Suppose it is late at night and a drywall job has somehow gone off the rails. Materials are not getting installed at the production rates estimated. This is because the crews just finished 1,800 linear feet of heavy-gauge framing on the exterior of a school and a check of the job cost report shows a 25-percent cost overrun for this portion of the budget.
The estimated production rate was 50 linear feet per man-day and in the end, the men only produced at a rate of 40 linear feet per man-day, resulting in the 25-percent cost overrun. This means that a labor activity that should have taken 36 man-days actually took 45 man-days to complete. That's a profit loss of nine full man-days multiplied by the workers' daily wage of $193-which equals a loss of $1,737. If the project manager had known that the men were not producing at the estimated production rates on the first day, steps could have been taken to correct the production problem before it ate into the job profits.
There is payroll to meet and a banker to keep happy, neither of which seems possible if progress draw is drastically reduced. It is no comfort to know that the situation is no different than approximately 50 percent of other subcontractors out there. Statistics show that almost 90 percent of all cost overruns in construction are in the labor category.
Dude, where's my profits?The original drawings are scattered on the table, along with the notepads where the quantities were taken off, units priced and tallied up. Checking and re-checking every unit shows that original calculations and totals were certain that the labor production rates used for the bid were very achievable and realistic. The fact that the bid was within five percent of the next two bids seemed that this should be a profitable job.
Looking at the job cost report shows that 75 percent of the labor cost should be spent. The job foreman says the job is about 75 percent done but only about 55 percent of the work is complete, according to the general contractor.
What went wrong and why doesn't one find out until late in the game that there is a problem? It's no wonder given the duties of a contractor's job description-prospecting for new work, project managing work-in-progress, pricing change orders, attending job meetings, and dealing with labor issues-that a small thing like under producing on one little labor code slipped by.
To complete the job will cut into profits and may require a contractor to reach into his own pocket to finish the project. A lot of money will be lost and there isn't anything to do about it now. There is a fair chance that this company will be joining the Dun & Bradstreet statistics that indicate construction trades have the highest failure rate of any type of business.
Contractors in business for long have probably already lived through at least a minor version of the above scenario. It may have been a near miss where a job lost small amounts of money but sooner or later the same situation repeats itself for countless subcontractors. The problem boils down to a lack of timely information. A job whose costs are exceeding projected progress tends to sneak up. To see the full job costing and percent complete picture, a contractor needs all information presented in a way that reflects the true position of the project.
The most common reason why job labor costs remain unknown until the consequences of being over-budget are beyond repair is in the nature of existing methods to report and track costs. When asking for a weekly report of job progress, a job foreman will traditionally use one of three methods to calculate percent complete: guess, estimate material used or physically count work in place. Some might say the most accurate way is counting but is it?
For example, a job consists of installing only two doorframes. The contractor has estimated one hour of labor for one doorframe and two hours of labor for the second, more complex frame. The carpenter in the field installs the first one-hour doorframe and turns in two hours of time. The foreman reports 50 percent completion based upon one out of two doorframes being installed. Reality is that the job is only 33 percent complete because he installed the doorframe that the contractor one hour of labor on but two hours were used, which represents 67 percent of the budget. So, the job is really 33 percent over budget. Now, imagine the potential for cost overrun if one had to install a thousand doors.
Estimators say their idea of completion hardly ever comes close to what a foreman's idea is of complete. In tracking percent complete and costs to complete, often the real cost of the job doesn't emerge until the project is almost finished. By the time a job is near completion, there is no flexibility to take corrective steps to bring it back on budget. Thus, the cycle continues and job cost completion projections are still optimistically overstated. The information arrives too late for corrective measures and profits are affected trying to get back on budget.
Software job trackingOne software manufacturer, On Center Software, of the Woodlands, Texas, has created a patented process called Digital % Complete, a software program that provides total job visibility to recognize labor production problems instantly. It also performs instant job costing daily. Job foremen will use a PC to count work in place and mark-off labor activities as they are completed, and log hours and cost codes worked by the crews on the job site. This produces an instant, color-coded drawing with payroll information and is transmitted via the Internet to the project manager in the office. The result: Managers at both locations know instantly if the project is within, or over the projected budget. Any levels of labor production that are exceeding budget can be viewed immediately instead of waiting for status reports to filter back to the office. For job site personnel, clicking on one of the red highlighted items on the color-coded plans tells them: the production they should have achieved, the production they actually achieved and the production they need to achieve tomorrow to get back on budget.
The program will also be used to more precisely track man-hours and labor codes. It will show employee efficiency ratings as they apply to different labor codes. Using the PC, the foreman enters daily time card information that is uplinked to the office so that the weekly accumulation and preparation of payroll is much simpler. Project managers will be able to see which labor activities workers are best suited for based on their success rates within the labor codes.
It is the correlation between the estimated labor, actual percentage complete and the labor expended to date that provides immediate identification of job cost over-runs. This software allows a job site supervisor to access a screen showing each job component, the estimated time, actual time and cost codes associated with that job component. The hours of work, production rates and the effects on cost are instantly available rather than trying to extract the same information from a payroll report which, at best, gives only a general sense of performance. A feature of this program is in its approach to determining "percent complete," by factoring in the estimated labor and degree of difficulty for every segment and component on the project, while remaining user friendly.
The program is also designed to address "percent complete" progress billing disagreements between general contractors and subcontractors, and between GCs and quantity surveyors working for the developer or mortgage companies. Project managers can use the program to backtrack the project to any given day and see what work was done, where it was done and if there were any progress notes on installed segments of work at that time. The software makes it easy to present the information, support it and bill for it.
Project managers can also use it to go back and find delays in work attributed to other trades. This is a resource for those times when back charges are in question on a job. Now, contractors have the documentation to support back charge claims and can dispute other subcontractor's back charges against.
OK computerProfits shrink on a job when actual costs exceed estimated costs. The information necessary to recognize the problem is usually not available at the time it can be fixed. However, this software provides daily information that prevents a labor production problem from ruining the profitability of a job. Users will find that this program allows project managers to track true progress against the true estimate and provides the information they have never had before to keep the budget headed in the right direction. The potential for profitability that can be gained from using this program is new to this industry.
Several construction professionals have employed the software. According to estimator Bruce Cooke, on his latest job, the Cuyahoga Valley Career Center, in Cleveland, "The software was easy to use. I receive color-coded drawings from the field to my computer workstation in the office with the current job progression highlighted. This allows me to see potential problems and proactively make adjustments before they start eating my bottom line."
Jeremy Speth, who works as an estimator with Cooke at Western Reserve Interiors, in Cleveland, says, "I can tell right away where we are making or losing money on a job. Having this information allows me to correct problems the day they happen and will provide the tools to estimate more accurately and faster. I'll be able to know which type of jobs to bid and save more money on future projects. We have never been able to track real time labor productivity in the field that is this accurate. This program makes it simple."