For the first eight months, the project manager had been telling them that it was going to be tight, but the project was on budget. For the past three months, the project has been stuck at 85% complete, labor costs continue to escalate and the cumulative write-downs approach a quarter of a million dollars. Everyone, including the project manager, is surprised, hoping that the latest cost-to-complete forecast is accurate and that the project has truly found the bottom.
Does this sound familiar? It happens every month across the industry. Project managers recognize too late in the project that they are going to have significant costs overruns and write-downs. How and why this happen so often? Having worked with thousands of contractors and tens of thousands of project managers, FMI has developed a good understanding of the reasons behind poor and inaccurate cost-to-complete (CTC) forecasts and why so many companies get surprised with bad news at the end of their projects. While forecasting all of the direct costs and general conditions is an important element of developing an accurate CTC, let us focus on the most variable direct cost item, labor.
The best and most accurate labor CTC is still a forecast or estimate, no matter how well it is done. By definition, a forecast or estimate is a prediction that includes both objective (science) and subjective elements (art). As a result, risk and uncertainty are central to estimating and forecasting, and usually there will be some variance between actual and estimated labor costs. Therefore, the objective to develop a good CTC should be to minimize this variance through use of as much objectivity as possible. Because there are so many moving parts and pieces, developing a reliable CTC requires a broad understanding of the various items that can affect it.
A number of key elements that ultimately affect the quality and reliability of a CTC forecast include:
- Role of the project manager
- Good project budget
- Accurate productivity tracking and reporting
- Agreement on percent complete
- Changing production rates
- Labor plan and schedule
- Change orders
To get more details on the basics of a good CTC for labor, please click here.