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07/05/20

It cost me how much?

It cost me how much?

It cost me how much?

Craig Palmer's insight into the importance of accurate cost records.

On large and complex projects, the need for accurate cost records and the ability to clearly and easily monitor and interrogate costs is essential in reducing the risk of cost overruns.

The use of electronic cost recording and monitoring systems on projects has been around for quite some time and has become an essential tool for the contractor's project team, and in certain circumstances employers in accurately controlling the costs incurred. If implemented and used correctly, the use of these systems allows the project team, contractor, and when necessary, employer, undertaking projects to have certainty in the cost of a project at any point in time.

To ensure cost recording is undertaken correctly, the project team would need to be fully engaged with the policies and procedures involved, not an easy task in itself. There needs to be a cost coding structure in place that clearly defines the parts or section of the project, for example Main Building [MB], Ancillary Buildings [AB], Roadways [RW], etc; and the type of work being undertaken, for example Groundworks [GDWK], Substructure [SUBS], Superstructure [SUPS], etc. This level of coding can be used to record costs at a high level; however, the use of task specific and expenditure type codes allows a much more detailed and dynamic breakdown. Examples of task specific codes could be 1000 Preliminaries, 2000 Site Works, 3000 Excavation and Earthworks, etc; and examples of expenditure type codes could be PR1100 Site Offices, LA1200 Labourer, MA1300 Reinforcement, PL1400 Excavators, SC1500 S/C -Pilling, etc.

As with all cost recording and monitoring systems, the defined coding structure must be adhered to strictly to ensure that the costs are allocated correctly and are visible for reporting and interrogation purposes. To this end, the project team would need to be trained to understand the coding structure, how it works, and how to apply it and be confident in the allocation of costs.

The project team should also be made aware that once a cost has been allocated and recorded in the system, it cannot be easily changed or reallocated. Whereas the original recording of a cost is a single step process, reallocating or changing a previously recorded cost, commonly known as a journal entry, is a two-part process (the deduction of the originally recorded cost allocation and then the addition to record the revised cost allocation, both of which will be recorded in the costing system) and is fraught with problems of clarity. Therefore, when making any amendment to an allocated cost, the project team will need to keep clear and detailed records of the amendment to ensure that anyone interrogating the costs in the future understands why the reallocation was made, where it came from and where it went to.

Failing to undertake the basic steps of training the project team on the costing structure, undertaking periodic reviews to ensure the project team are following the cost procedure, correctly using the costing structure, and providing support where needed is essential. The dangers of not keeping journal records, or not having sufficient detail in the journal records will lead to confusion on the part of anyone interrogating and reporting the costs and ultimately leads to uncertainty as to the accuracy of the costs.

Another requirement of the process is ensuring the costs are recorded in the correct time period. In the normal course of a project, directly employed resources such as labour, materials and plant can be recorded as the cost is incurred. However, the accurate recording of when costs are incurred is especially important when a project is predominantly undertaken by subcontractors. The works undertaken by directly employed labour, generally, would be recorded through the use of timesheets and daily allocation sheets which feeds into the payroll system resulting, in a best-case scenario, in the cost being allocated on a daily basis as they are actually incurred. Directly procured materials, generally, would be delivered to the project accompanied by delivery tickets (or some other form of documentation) recording the date of the delivery enabling the cost to be recorded when it was actually incurred. The recording of directly employed plant (either owned or hired) would be recorded on a similar basis to directly employed labour and, generally, would be recorded on plant records and daily allocation sheets with the cost again being recorded when it was actually incurred. Costs associated with the works undertaken by subcontractors can present a problem due to the varying agreed payment terms and how the subcontract works are recorded. Generally, subcontractors provide applications for payment on a monthly basis which is reviewed and amended if required, a payment notice is then issued with payment following in due course. The protracted subcontractor payment process can make the accurate time recording of subcontractor costs difficult as shown above.

These points can be very problematic, especially when the contractor is utilising cost records as a means of supporting recovery of amount included for variations and/or when the project is suffering from delays and cost overruns and the contractor is using cost records to support a claim for additional monies from the employer.

As part of our project cost monitoring and forensic analysis work, we have, in the past, had to deal with numerous examples of cost uncertainty due to poor cost record keeping, inaccurate cost allocations, and insufficient detail when interrogating complex journals undertaking multiple reallocations. If the costs are incorrectly allocated, there are significant risks to credibility and the potential under recovery of the actual cost incurred. Further, there will be unrecoverable expense in time and cost associated with fixing issues of inaccurate cost allocation and insufficient journal details.

Are these costs correctly allocated?

Invoice from Seeker Site Services for 60 pigtails. This cost was allocated to Preliminaries as costs for catering to the site offices. Is this correct? [No]

Invoice from AIM Readymix for 20m³ of concrete delivered to a completed road structure with kerb installation works ongoing prior to surfacing works being undertake. This cost was allocated to the Structure. Is this correct? [No]

Invoice from HiT Plant Hire for the hire of a Sheepsfoot. This cost was allocated to Roadworks as costs for earthworks. Is this correct? [Yes]

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