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COST PLANNING

COST PLANNING

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COST PLANNING

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  1. COST PLANNING For your Construction Project, your Company will evaluate the FinancialAspects of the Project from three different perspectives. • What are those 3 Perspectives?

  2. COST PLANNING 3 Financial EvaluationAspects? 1. Planned Cost (Budgeted Cost)

  3. COST PLANNING 3 Financial EvaluationAspects? • Planned Cost • Actual Cost

  4. COST PLANNING 3 Financial EvaluationAspects? • Planned Cost • Actual Cost • Earned Value – how much money are you going to get paid

  5. COST PLANNING • What is the simple equation for Earned Value? – How will you determine whether your Job makes money or loses it?

  6. COST PLANNING • What is the simple equation for profit? • How will you determine how well your Job turned out? • Profit = Revenue – Expenses • $$$ In minus $$$ Paid Out

  7. COST PLANNING • What are your Revenues on a Construction/Design Job?

  8. COST PLANNING • What are your Revenues on a Construction/Design Job? • How much you get paid - Your monthly + final payments

  9. COST PLANNING • What are your Expenses on a Construction/Design Job?

  10. COST PLANNING • What are your Expenses on a Construction/Design Job? • Everything you pay out to get the Job done • Salaries, materials, equipment expenses, overhead costs, etc.

  11. COST PLANNING • What is the Problem with looking at a Job solely on the basis of Revenues minus Expenses?

  12. COST PLANNING • Problem with looking at a Job solely on Revenues minus Expenses? • It has no relationship as to whether you are ahead or behind Schedule on your Activities, nor does it tell you if Activities have cost more or have cost less than planned

  13. COST PLANNING How did Struksnes Construction (Minot, North Dakota) determine the financial condition of their Company?

  14. COST PLANNING How did Struksnes Construction determine their financial condition? • If Harold Struksnes had more money in his checkbook at the end of the year than when the year started! • Ultimate Revenues minus Expenses

  15. COST PLANNING There are two terms that you will hear used to represent your Company’s Planned Costs for your Project - • What are those terms?

  16. COST PLANNING Two terms used to represent the Planned (Budgeted) Costs? 1. Bid Estimate

  17. COST PLANNING Two terms used to represent the Planned (Budgeted) Costs? • Bid Estimate • “Schedule of Values”

  18. COST PLANNING Will the Bid Estimate be the same as the Schedule of Values?

  19. COST PLANNING Will the Bid Estimate be the same as the Schedule of Values? • Usually not • Why wouldn’t they be the same?

  20. COST PLANNING Why wouldn’t the Bid Estimate be the same as the Schedule of Values? • The Schedule of Valuesrevises/ builds on the Bid Estimate and more accurately represents what you anticipate your Project Costs to be

  21. COST PLANNING Review: What are the two main ways that Construction contracts are normally bid out?

  22. COST PLANNING Two main ways that Construction contracts are normally bid out? • Lump Sum - Commercial • Unit Price - Heavy

  23. COST PLANNING Lump Sum – Commercial Buildings • Usually based on AIA (sometimes AGC) contract format • AIA format requires Contractor to submit proposed Schedule of Values for Owner approval

  24. COST PLANNING Unit Price – Contractors will often break down individual Unit Price Bid Items with their own Schedule of Values for the Activities/Tasks that make up a particular Bid Line Item • This may or may not be shared with the Owner

  25. COST PLANNING The Schedule of Values is normally submitted to the Owner for approval with the Baseline Schedule, and is then used as the basis for the periodic payments made throughout the life of the Contract.

  26. COST PLANNING What is the term used to describe when a Contractor “inflates” the cost of Activities that occur early in the Schedule?

  27. COST PLANNING What is the term used to describe when a Contractor “inflates” the cost of Activities that occur early in the Schedule? • “Front-loading” the Schedule • Is “Front-loading” unethical?

  28. COST PLANNING • Is “Front-loading” unethical? • This is a gray area • If an Owner challenges it, it can hurt a Contractor’s reputation • Contractor’s have a substantial initial investment in every Project that they need to recoup ASAP to maintain a positive Cash Flow

  29. COST PLANNING How will you track the Actual Costs of your individual Activities?

  30. COST PLANNING How will you track the Actual Costs of your individual Activities? • This is a function of your Company’s cost-accounting system • How you track and bill-out your actual labor, materials, supplies, and equipment utilization

  31. COST PLANNING How will you track the Actual Costs of your individual Activities? • Accurate, detailed data will give you better historical data to use for estimating future jobs • It takes additional time and effort to do this right on the Jobsite, but it’s an investment for the Future

  32. COST PLANNING What is included in your labor cost?

  33. COST PLANNING What is included in your labor cost? • Salary paid • Social Security (FICA) • Vacation, Sick Days, and Holidays • Health/Life Insurance • Pension/Retirement Funds • Worker’s Comp/Injury Insurance

  34. COST PLANNING Items 3, 4, and 5 are commonly referred to as your Benefits Package (G&A – General and Administrative OH) – what % of your gross pay are they? 3. Vacation and Holidays 4. Health/Life Insurance 5. Pension/Retirement Funds

  35. COST PLANNING Items 3, 4, and 5 are commonly referred to as your Benefits Package – what % of your gross pay will they be? 3. Vacation, Sick, and Holidays (5 – 20%) 4. Health/Life Insurance (15-25%) 5. Pension/Retirement Funds (5-15%) • Around 50% of your gross pay

  36. COST PLANNING Benefits Package • This is a substantial part of your total salary (~35%), and graduates often don’t realize that this is negotiable when you discuss your total salary package with a potential employer • Especially paid vacation time!

  37. COST PLANNING Normally – G&A costs are not applied against Overtime Hours – often making Overtime work (time-and-a-half) comparable in cost to “straight time”

  38. COST PLANNING How much Overtime are you going to make when you go to work for a Construction Company or Engineering Design Firm?

  39. COST PLANNING Additional Overtime compensation? • As a salaried employee – you will be expected to work 50, 60, 70 hours per week for your base pay without any additional compensation for working more than 40 hours per week

  40. COST PLANNING • As hourly employees, the craftsmen and equipment operators on your Jobsite will get time-and-a-half; shift differentials; hazardous duty pay; etc • Not unusual for a craftsmen or an operator to earn a 6 figure salary • NYC Crane Operators - $70/hr

  41. COST PLANNING Obviously, your Actual Costs will not be the same as your Planned (Budgeted) Costs. • What is the term used for the difference between the Budgeted Cost and the Actual Cost?

  42. COST PLANNING • What is the term used for the difference between the Budgeted Cost and the Actual Cost? • Cost Variance

  43. COST PLANNING What does an Activity’s Value include above-and-beyond the Activity’s Cost?

  44. COST PLANNING What does an Activity’s Value include above-and-beyond the Activity’s Cost? • Overhead • Profit • What are the terms used that include both Overhead and Profit?

  45. COST PLANNING What are the terms used that include both Overhead and Profit? • Mark-up • Margin

  46. COST PLANNING What is another term for Overhead?

  47. COST PLANNING What is another term for Overhead? • Indirect Expenses • What are “Indirect Expenses”?

  48. COST PLANNING What are “Indirect Expenses”? • Costs that can notbe specifically allocated against a single Activity • They are “spread out” and allocated against the entire Job

  49. COST PLANNING How will Overhead be allocated on your Job?

  50. COST PLANNING How will Overhead be allocated on your Job? • It depends • Contractors like to use a method that allocates their indirect costs in a consistently uniform manner • Specific to the type of work they do