Monitoring Construction Costs (not just buildings)

When I left university, my first job was for a government agency (Ministry of Works and Development) where I was taught how to manage architectural contracts. My first boss (Maurice Langdon) told me how to use a fantastic chart for monitoring building construction costs. He showed me how to monitor the construction costs of each project. Each month I would chart the certified contract amounts on a standard “S” curve. This curve is suitable for many types of projects. When I was completing my research for this blog, most of the examples and documents that covered this curve were related to engineering contracts, but I always used this with buildings, and I believe it would work with many other project types (including landscaping and entertainment).

After being taught how to use this curve, I was able to keep a close eye on the construction costs. I could tell within a few whether the project was going to be delivered late, or whether the budget was going to be overspent.
The basic philosophy of this curve is the construction costs start off low, take a while to get up to full construction, and tail off at the end. At one third of the contract, one quarter of the budget should have been spent. At two thirds of the contract, three quarters of the budget should have been spent.
[ms-protect-content id=”34491,34492,34493, 34494, 34495, 34496, 344927″]Divide the chart up into contract periods and money (in this case all use dollars).

Now you can chart the monthly contract claims.
This image shows the first month. Contracts usually start out slowly, although the first month usually includes several of the Preliminaries and General costs. These are the starting up costs, sometimes called the site mobilization costs. This can make the first amount look too high.

Now that you know that the start-up costs are included, you might think that the first month’s amount should be higher. If so, well done. I would have expected the contractor to have done more work this month. It is too early to voice your concerns at the moment, but you will need to watch this contract carefully.
When you get the second month’s account, plot that on the chart. It is difficult to see the direction of the contract. It gets easier with each month. At the moment you can see a trend, it looks like the contractor is spending more money than they should do. But be careful, it is still a bit early to say anything, and it could be that the contract was just a bit late with some of the site mobilization costs.

Now we can look at the next month, month 3, plot the progress on the chart.

In the image above you can see that after five months of the project it is clear that the contractor is spending too much money. You might think that the project will complete earlier, but in my experience this is a very very rare event. More likely is that the contractor is spending more money than he should do. It is possible that the contractor is claiming for more work on site than is actually completed. It is also possible that the contractor is going to overspend on this project and will seek to claim this money back. Either way, you should see this as a warning sign.
In the image below you can see the state after 6 months. The contract is now 50% completed and the contractor is overspending. I have also projected two possible outcomes. In the best-case, the contractor will overspend the budget. The reasons for this could be many and varied, and the cost overrun might be due to instructions that have been issued, but either way, you might need to tell the the client that the project is over budget. If the contractor keeps increasing the expenditure then the worst-case situation is 15% overspend.