertise, to rein in the architect’s vision for the project, save money, yet deliver to the client an unadulterated project.

Well we are kidding ourselves. The dreaded VM spreadsheet starts off with savings as big as telephone numbers and then the fun begins. We cannot change what the local authority approved plans, there may be an end-user contract condition to satisfy, it may even be the sales documentation that some evangelical styled real estate novelist has dreamt up. Slowly the VM spreadsheet total savings reduce. yet we still believe there are dollars to be squeezed out. meanwhile the design is developing, more doors are closing behind us, now the client has developed expectations.

At this point we have signed a contract and of course we are jointly bound with the client to actively seek savings through VM. With the proviso not to compromise anything in the project brief. We fooled ourselves there was money to be saved and find that we won the job on the basis the VM would stack up.

The simple rule is you make money before you start on site, and if any VM is achievable it has to be seized as early as possible in the design stage. Controlling drunken sailors, sorry the design team, is like herding cats, and we have to do it before the scribblings begin in earnest. The cartoon was sent to me by an architect commenting on the way I run design team meetings, thanks Milo.

Cartoon courtesy of: http://allthingslearning.wordpress.com/tag/classroom-management/

Oh No, they have brought in a Quantity Surveyor

Budget Meeting

Builders hire external quantity surveyors only as a last resort. Usually after months of trying to convince themselves that the project bottom line will improve, they realize that they are in for a contractual fight with the client and any straw needs to be grasped.

Month after month of cost reports with ever diminishing margin, force them to consider the battle ahead. That means finding every conceivable error, ambiguity, inference in the contract documents or any slip by the client’s representative. Project managers think they are experts in construction law, directors look for blame, and the site based project team convince themselves they have a cas against the client. Delusion has set in.

Wonderful expressions are uttered, “global claims”, “unfair enrichment”, deceptive and misleading conduct” All are bandied about with as much abandon in the site office as in the boardroom. Sight is completely lost of the simplicity of contractual claims:

  • What did the client do or not do?
  • Did this cause us costs?
  • Is it recoverable under the contract?
  • What are those costs?

The client’s quantity surveyor has  either dismissed or taken a blow torch to variation claims and because builders are not in the quantity surveying club, they are forced to seek the services of an external professional – the QS.

by Gerry Keating

So we go through the very expensive exercise of our people talking to their people and if we are lucky end up with a compromise on the steps of the court.

The alternative is to start the process from the day the first variation is carved up by the client’s QS, not wait until the dire cost report forces the issue. Get in early, don’t get time barred, and do not put up with any nonsense from a QS who probably created the errors or ambiguities in the first place.

Hard Dollar Hero

Hard dollar, lump sum, fixed price they are all the same. Submit your tender, win the job and away we go, in theory the only additional dollars come from client approved variations. Some say this is the old-fashioned way, it is confrontational, leads to major contractual arguments and neither the builder nor the client wins.11a%20Fixing%20fibre%20glass

The alternatives such as construction management, PPPs, negotiated D&C, etc have come to the fore, espousing so-called “win win” deals.

Interestingly, hard dollar gains popularity with clients as money becomes tight. they want certainty over budgets, especially as the IRR on projects reduces. Some builders tend to specialize in hard dollar projects, they are usually run with minimum overheads, tight margins and preliminaries cut to the bone. The project management style companies who are in the construction management mode struggle with hard dollar. Their management structure, staff experience means their overheads are high and they find the hard dollar market difficult to be competitive in and often get burnt thinking that they can adapt easily. At site level foreman on construction management projects issue site instructions with little regard to financial impact.

Subcontractor selection on construction management projects can be less rigorous than hard dollar. Their selection can be influenced by how easy they are to deal with rather than the best price.

Personally, I prefer hard dollar. i have spent most of my career delivering fixed price projects, with like-minded project teams and focussed subcontractors. project management teams who have concentrated on construction management, fee based on trade packages, need experience in the hard-nosed world of lump sum. They sink or swim.

Accountants or Builders

Budget-Earned-Accrued

Over time I have interviewed many people for roles in the construction industry, some junior and many senior positions. Interestingly, the younger applicants looking for a job at a junior level, invariably want to work for major builders on mega projects and want to be project managers as soon as possible. They equate large construction companies with status and expect those companies to be the best, to have the best systems, people, projects and rewards. Whereas the older applicants who have worked for “the big boys” are more circumspect and have experienced the multi nationals and often the smaller companies. All too often both types of applicants become disenchanted not with the project delivery but in the way the companies manage their processes. The young guys assume the large organisations have done it all before, learnt lessons and use best practice in how they manage projects from initial enquiry through to project hand over.

Unfortunately they are often disappointed, especially with the tools their companies use in project financial management. The most disappointing aspect of this is the reliance by large companies on spreadsheets for financial control. It never ceases to amaze me that smaller contractors invest in proprietary software such as Jobpac or Cheops whilst the “big boys” continue with antiquated linked spreadsheets and unreliable macros designed by long forgotten Excel devotees and fiddled with by every man and his dog.

Anyone who has spent hours preparing cost forecasts using “the company standard excel template” to find something is wrong. A formula in a cell has been over typed, a redundant hyperlink, or simply not being in the most current  version of the workbook.

But why do large organisations continue with antiquated financial management systems and yet smaller companys can see the benefits and use software that is fit for purpose. Perhaps it is simply that large companies are run by accountable far removed from project costing and smaller companies are run by people who have worked on site, hired subbys and had to fight for every dollar

Consultants and their “Visions”

Sometimes trying to control consultants on a design and construct project is similar to catching a runaway horse. That is if you come to the project after the design process has begun. What is this “vision” that architects wax eloquently on about. Forget the vision for a moment; just consider how many dollars we have to deliver what is in the client brief. Why, all of a sudden, do embellishments appear on the drawings before they are at “for construction issue”?

We refer to this as “design creep”. Utter nonsense. It is lack of design control and has to be nipped in the bud. What happens is that the drawings through the design phase are issued to the project team and then they are pored over, red pen at the ready, to check that the consultants have not added anything which is either incorrect or not required. The more “prestigious” the consultant the more likely for this to occur. It could be argued that the cost of design creep is proportional to the size of the consultant’s (usually the architect’s) ego. If I hear the words vision, statement or landmark one more time at a design meeting, I may start taking a Taser to the meeting instead of the red pen.

Of course they consider me a philistine or a dumb builder, but we have deliver projects that satisfy various parameters including the client’s brief, various approvals and my budget. Some consultants, people who we hire to provide a service, just don’t get it.

So how do we deal with this problem? It is easy if you are there from the initial discussions. It is called control. However, the onsite construction team do not get involved until the design train is hurtling down the track heading for derailment. Then you give our consultant friends a reality check and guess what they don’t like it. No more latte style nebulous meetings, we are now down to brass tacks. If we are trying to design down to a budget and the consultant team have been previously chasing visions, it is going to end in tears before bedtime. You become the hardnosed school teacher with a class full of recalcitrant children. I usually revert to the simplest method of reining in the runaway horse. Dollars. When it is pointed out that these embellishments, visions etc. are going to hurt the budget, simply deduct monies from the consultancy agreement for wasted time. That is the time the project team spends with the red pen and the abortive time the consultants have spent producing spurious design.

If the bricklayer uses the wrong bricks do we pay him because he thought they would look better? We do not but yet we are prepared to pay for consultants to fix up what they should not have done in the first place.

Consultants need clear direction, strong management and as soon as they veer away from the brief jump on them from a great height. They won’t like it – but it is not their budget.