Cost Records for Construction Estimating
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Chapter 1

Keeping Accurate Cost Records

Do you know of any construction companies that have gone broke? If you've been around the construction industry very long, you've heard of contractors going belly up . . . leaving jobs unfinished and suppliers unpaid. Every time interest rates climb a few points, construction activity falls off, or shortages develop in key materials. Many general contractors and subcontractors have to struggle to meet their payroll and stay in business.

To the contractor who's short of cash, it seems that the problem is either a lack of ready capital or a burdensome debt load. But most consultants that have studied failures in the construction industry agree that it isn't cash shortages that shut down most contractors. Working capital requirements are relative. There's some level of business that's right for the capital that's available, no matter how meager it may be.

And the problem isn't a lack of construction work or poor construction skills. Some very busy builders with first-rate knowledge of their trade have gone under, even at times when other contractors were making good money.

There's one characteristic that's common to most failures in the construction industry: poor record-keeping. When a builder is teetering on the edge of bankruptcy, the consultant called in to bail him out will nearly always find chaotic records. If there are any records at all!

The contractor gets into a financial bind because he doesn't know what his costs are. His estimates are based more on guesswork than on known costs. He's probably had trouble with the I.R.S. because payroll records were incomplete and tax reports and deposits were not made on time. Often there will be no complete file of payables and receivables. Material receiving records will be missing or inadequate.

If what I've just described fits your business, you're a good candidate for the system I'm going to describe in this book. Every construction contractor needs some simple and efficient system for controlling and recording project costs. If your cost records aren't providing all the information they should, and if you're worried that the documents in your file don't meet I.R.S. standards, keep reading. This book's for you.

Your cost records should be the foundation for every construction estimate you compile. Sure, many builders use cost-estimating manuals. But nobody will ever sell a cost book that comes close to matching the accuracy of your own records of work completed on your jobs, by your own crews, and under your supervision.

But, you say, "Don't I need an accountant to keep all those numbers?"

Fortunately, you don't need an accountant or bookkeeper to record construction costs. If you can keep time for your employees, you can keep accurate cost records and with a minimum of effort and expense.

Why Keep Good Cost Records?

Keeping accurate cost records will help put extra profit into your pocket. Here's how. Accurate cost records will:

1. Keep you up-to-date on the expenses for each job all during construction. You can't control costs if you don't know what the costs are. Good records show all your costs and make control possible.
2. Tell you immediately where costs are exceeding estimates.
3. Provide the essential data for estimating future jobs.
4. Help you supervise and schedule construction. (Cost records show the man hours required for each phase of construction.)
5. Reveal waste in materials and manhours: excess crew members, inefficiency, unnecessary waiting for materials, time lost due to weather problems, and other job factors that may be beyond your control.

The beginning of every good cost-record system is an organized account system-usually a set of numbered categories into which all job costs fall. The format followed by most professional construction companies is The Uniform Construction Index. It's published jointly by the American Institute of Architects, the Associated General Contractors and the Construction Specifications Institute.

The U.C.I. lays out an extensive cost analysis format and system of account numbers for every part of a construction project. For example, U.C.I. account number 06190 is used for recording all costs associated with wood trusses. This format is essential for contractors who handle major construction projects. But most residential builders don't need that much detail. You can get the same results with a simplified account number system that you design yourself.

The format you use to keep cost records isn't critical. But using one system consistently is vital to your success. The basic objective is to know your costs at every stage of the job and with a minimum of record-keeping. .

In this chapter, we'll look briefly at automated record-keeping. Then we'll explain each of the forms you'll need for an efficient cost record system.

Automated Record-keeping

The inexpensive personal computer is revolutionizing the way this country does business. And the construction industry is no exception. Every builder dreams of the day when a computer will maintain all of his records automatically, at high speed and for peanuts. We may see that day. But it isn't here yet for most small construction companies.

Big construction companies have been very successful in putting most record-keeping on computer. But they have the resources to develop custom programs that can be used by employees who do nothing else but run the computer.

Most smaller contractors can't and shouldn't commit thousands of dollars and hundreds of hours to automating their record-keeping systems. They don't have a full-time data processing staff to keep the equipment and programs running. And they can't afford the luxury of developing the custom programs required to fit their needs.

Instead, you'll have to select from among standard programs that reflect someone else's concept of how a construction business should be run. Unfortunately, that always involves compromise. And you don't find out if the standard programs really meet your needs until after you've invested the time and money to have the programs installed.

If you enjoy using computers and have one at your disposal, consider using it to do some basic accounting. That's an easy application. Many good programs are available. Some will fit your business very well. If you feel comfortable with the accounting programs, next consider a payroll program. Eventually, you may even be able to buy a job cost program that does most of what we describe in this book.

But don't expect any computer to automate your record-keeping overnight. Even if you have the perfect programs for every application you need, you'll still have to gather the records and organize them just the way we describe in this book. The computer won't replace record-keeping. It'll just report the information faster.

It's good practice to use a computer for payroll and general ledger (bookkeeping). But that doesn't mean you have to buy a computer if you don't already own one. Many banks and service bureaus offer computerized payroll systems for about $2 per employee per pay period. Some banks even waive this fee if you maintain a specified average balance in your checking account.

Here's how these payroll systems work. You supply the bank or service bureau with the name, pay rate and social security number for each employee. A day or two before payday, you phone in the number of hours each employee worked. On payday, the checks are available for pickup, or they can be delivered by messenger. All deductions are computed, tax deposits are made, and forms are filed with state and federal authorities. This simplifies your payroll chores and gives you time to concentrate on more productive work.

A service bureau (or bookkeeping service) will also make up a monthly balance sheet and income statement. You supply a copy of all checks written and all deposits made during the month. Itemize charges made to important accounts. About 10 days after submitting this information, you'll receive a report that summarizes operations for the month and for year-to-date. The cost will be about $50 per month.

Remember that a service bureau can reduce your paperwork, but it's still your job to gather and organize the information the bureau will use to prepare the payroll and general ledger reports. Payroll will be covered in more detail in Chapter 2. We've discussed the reasons for keeping accurate cost records. And we've looked briefly at automated record-keeping. Now let's look at each of the forms you'll need to set up your own cost record-keeping system.

Forms for Simplified Record-keeping

Every contractor needs some good forms for keeping his records. You can buy most of them at any office supply store. Two forms, however, should be custom designed: the weekly time sheet with a daily log, and a payroll envelope with a payroll receipt. Two additional forms you'll need are: the individual employee earnings record, and columnar (or analysis) sheets. Let's look at each of these forms in detail.

Blank copies of the customized forms used here are provided in the back of this manual. Make copies for your own use on your office copier, or have a print shop make you a pad of them.

Weekly Time Sheet

The weekly time sheet is your payroll sheet. It lists employees who are entitled to compensation. It tells how much each employee should receive for the pay period.

It's easy to make errors in recording employee time. Make sure that each employee is given credit for the correct number of hours worked each day.

At the bottom of each weekly time sheet, there's room to describe the work done each day. Record this information at the end of each day while it's fresh in your mind. This daily log is the most essential cost record and becomes the source document for many other cost records.

Keep separate weekly time sheets for each job. If one of your employees works part of a day on one job and part on another, you must record his hours on two different time sheets. Here's how.

Figures 1-1A and 1-1B show employee time charged to two different jobs. Of the six employees listed during this pay period, four of them worked on both jobs.

Look at Figure 1-1 A. On Monday, three men each worked 8 hours (24 manhours) doing the formwork for the footings. On Tuesday, they worked another 24 manhours. On Wednesday, the formwork was finished after only 18 manhours. So on this job, it took 66 manhours to construct the forms for the footings.

This is your record of the actual labor cost for the formwork. Compare it to your estimated labor cost for the formwork. Use this record as a reliable guide when making future estimates. But make sure you use only the number of manhours (and not the dollars) from this record when you prepare future labor estimates. Why? Because taxes, labor rates, and insurance rates change constantly, whereas manhours have some degree of stability. Labor costs are always estimates. But labor productivity, while it does vary with each journeyman, and from day to day - up one day and down the next, depending on the worker's attitude and how he feels that day - can be fairly accurately estimated by an experienced estimator who can anticipate potential problems and opportunities in each estimate.

Payroll Envelope and Receipt

You must keep a record of each employee's gross earnings, deductions and net pay for each pay period throughout the year. As an employer, you'll need these figures for your cost records and for filing your quarterly and year-end tax returns. Your employee will need these figures for his personal records and for filing his own tax returns.

Figure 1-2A shows a payroll envelope and receipt. The employee keeps the envelope, which shows gross earnings, deductions and net pay. The receipt, which provides the same information, is kept by the employer. The employee signs the receipt if he is paid in cash. If he's paid by check, he doesn't need to sign the receipt, because the cancelled check is a receipt. 

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