CE303 Introduction to Construction Engineering. Importance of Cost Control System. Project Cost Control System

Transcription

1 CE303 Introduction to Construction g PROJECT COST MANAGEMENT & BUSINESS METHODS LEARNING OBJECTIVES The student should be able to: Define and understand the need for a cost control system. Describe the purpose of cost accounting in management of projects. Cost accounting Identify project performance by analyzing its S-curves. 2 Project Cost Control System A project cost control system enables a manager to observe current cost levels, compare them with a standard plan or norm, and institute corrective action to keep cost within acceptable bounds Importance of Cost Control System Retrieves: Costs, Labor & Equipment Hours, and Production Quantities Information used in two ways: Monitor the costs of an ongoing project within its established budget. Used to estimate the cost of future work. 3 4 Limited Objective of Project Cost Control Project control procedures are primarily intended to identify deviations from the project plan rather than to suggest possible areas for cost savings 5 6 1

2 Project Cost Control Process Accounting Codes Concrete Work $$$ Steel Work $$$ Electrical Work $$$ Estimate Budget Budgeted Concrete $ Actual Concrete $ Concrete Work $$$ Budgeted Steel $ - Steel Work $$$ Actual Steel Electrical Work $$$ Budgeted Electrical $ - Actual Steel $ Job Cost Accounts Examines Variance (Budget Actual) Code of Accounts See Appendix O, p. 628 for an example of general ledger accounts; p. 341 for an example of project accounts There is no standard code of accounts used by every firm. Tailored to the needs of the firm. 7 8 Eti Estimatet 9 10 Job Cost Accounts and Monthly Cost Report Company financial account and project wise detailed account. Information contained in the job cost accounts is periodically summarized to prepare various forms of cost reports. Designed to inform project management in sufficient detail and in a timely manner concerning the cost status of the work. Information conveyed and the frequency of such reporting are chosen to meet the specific needs of job management

3 Labor and Equipment Costs Job costs associated with materials, subcontracts, and the project overhead is of a relatively fixed nature. Barring an estimating mistake, there is little variation in these costs. Uncertainty associated with labor and equipment costs. These costs determined by productivity, which is influenced by many factors. Cost Accounting: Input Output Reports Labor Time Cards Quantity Reports Equipment Time Cards Labor Cost Report Equipment Cost Report Labor Time Cards Daily or weekly depending upon company preference. Contains Worker ID number Name Craft Time classification - regular or overtime Hourly rate - base rate, no benefits Account numbers for allocating hours worked Total hours worked Prepared by foreman Measurement of Work Quantities Items of work measured must be identical with the standard cost code work classifications. Includes all work items performed, whether accomplished by labor, equipment, or a combination of both. Measurement of Work Quantities Measurement obtained in a variety of ways direct field measurement on the job estimation of percentages completed computation from the drawings or CPM sheets often done by field supervisors, may be done by field engineer

4 19 20 Weekly Labor Cost Reports Weekly Labor Cost Reports Weekly, labor costs are obtained from the time cards and are matched to the work quantities produced. Results are summarized in cost report. Direct labor costs only. Designed to identify immediately those work classifications having excessive labor costs and to give an indication of how serious those overruns are Weekly Labor Cost Reports Equipment Expense Objectives are the same as for labor costs Only major pieces of merit detailed cost study. Up to the contractor t to establish its own equipment expense rates. Must keep accurate records for owning and operating expenses

5 Input Output Reports Labor Time Cards Quantity Reports Labor Cost Report Equipment Time Cards Equipment Cost Report Cost Control 27 Hourly rates of labor and equipment are not controllable Real opportunity for cost control lies in improving production rates Skilled field supervision, energetic resource expediting, improved makeup of labor crews and better selection of equipment, etc. The effectiveness of corrective procedures depends on the ingenuity, resourcefulness and energy of the people involved 28 S-Curves A graphical representation of the cumulative expenses (both direct and indirect) associated with executing the works, along the project duration

6 Project Cost Management Terminology BCWS Budgeted Cost of Work Scheduled, or Budget or Planned Cost, or Baseline Cost, or S Curve EAC (Estimated Cost at Completion) BAC (Budgeted Cost at Completion) BCWP Budgeted Cost of Work Performed, or Earned Value, or Planned Value of Work Completed ACWP Actual Cost of Work Performed BAC Budgeted Cost at Completion EAC Estimated Cost at Completion EAC = ACWP + Estimated Cost to Complete CV = Cost Variance at any point in time (data date or time now) for a work item or project level CV = BCWP (Earned Value) ACWP (Actual) If -, Over Cost If +, Under Cost SV = Schedule Variance: provides information regarding schedule performance SV = BCWP (Earned Value) BCWS (Budget) If -, Project/Work item is behind schedule If +, Project/Work item is ahead of schedule ACV = At Completion Variance ACV = BAC (Budget) EAC (Est. (Final) Cost at Completion) If -, Forecast over budget If +, Forecast under budget

7 CV = BCWP-ACWP CV = $79,000-$100,000 CV = -$21,000 (Over Cost) SV = BCWP-BCWS SV = $79,000 - $87,000 SV = -$8,000 (Behind Schedule) Cost Performance Ratio (CPR) measures the cost performance (efficiency) of the work accomplished CPR = (Earned Value/Actual Cost) = BCWP/ACWP CPR > 1 indicates a favorable outcome CPR < 1 indicates an unfavorable outcome Ex.: CPR = 0.90 or 90% indicates that each $100 or actual work correspond to $90 of planned work Schedule Performance Ratio (SPR) measures the schedule efficiency SPR = Earned Value/Budget = BCWP/BCWS SPR > 1 denotes a favorable performance SPR < 1 denotes a delay or behind schedule Ex.: SPR=0.70 or 70% indicates that at the data date for each $100 of work schedule only $70 has been accomplished Project Cost Management Analysis Project Cost Management Analysis CPR = BCWP/ACWP CPR = $79,000/$100,000 CPR = 0.79 (Over Budget) SPR = BCWP/BCWS SPR = $79,000/$87,000 SPR = 0.91 (Behind Schedule) FINANCIAL STATEMENTS Shows all relevant financial information of a company construction firm There are four main financial statements. They are: (1) balance sheets (2) income statements (3) cash flow statements and (4) statements of shareholders equity

8 THE INCOME STATEMENT Report that shows the difference between the retained earnings in two consecutive balance sheets. Time period is called the accounting period, typically one year period. Reports profit or loss experienced. Does not show overall financial condition of the firm THE BLANK CONSTRUCTION COMPANY, INC. THE BALANCE SHEET PORTLAND, OHIO BALANCE SHEET For the year ending December 31, 2005 ASSETS LIABILITIES CURRENT ASSETS: (f) CURRENT LIABILITIES: A Report Prepared at the End of a Fiscal Period to Show the Financial Status of an Entity at that Point in Time Assets are Listed on the Left and Liabilities and Networth are Listed on the Right Assets anything of value tangible or intangible Liabilities obligations to pay assets or render services to other parties. Networth total assets minus total liabilities Cash on hand on deposit $389, Accounts Payable $306, Notes receivable, current 16, Due subcontractors 713, Accounts receivable, including Accrued expenses and taxes retainage of $265, ,222, , Deposits and miscellaneous Equipment contracts, current receivables 15, , Inventory 26, Provision for income taxes 97, Prepaid expenses 8, TOTAL CURRENT LIABILITIES $1,171, TOTAL CURRENT ASSETS $1,679, (g) DEFERRED CREDITS: NOTES RECEIVABLE, Income billed on jobs in progress on December 31, 1997 NONCURRENT $12,77.97 $2,728, Costs incurred to December 31, 1997 on completed jobs 2,718, PROPERTY: Deferred credits $9, Buildings $55, TOTAL CURRENT LIABILITIES $1,181, EQUIPMENT CONTRACTS, Construction equipment 388, NONCURRENT 7, Motor vehicles 97, TOTAL LIABILITIES $1,188, (h) Office Furniture and equipment 23, TOTAL PROPERTY $564, NET WORTH: Less accumulated depreciation 422, Common stock, (i) 4,610 shares 461, NET PROPERTY $141,98.01 (j) Retained earnings 184, TOTAL NET WORTH 645, TOTAL ASSETS $1,834, (k) TOTAL LIABILITIES AND NET WORTH $1,834, FINANCIAL RATIOS The Quick Ratio Absolute size of the figures in the balance and income statements aren t especially meaningful Relation of different values is key. The Quick Ratio The Current Ratio The Dept to Equity Ratio The Quick Ratio, the ratio of current assets minus inventory to the current liabilities Quick assets are essentially cash on hand and in bank accounts Shows the funds immediately available to cover the current debt. It should be 1.0 or greater for the company to be considered to be liquid

9 BALANCE SHEET For the year ending December31, 2001 ASSETS LIABILITIES LIABILITIES: CURRENT ASSETS: (f) CURRENT Cash on hand on deposit $389, Accounts Payable $306, Notes receivable, current 16, Due subcontractors 713, Accounts receivable, including Accrued expenses and taxes retainage of $265, ,222, , Deposits and miscellaneous Equipment contracts, current receivables 15, , Inventory 26, Provision for income taxes 97, Prepaid expenses 8, TOTAL CURRENT LIABILITIES $1,171, TOTAL CURRENT ASSETS $1,679, (g) DEFERRED CREDITS: NOTES RECEIVABLE, Income billed on jobs in progress on NONCURRENT $12,77.97 December 31, 1997 $2,728, Costs incurred to December 31, 1997 on completed jobs 2,718, PROPERTY: Deferred credits $9, Buildings $55, TOTAL CURRENT LIABILITIES $1,181, EQUIPMENT CONTRACTS, Construction equipment 388, NONCURRENT 7, Motor vehicles 97, (h) TOTAL LIABILITIES $1,188, Office Furniture and equipment 23, TOTAL PROPERTY $564, NET WORTH: Less accumulated depreciation 422, Common stock, (i) 4,610 shares 461, NET PROPERTY $141,98.01 (j) Retained earnings 184, The Current Ratio The Current Ratio, the ratio of current assets to current liabilities Current Assets = Quick Assets + Inventory Shows the company's ability to meet current obligations. The higher the value the better. A value of 1.5 is considered normal in the construction industry. TOTAL NET WORTH 645, TOTAL ASSETS TOTAL LIABILITIES AND NET (k) $1,834, WORTH $1,834, THE BLANK CONSTRUCTION COMPANY, INC. PORTLAND, OHIO BALANCE SHEET For the year ending December31, 2007 ASSETS LIABILITIES LIABILITIES: CURRENT ASSETS: (f) CURRENT Cash on hand on deposit $389, Accounts Payable $306, Notes receivable, current 16, Due subcontractors 713, Accounts receivable, including Accrued expenses and taxes retainage of $265, ,222, , Deposits and miscellaneous Equipment contracts, current receivables 15, , Inventory 26, Provision for income taxes 97, Prepaid expenses 8, TOTAL CURRENT LIABILITIES $1,171, TOTAL CURRENT ASSETS $1,679, (g) DEFERRED CREDITS: NOTES RECEIVABLE, Income billed on jobs in progress on NONCURRENT $12,77.97 December 31, 1997 $2,728, Costs incurred to December 31, 1997 on completed jobs 2,718, PROPERTY: Deferred credits $9, Buildings $55, TOTAL CURRENT LIABILITIES $1,181, EQUIPMENT CONTRACTS, Construction equipment 388, NONCURRENT 7, Motor vehicles 97, (h) TOTAL LIABILITIES $1,188, Office Furniture and equipment 23, TOTAL PROPERTY $564, NET WORTH: The Debt to Equity Ratio The Debt to Equity Ratio, the ratio of total liabilities to net worth A measure of a company s leverage (the degree to which a company is utilizing borrowed money). Values of 1.0 to 2.0 are considered acceptable in the construction industry. Less accumulated depreciation 422, (i) Common stock, 4,610 shares 461, NET PROPERTY $141,98.01 (j) Retained earnings 184, TOTAL NET WORTH 645, TOTAL ASSETS $ (k) TOTAL LIABILITIES AND NET WORTH $ BALANCE SHEET For the year ending December31, 2001 ASSETS LIABILITIES CURRENT ASSETS: (f) CURRENT LIABILITIES: Cash on hand on deposit $389, Accounts Payable $306, Notes receivable, current 16, Due subcontractors 713, Accounts receivable, including Accrued expenses and taxes retainage of $265, ,222, , Deposits and miscellaneous Equipment contracts, current receivables 15, , Inventory 26, Provision for income taxes 97, Prepaid expenses 8, TOTAL CURRENT LIABILITIES $1,171, TOTAL CURRENT ASSETS $1,679, (g) DEFERRED CREDITS: NOTES RECEIVABLE, Income billed on jobs in progress on December 31, 1997 NONCURRENT $12,77.97 $2,728, Costs incurred to December 31, 1997 on completed jobs 2,718, PROPERTY: Deferred credits $9, Buildings $55, TOTAL CURRENT LIABILITIES $1,181, EQUIPMENT CONTRACTS, Construction equipment 388, NONCURRENT 7, Project Cost Management & Business Methods End of Lecture Motor vehicles 97, (h) TOTAL LIABILITIES $1,188, Office Furniture and equipment 23, TOTAL PROPERTY $564, NET WORTH: Less accumulated depreciation 422, Common stock, (i) 4,610 shares 461, NET PROPERTY $141,98.01 (j) Retained earnings 184, TOTAL NET WORTH 645, TOTAL ASSETS TOTAL LIABILITIES AND NET (k) $1,834, WORTH $1,834,

10 Class Assessment 55 10