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Blog/May 20, 2016

Three Key Ingredients of an Accurate Cost-to-Complete Estimate

three-key-ingredients-of-an-accurate-cost-to-complete-estimateTrade contractors live and die by their ability to estimate, manage and project labor costs. In most construction firms, few things are as misunderstood or as poorly managed as accurate projections of costs to complete (CTC)—particularly when it comes to understanding how to estimate the remaining labor costs on a labor-intensive project.

Unfortunately, project managers don’t always understand what goes into a solid CTC estimate. On bid day, for example, estimators are expected to accurately determine how much labor cost will be required to complete an entire project with less than adequate plans and specs, absolutely no history of completed work on the current project, and a limited amount of time.

Like any good recipe, failure to include one or more of the important ingredients will produce a less than desirable result. Since labor is the big wild card in the cost-to-complete estimate, the following ingredients will focus on the labor portion of this process.

Ingredient #1 — Basic understanding of the definition of a cost-to-complete estimate and how that CTC impacts the overall financial performance of the company.

At a very basic level, it is important to understand that a CTC estimate or projection is simply an estimate of direct costs required to complete the remaining work on a project. Therefore, the two basic questions that must be answered to produce a sound CTC are: What specific tasks or work activities on the project still need to be completed? How many labor hours and dollars will be required to complete this remaining work?

These sound like simple questions, but many project managers do not understand that the CTC is simply an estimate to complete the remaining work. Inaccurate CTCs often create significant swings in the overall profitability of the company from month to month and send wrong signals to senior leadership.

Ingredient #2 — A logical project budget that breaks a large project down into multiple small projects to allow for accurate tracking.

To develop a good CTC, there is specific job cost and productivity information that must be tracked from the time a project starts through completion. Failing to set up a logical project budget is one of the biggest mistakes that contractors make. Ultimately, the quality of the initial budget impacts the reliability of every CTC completed during the life of a project. Failure to do this correctly before labor is charged to a project is a serious mistake and one that cannot be fixed later.

The key here is to determine the appropriate number of labor phases and codes needed to accurately track labor cost and productivity. This format of labor tracking should be based on how the project will actually be constructed. FMI recommends breaking a project down into smaller bite-sized pieces, which allows the project manager to easily determine which activities are completed, which ones are partially completed, approximately how much work is remaining on these activities, and which activities have not yet started. This should provide a fairly objective means of identifying the remaining work on the project, which is the first piece of information that is needed to prepare a good CTC.

Ingredient #3 — A process for tracking and reporting actual quantities or units installed in addition to man-hours reported to a cost code.

Once the project manager identifies the specific work remaining to complete the project, the next step is to estimate the labor to perform this work. The best and most logical way to estimate the remaining work is to start with real productivity data for the installed units to date. In simple terms, this means that beyond simply reporting time to a cost code, there must be a process to track and report the actual units or quantities associated with the reported hours. Since productivity is defined as units per man-hour, tracking installed quantities is a necessity. The idea is not to come up with perfect measurements for quantities installed, but something more scientific than a pure guess as to how much of an activity is completed and how much more needs to be done.

Using Best CTC Practices

Being a self-performing contractor is risky business. Large, labor-intensive projects won in a competitive bid situation are even riskier business. Being a successful project manager in this environment requires a lot of skill, hard work and the ability to identify potential cost overruns early. By using the CTC best practices described in these three ingredients, you will not only become a better project manager, but you will also identify problem projects sooner, take action earlier and proactively impact project outcomes.

Want to know more?