Avoiding Project Overruns Through Better Project Management

Generally speaking, estimators have a very short amount of time to gather all the necessary information available and complete the work to put together a winning bid. And experience shows that most of the time, some of the project information is not available to the estimator during the initial takeoff and bid estimation.

The Project Manager

If the project manager (PM) uses the estimator’s takeoff and budget as the benchmark, the likelihood of project success is limited. This is not the fault of the estimator; it is simply a result of "not knowing what you don’t know" at the time of the bid. A takeoff and bid used to sell the work is not the same as a takeoff and budget used to build the job.

PMs should complete an analysis of the project. After winning the contract, a thorough review of the quantity takeoff, as well as the material and labor budget, should be conducted. The best practice is for the PM to deploy value engineering to save on materials, labor and equipment.

Value Engineering

Although value engineering (VE) has its roots in manufacturing, it has been utilized in the construction industry for decades. VE is a focused and innovative way to review project requirements to achieve the end result at the lowest total cost over the life of the project. It is not intended to be a process for a PM to review the work of a peer, such as an estimator, or purely that of a cost-cutting process.

The earlier in the project life cycle that VE is deployed, the higher the probability of project success. VE will save money on materials, labor and equipment. PMs who complete their own independent takeoff and pricing exercise do so at a greater level of detail. More information is available to them and they have time to dive deeper into the project specifications. PMs that utilize this method achieve a higher gross margin than those who don’t take the time to complete this exercise.

A project that begins with detailed scrutiny starts off on solid ground is more likely to avoid cost overruns.

Project Awareness

There is no better way to understand a project than to do a takeoff and price it. The depth and level of understanding around a project is significantly higher than reviewing someone else's work on the project.

During this process, the PM may find anomalies or errors in the original bid. If an error is found, the best time to identify the issue is during the project setup, not when the job is 20 percent to 50 percent complete. The earlier the error is identified, the lower the cost to resolve it and the less impact it will have on other project phases.

PMs should set a personal goal of finding, at minimum, a 5 percent to 10 percent cost saving as part of setting up the job. A thorough review of the specifications should be included. Risks or rewards may be found in the specifications during the PM takeoff that might have been overlooked or did not exist at the time of the original bid. Specific items that should be included in the PM’s takeoff are material substitutions, pre-ordering materials at custom lengths and potential prefabrication.

Analyze the Project

Another key element to consider in avoiding cost overruns is having knowledge of all the project’s players. This helps with staging and sequencing the work at a greater level of detail.

It is at this point that the labor budget strategy and the right size and mix of the crew are determined. The project is then broken down into floors, rooms and phases for better job costing (e.g., building, floor, room, elevations, etc.). Site and stocking considerations are reviewed.

The next extensive analysis before start of construction is around developing a construction-ready budget. The best budgets are collaborative, credible and measurable. This collaboration starts between the estimator and the PM and is then carried on between the PM and the site foreman. The budget deliverables include: a color-coded takeoff, detailed color-coded labor costs, a solution to keep track of the budget, reports for additional material, scope and change order updates.

The takeoff and pricing is done with the foreman. Because of this collaboration, when the foreman receives the color-coded plans and corresponding stock list and labor budget, it is easier to track and manage the job.

Company Codes

Companies that budget and track their labor using areas and detailed codes have more consistent job cost data, better estimates and arguably greater profits. Everyone in the company should use the same list of codes, including other branches and departments.

The best way to do this is to sit down as a team and debate what the company’s codes should be. Develop a list, agree to the list and stick to the list. When creating these codes, consider how the codes enable tracking changes separately. Not every single code is necessary for every single job. The sequence of work and crew size will dictate how many codes should be used.

Everyone reaps the benefits when standards are established before construction. Data is consistent. Accounting will have fewer errors. Job cost reporting is more actionable. Problem areas are addressed more quickly. In general, estimating is better. This leads to more successful projects because the foreman and PM have a clear and agreed upon direction.

Next: Under Construction

Not all companies follow these exact practices all the time, but they should. Great PMs are a highly valued part of the team. Most PMs have the ability to be great and simply need coaching to become a critical asset to the company.

Best practices established between winning the bid and project kickoff are extremely important. The employment of best practices during the construction of the project is also critical.

Labor Production

A high percentage of a project’s budget is labor. For example, in Division 9, labor is approximately 60 percent of a project’s budget. It is imperative that a company fully understands and manages labor production. Analyzing and understanding historical labor and production information assists in creating guidelines for accurate bidding on future jobs and also for active jobsite management.

If historical data is not available, then consider conducting onsite time trials. These trials involve assigning specific tasks to workers in the field and recording how much work is completed in a given time period. The trials should be conducted under real field conditions, if possible, using typical work performed on a regular basis, such as wall framing, drywall hanging or ceiling grid installation. Good construction project management must vigorously pursue the efficient utilization of labor, material and equipment.

Improvement of labor productivity should be a major and continual concern of those who are responsible for cost control of constructed facilities. Materials handling, which includes procurement, inventory, shop fabrication and field delivery, also requires special attention for cost reduction.

Materials Management

Mismanaged material stocking has a devastating effect on a project’s success and profitability. Materials delivered in the wrong quantities, at the wrong location and at the wrong time negatively impact an entire jobsite and may delay or stop work for several trades at one time. A well-organized and "field friendly" material management and stocking plan changes the overall project entirely.

Materials might only represent one-third of the total job costs, yet labor spent looking for materials is in the range of 13 percent to 15 percent of total labor costs. Studies of heavy construction sites reflect that the introduction of materials management results in 6 percent to 8 percent cost savings. The goal is to have material available when it is needed—not before and not after.

A stocking list should be broken down into manageable pieces. If a portion of the work is on hold or awaiting a change order, then break those out and ship everything except that scope of work. It takes a few minutes to break down a stocking list and saves hundreds of labor hours on a project if properly done. Use of color-coded site coordination drawings also can be leveraged to give more precise information as to the exact locations and date of delivery of the required materials.

Cost Management

A common complaint between foremen and PMs is that they do not have the information to effectively monitor and manage labor costs. In most cases, the data is available. Job cost management requires six components: estimated quantities, estimated hours, method to measure installed quantities and corresponding hours, percentage complete to calculate earned value, actual payroll data, and a report to calculate job-to-date (JTD) and project costs.

When this information is readily available, the foreman and the PM must review this data. When done in a timely manner, such as each week, they know if the project is making money and what the projected profit margin is at the end of the job. Additionally, they have the ability to look at the number and dive in if it looks wrong. It is possible to turn around a "losing" job if it is done early in construction (approximately 25 percent complete). The longer a problem goes unnoticed, the less time there is to react and the lower the likelihood that it can be positively affected.

Detailed RFI

The construction documents (agreement, drawings, and specifications) developed by the architects and engineers specify the conditions agreed upon between the owner and the contractor. These documents reflect the understanding that each party has with regard to constructing the project they represent. If every set of construction documents were clear, unambiguous and complete, interpretation wouldn’t be necessary—the intent and understanding of the parties would be self-evident.

Unfortunately, this is not always the case. In most construction documents, it is inevitable that the agreement, drawings and specifications will not adequately address every single matter. There may be gaps, conflicts or gray areas that require clarification.

Requests for information (RFI) provide opportunities to clarify issues and avoid conflicts. PMs should write RFIs as early in the process as possible so that the foreman is not impacted during construction. Before a question is asked, the PM should determine if there is a cost impact.

Regardless of the cost impact, there is likely to be a schedule impact. When crafting the question, it must be written in a way that creates a billable document.

Also, the RFI should include pictures of: the plan showing the conflict, the elevation, details of the situation, and work that’s completed (including date and time stamps). A solution should be proposed, making note that the conflict may result in a cost or schedule impact of a specified amount. In closing, the RFI must include a "need answer by" date; log the time between submitting the question and receiving the reply.

Organization is Key

One of the greatest threats to profitability on any job is requested change orders. Changes get communicated in plan modifications, RFIs, meetings, conversations, phone calls, job walks and change of scope.

Whether changes are noted clearly, clouded on drawings, delivered in letters, or placed in additional work authorization documents—document, document, document! When the project is under construction, it is the responsibility of the PM and the foreman to manage the job. It is critical to prepare and modify labor and material budgets to fit how the job will actually be built and managed on site.

The PM should visit the jobsite at regular intervals, keep daily logs on the project, and include job photos and videos.

Profit

A takeoff and bid used to sell work is not the same as a takeoff and budget used to build a job. Estimators, PMs and foremen collaborate to generate the most accurately detailed and documented project possible. Deploying VE saves on materials, labor and equipment. Participation in project construction brings a fresh pair of eyes to the site and provides helpful information that may have been missed during daily job duties.

Overruns are avoided when project management is an ongoing process from bid to completion. Not all companies deploy these best practices: be the exception—be more profitable.DOWNLOAD the full white paper.