1. COST PLANNING For your Construction Project, your Company will evaluate the Financial Aspects of the Project from three different perspectives.  What are those 3 Perspectives?

2. COST PLANNING 3 Financial Evaluation Aspects? 1. Planned Cost (Budgeted Cost)

3. COST PLANNING 3 Financial Evaluation Aspects? 1.Planned Cost 2.Actual Cost

4. COST PLANNING 3 Financial Evaluation Aspects? 1.Planned Cost 2.Actual Cost 3.Earned Value – how much money are you going to get paid

5. COST PLANNING  What is the simple equation for Earned Value? – How will you determine whether your Job makes money or loses it?

6. COST PLANNING  What is the simple equation for profit?  How will you determine how well your Job turned out?  Profit = Revenue – Expenses  $$$ In minus $$$ Paid Out

7. COST PLANNING  What are your Revenues on a Construction/Design Job?

8. COST PLANNING  What are your Revenues on a Construction/Design Job?  How much you get paid - Your monthly + final payments

9. COST PLANNING  What are your Expenses on a Construction/Design Job?

10. COST PLANNING  What are your Expenses on a Construction/Design Job?  Everything you pay out to get the Job done  Salaries, materials, equipment expenses, overhead costs, etc.

11. COST PLANNING  What is the Problem with looking at a Job solely on the basis of Revenues minus Expenses?

12. COST PLANNING  Problem with looking at a Job solely on Revenues minus Expenses?  It has no relationship as to whether you are ahead or behind Schedule on your Activities, nor does it tell you if Activities have cost more or have cost less than planned

13. COST PLANNING How did Struksnes Construction (Minot, North Dakota) determine the financial condition of their Company?

14. COST PLANNING How did Struksnes Construction determine their financial condition?  If Harold Struksnes had more money in his checkbook at the end of the year than when the year started!  Ultimate Revenues minus Expenses

15. COST PLANNING There are two terms that you will hear used to represent your Company’s Planned Costs for your Project -  What are those terms?

16. COST PLANNING Two terms used to represent the Planned (Budgeted) Costs? 1. Bid Estimate

17. COST PLANNING Two terms used to represent the Planned (Budgeted) Costs? 1.Bid Estimate 2.“Schedule of Values”

18. COST PLANNING Will the Bid Estimate be the same as the Schedule of Values?

19. COST PLANNING Will the Bid Estimate be the same as the Schedule of Values?  Usually not  Why wouldn’t they be the same?

20. COST PLANNING Why wouldn’t the Bid Estimate be the same as the Schedule of Values?  The Schedule of Values revises/ builds on the Bid Estimate and more accurately represents what you anticipate your Project Costs to be

21. COST PLANNING Review: What are the two main ways that Construction contracts are normally bid out?

22. COST PLANNING Two main ways that Construction contracts are normally bid out? 1.Lump Sum - Commercial 2.Unit Price - Heavy

23. COST PLANNING Lump Sum – Commercial Buildings  Usually based on AIA (sometimes AGC) contract format  AIA format requires Contractor to submit proposed Schedule of Values for Owner approval

24. COST PLANNING Unit Price – Contractors will often break down individual Unit Price Bid Items with their own Schedule of Values for the Activities/Tasks that make up a particular Bid Line Item  This may or may not be shared with the Owner

25. COST PLANNING The Schedule of Values is normally submitted to the Owner for approval with the Baseline Schedule, and is then used as the basis for the periodic payments made throughout the life of the Contract.

26. COST PLANNING What is the term used to describe when a Contractor “inflates” the cost of Activities that occur early in the Schedule?

27. COST PLANNING What is the term used to describe when a Contractor “inflates” the cost of Activities that occur early in the Schedule?  “Front-loading” the Schedule  Is “Front-loading” unethical?

28. COST PLANNING  Is “Front-loading” unethical?  This is a gray area  If an Owner challenges it, it can hurt a Contractor’s reputation  Contractor’s have a substantial initial investment in every Project that they need to recoup ASAP to maintain a positive Cash Flow

29. COST PLANNING How will you track the Actual Costs of your individual Activities?

30. COST PLANNING How will you track the Actual Costs of your individual Activities?  This is a function of your Company’s cost-accounting system  How you track and bill-out your actual labor, materials, supplies, and equipment utilization

31. COST PLANNING How will you track the Actual Costs of your individual Activities?  Accurate, detailed data will give you better historical data to use for estimating future jobs  It takes additional time and effort to do this right on the Jobsite, but it’s an investment for the Future

32. COST PLANNING What is included in your labor cost?

33. COST PLANNING What is included in your labor cost? 1.Salary paid 2.Social Security (FICA) 3.Vacation, Sick Days, and Holidays 4.Health/Life Insurance 5.Pension/Retirement Funds 6.Worker’s Comp/Injury Insurance

34. COST PLANNING Items 3, 4, and 5 are commonly referred to as your Benefits Package (G&A – General and Administrative OH) – what % of your gross pay are they? 3. Vacation and Holidays 4. Health/Life Insurance 5. Pension/Retirement Funds

35. COST PLANNING Items 3, 4, and 5 are commonly referred to as your Benefits Package – what % of your gross pay will they be? 3. Vacation, Sick, and Holidays (5 – 20%) 4. Health/Life Insurance (15-25%) 5. Pension/Retirement Funds (5-15%)  Around 50% of your gross pay

36. COST PLANNING Benefits Package  This is a substantial part of your total salary (~35%), and graduates often don’t realize that this is negotiable when you discuss your total salary package with a potential employer  Especially paid vacation time!

37. COST PLANNING Normally – G&A costs are not applied against Overtime Hours – often making Overtime work (time-and-a- half) comparable in cost to “straight time”

38. COST PLANNING How much Overtime are you going to make when you go to work for a Construction Company or Engineering Design Firm?

39. COST PLANNING Additional Overtime compensation?  As a salaried employee – you will be expected to work 50, 60, 70 hours per week for your base pay without any additional compensation for working more than 40 hours per week

40. COST PLANNING  As hourly employees, the craftsmen and equipment operators on your Jobsite will get time-and-a-half; shift differentials; hazardous duty pay; etc  Not unusual for a craftsmen or an operator to earn a 6 figure salary  NYC Crane Operators - $70/hr

41. COST PLANNING Obviously, your Actual Costs will not be the same as your Planned (Budgeted) Costs.  What is the term used for the difference between the Budgeted Cost and the Actual Cost?

42. COST PLANNING  What is the term used for the difference between the Budgeted Cost and the Actual Cost?  Cost Variance

43. COST PLANNING What does an Activity’s Value include above-and-beyond the Activity’s Cost?

44. COST PLANNING What does an Activity’s Value include above-and-beyond the Activity’s Cost?  Overhead  Profit  What are the terms used that include both Overhead and Profit?

45. COST PLANNING What are the terms used that include both Overhead and Profit?  Mark-up  Margin

46. COST PLANNING What is another term for Overhead?

47. COST PLANNING What is another term for Overhead?  Indirect Expenses  What are “Indirect Expenses”?

48. COST PLANNING What are “Indirect Expenses”?  Costs that can not be specifically allocated against a single Activity  They are “spread out” and allocated against the entire Job

49. COST PLANNING How will Overhead be allocated on your Job?

50. COST PLANNING How will Overhead be allocated on your Job?  It depends  Contractors like to use a method that allocates their indirect costs in a consistently uniform manner  Specific to the type of work they do

51. COST PLANNING Overhead allocation on your Job? 1.Percentage of gross costs 2.Percentage of labor costs 3.Percentage of equipment costs

52. COST PLANNING Will your Company pick-up be part of your Job’s Overhead Expense?

53. COST PLANNING Will your pick-up be part of your Job’s Overhead Expense?  That depends on your Company’s accounting procedures.  Some Companies bill Field Overhead as a Direct Cost, some bill it as Indirect

54. COST PLANNING Will your pick-up be part of your Job’s Overhead Expense?  If you are normally working on numerous Projects at one time – your Accountants may decide that it is more representative to bill your pick- up out as an Indirect HOOH cost

55. COST PLANNING Review: As a % of gross income – what is a reasonable HOOH rate for: 1.Construction Company 2.Engineering Design Firm

56. COST PLANNING As a % of gross income – what is a reasonable HOOH rate for: 1.Construction Company12-15% 2.Engineering Design Firm

57. COST PLANNING As a % of gross income – what is a reasonable HOOH rate for: 1.Construction Company12-15% 2.Engineering Design Firm150-200%  This is due to the fact that most Designers are working on many Projects at a given time

58. COST PLANNING As Superintendent or Project Engineer at the Jobsite – which of these are you going to be concerned with? 1.Budgeted Costs 2.Actual Costs 3.Earned Value

59. COST PLANNING As the Superintendent or Project Engineer at the Jobsite – what are you going to be concerned with? 2. Actual Costs

60. COST PLANNING What are your Responsibilities going to be in relationship to the Actual Costs?

61. COST PLANNING Actual Costs Responsibilities?  Monitoring (tracking) and  Controlling the Actual Costs on your Project.

62. COST PLANNING How are you going to Monitor and Control your Job’s Actual Costs?

63. COST PLANNING How are you going to Monitor and Control your Job’s Actual Costs? 1. Payroll labor cost data

64. COST PLANNING How are you going to Monitor and Control your Job’s Actual Costs? 1.Payroll labor cost data 2.Material invoices/purchase orders

65. COST PLANNING How are you going to Monitor and Control your Job’s Actual Costs? 1.Payroll labor cost data 2.Material invoices/purchase orders 3.Targeted production rates  Velocity Diagrams

66. COST PLANNING How are you going to Monitor and Control your Job’s Actual Costs? 1.Payroll labor cost data 2.Material invoices/purchase orders 3.Targeted production rates  Velocity Diagrams 4. Trend Analysis – improving?

67. COST PLANNING Any Questions on Cost Planning?

68. EARNED VALUE What is the Concept of Earned Value?

69. EARNED VALUE What is the Concept of Earned Value?  It is combining Cost Evaluation with your Schedule to create commonly used Values to assess the status of your Project (4D + 5D)  Another term is “Cost/Schedule Control System Criteria (C/SCSC)”

70. EARNED VALUE Is being ahead of Schedule a good thing?

71. EARNED VALUE Is being ahead of Schedule a good thing?  It depends  On what?

72. EARNED VALUE Is it good to be ahead of Schedule?  Were you able to get ahead of Schedule with less cost than budgeted?  Will there be cost benefits to Successor Activities due to your being ahead of Schedule?

73. EARNED VALUE Bottom Line: Is it good to be under budget on your Project – compared to what you had Planned to have spent at this point in time?  If you are on or ahead of Schedule  But not if you are behind Schedule!

74. EARNED VALUE Terminology : 1.Budgeted Cost of Work Scheduled? - BCWS

75. EARNED VALUE Terminology: 1.Budgeted Cost of Work Scheduled?  BCWS = Planned amount of money budgeted to complete the work that was Scheduled to be complete through the analysis date

76. EARNED VALUE Terminology: 2. Budgeted Cost of Work Performed? - BCWP

77. EARNED VALUE Terminology: 2. Budgeted Cost of Work Performed?  BCWP = Planned amount of money budgeted for the actual work Scheduled and Completed to date  [Unscheduled work that has been completed ahead of schedule should not be included in this amount.]

78. EARNED VALUE Terminology: 3. Actual Cost of Work Performed? - ACWP

79. EARNED VALUE Terminology: 3. Actual Cost of Work Performed?  ACWP = Measure of the actual amount of money expended in completing the work that has been accomplished to date

80. EARNED VALUE Terminology:  When you are doing your analyses using BCWS, BCWP, and ACWP – you must be sure that you are comparing “apples-to-apples” – you can not compare ACWP to BCWS if ACWP contains unscheduled work

81. EARNED VALUE Terminology: 4.Variance  Any deviation from planned costs, budget, or schedule

82. EARNED VALUE Terminology: 5.Cost Variance (CV) CV = (BCWP – ACWP)  Positive value (+) is good  Negative value (-) is bad

83. EARNED VALUE Terminology: 6. Schedule Variance (SV) SV = (BCWP – BCWS)  Positive value = ahead of schedule  Negative value = behind schedule

84. EARNED VALUE Terminology: 7.Total Variance (TV) TV = (BCWS – ACWP) or TV = (CV – SV)  Positive value = under budget ???  Negative value = over budget ???  Under budget if WS = WP, SV = 0

89. EARNED VALUE Variances:  CV = BCWP - ACWP  CV = 850,000 – 1,019,000 = -169,000  SV = BCWP – BCWS  SV = 850,000 – 1,890,000 = -1,040,000  TV = BCWP – ACWP  TV = 1,890,000 – 850,000 = 871,000  TV = CV – SV  TV = -169,000 – (-1,040,000) = 871,000

90. EARNED VALUE Closing: If you want to advance in your company – the fastest way to do it is to demonstrate competency in understanding and managing the financial aspects of your Projects.  To become CEO, you have to understand what the CFO does

91. EARNED VALUE One of the most Common Causes of Construction Company failures is the failure of the company leadership to truly comprehend the Company’s financial status.  Comprehensive Review of every Job’s status at least Quarterly