You signed a contract for S$500,000 and your own estimate of cost was S$400,000. Six months later the site is busy and you do not know whether you still earn S$100,000. Most overruns show up in the accounts after the money is spent. Set up your cost control before the first purchase order.
Build the budget by cost code
Split the estimate into lines you track: materials, subcontractors, direct labour, equipment hire and site overheads. Use the same lines in your accounting software. A single total gives you nothing to compare later. Add a contingency line sized from your past projects and name who approves its use.
Record commitments, not only bills
A purchase order for S$30,000 of steel is a cost you own the day you sign. Wait for the supplier invoice and your cost to date looks lower than the truth. Log each order and subcontract against its cost code when you issue the order.
Price every change before the work starts
A client asks for an extra door or a different finish. Write down the scope, the cost and the added price, and get the client to sign. Work done on a verbal request becomes a dispute at the final account. Keep a numbered list of changes with the status of each.
Compare cost with progress every month
Measure how much of the job is done, by physical progress or by a certified claim. Multiply this percentage by your budgeted cost. Compare the result with your actual cost to date.
A worked example
– Contract price S$500,000. Budgeted cost S$400,000. Planned profit S$100,000, which is 20%.
– Progress is 50%, so the budgeted cost of work done is S$200,000.
– Actual cost to date is S$250,000, so you are S$50,000 over.
– Actual cost per dollar of budget is 1.25. At this pace the full job costs S$400,000 x 1.25 = S$500,000.
– Forecast profit is S$500,000 less S$500,000, which is nil.
You find this at the halfway mark and still have the other half of the job to act on. Check which cost code ran over. Renegotiate a subcontract, change the buying method, or price a change order for the extra work the client asked for. Waiting until the final account removes all of these options.
Revise the forecast each month
Update the estimate of cost to complete using what you learned, not the original budget. Write down the new forecast profit. Show the project manager, the site lead and yourself the same sheet.
A work-in-progress schedule puts contract value, cost to date and percentage complete for every job on one page. Your accountant uses the same figures to set revenue and profit in your financial statements, so a monthly schedule helps at year end as well.
Want to check a live project against its budget? Send your latest profit figure or your question by WhatsApp to +65 9876 3553 or by email to henry@cschow.com.sg.
Henry Chow
Public Accountant, C S Chow & Co