SECTION 1 - INTRODUCTION General 1. Three distinct tasks are required to achieve effective cost control of a project. These are:a.

Planning and organizing the project. b. Recording and Reporting Costs during the execution of the project. c. Taking Corrective action if the cost reports indicate such action is necessary. The greatest control of costs is achieved at the planning and organizing stage of any project, more so if the design of permanent or temporary works is involved. Effective cost control is achieved at this stage by means of close analysis of alternative designs (permanent and temporary works), the realistic pricing of alternatives, analysis of alternative methods of construction, realistic pricing of these alternatives, detailed planning of the task, proper purchasing procedures, organizing resources, etc, etc. 2. This procedure deals with the Reporting task involved in the project cost control process, and also covers some aspects of the Corrective Action task. 3. This procedure consists of the following sections : Section 1 This introduction. Cost Code Numbering system and the Estimate Split Labour (Manhour reporting). Labour (Cost reporting). Plant Cost Reporting. Commitment Reports. Historical Cost Reports. Escalation. Project Assessment & Summary. Variations and Extras. Exceptional items.

Section 2 Summary. Section 3A 3B Section 4 Section 5A 5B 5C 5D Section 6 Section 7

4. This introductory section of the Project Cost Control procedure discusses the philosophy of the standard cost reporting system, but the details are covered in the other sections above. The system applies in principle to all types of contract, i.e., lump sum, schedule of rates and cost reimbursable, although the details and requirements will vary. 5. The procedure describes a manual method of project cost control reporting. Company Name objective is to use payroll data, financial and estimate figures for project cost control reporting system based on the manual method. This procedure has a number of draft report formats that "Company Name" intends to implement, and are attached to this procedure marked Attachments. For the purpose of putting in place the COMPANY NAME. Project Cost Control Procedure, it shall be referred to as the manual method where it may be necessary to set up the reports in appropriately designed spreadsheets to suit

manual entry of data obtained through COMPANY NAMEs Financial and Payroll Systems.

Overview of Cost Control Reporting System 6. In outline, the key elements of an effective cost control reporting system are:a. Proper design of an effective cost code numbering system and correct allocation of allowed into this system. b. Prompt accurate reporting of commitments and/or costs against allowed, taking realistic account of escalation, variations, etc. c. Intelligent analysis of reports leading to specific action plans for improvement. d. Implementation of the action plans. (Note that in effect items b, c and d form a continuing cycle.) 7. The emphasis of the cost control reporting system is to report at the earliest stage of incurring cost. For many items, this can be achieved by reporting at the time of placing an order i.e. at commitment. For such a system to succeed it is essential that expenditure is not incurred without the issue of a properly costed order signed by an authorized person. However, with certain items it is impractical to report costs at the time of commitment. The cost control reporting system provides alternative methods for reporting these items, which include labour and miscellaneous materials etc. Effective Cost Control Reporting 8. The principles for effective cost control reporting are:a. Concentrate on the "critical few" rather than the trivial many. b. Make the system simple enough so that all project staff fully understands it, and realistic enough so that they believe in it, i.e. make provision for taking account of escalation, variations, etc. (Thus they are able to spot unsatisfactory performance and initiate corrective action without delay). c. Be sure that like is compared with like. d. Differentiate between items with single- decision costs, e.g. supply of structural steel and those with recurring-decision costs, e.g. oxygen and acetylene. e. Identify "one off" items where cost reporting is ineffective and short term planning is the only effective way of controlling costs. a. Use "rule of thumb" estimates to check actual costs and seek explanations for those that do not check. It will often lead to errors in coding or incorrect allocation of costs.

Terminology 9. Attachment 1A lists the terms and definitions that are relevant within the "Company Name" manual method in the context of cost control and reporting and financial aspects. Terms used within the reporting system must be consistent to avoid errors and misunderstandings. Abbreviated terms, particularly when used in reports, must be fully understood to avoid errors in reporting. The System 10. The cost control reporting system is based on two distinct types of reporting method:a. Reporting at commitment and b. Reporting using historical (invoiced) costs. At the stage of establishing the cost control report documents it is necessary to determine those items that are best reported at commitment and those that are best reported using historical cost. The items should be clearly separated and controlled accordingly. 11. Those items that are best reported at commitment include: Major materials, the cost of which are known at the time of ordering and where the gain or erosion of margin can be predicted providing wastage is as expected. Thus after the initial "single-decision" the only effective control is on wastage. Subcontracts, the cost of which are known at the time of ordering and again the gain or erosion of margin can be predicted.

Plant (including all hired items), where the hire rate is known at the time of ordering. In the case of Plant, however, the commitment can only be accurately assessed in most instances for the period that the plant has been on the project, and forecasting the commitment to completion is not as accurate as when assessing commitments for major materials and subcontracts. Thus Plant control is best based on a system that measures commitments to date rather than forecast commitments to completion. For this reason a different reporting system is proposed for Plant when the plant component of a contract is significant.

13. Those items that are best reported using historical costs are: Minor materials, notably small tools, consumable, formwork, scaffolding (unless hired), temporary materials etc., where, because they are ordered piecemeal, it is virtually impossible to make a reliable prediction of the total final commitment and hence forecast the gain or erosion of margin. It therefore becomes necessary to review the costs for these items each month, and compare them with an assessment of alloweds for the costs recorded, as a basis for control action. Labour, where up-to-date accurate costs are known (from payroll) but reliable predictions of the total final costs are virtually impossible due to the usual uncertainties associated with labour. For the Labour component of a contract, measurement of performance, production rates, etc., becomes more important, and this often requires a more frequent rate of cost reporting than for other items controlled by historical cost means. For this reason a different reporting system for Labour is proposed when the Labour component of a contract is significant. Other items that are often included in historical cost control reporting methods are: reporting can be more readily and satisfactorily reported by historical costs means. This is particularly so if these items are combined with other historical cost type items. Examples include subcontracts and materials for site establishment. Freight charges, office running expenses, items not normally covered by orders (e.g.. telephone accounts), Staff charges.

14. It is possible for any item to be reported by either the commitment or historical cost method. The final choice of method must be determined from the above guidelines and factors such as the administrative task involved, the value of any particular item, the likelihood of major variations or variances necessitating close control, and the availability of documentation such as orders.

Production of Cost Control Reports 14. Commitment reports will generally be produced monthly giving details for each cost code. 15. Historical cost reports will similarly be produced monthly giving details for each cost code. 16. For projects with a significant component of Labour requiring separate Labour reports it would be expected to produce Labour Manhour and Cost reports weekly to coincide with payroll closing dates. 17. For projects with a significant component of Plant necessitating separate Plant Cost reports it would be expected to produce Plant Cost reports weekly, or as required to suit the desired level of control. 18. The relationship between the various reports that make up the cost control system is illustrated in the flow charts in Attachments # & #.

Treatment of Escalation 19. The system is designed on the basis of comparing actual costs with escalated alloweds. The procedure for escalating the alloweds is detailed in section 5C.

Guidelines for analysis of cost control reports 20. Cost reports must be analysed as soon as as they are available and action taken as necessary. 21. In Labour Manhour Reports it will usually be adequate to:a. Study each "critical few" item in depth. b. Scan other items to identify those where the variance exceeds a predetermined figure, say 10%. 22. The Labour Cost Report must be studied to verify that actual manhour rates line up with current alloweds manhour rates. If they do not line up, the reason, e.g., excessive overtime, bonuses, must be sought and found. 23. In Plant Cost Reports, each "critical few" item must be similarly studied and reasons for variances determined. 24. For Commitment items the reports are more in the nature of a recording system than a principal cost control instrument. This is because if wastage (in the case of materials) is kept under control, the end result costwise is decided at the time of placing the order. Thus these cost reports are studied to detect

anomalies; i.e. materials not invoiced, variations for which orders have not been placed, uncontrolled expenditure, etc. 25. For Historical Cost item, the cost reports do form a principal cost control instrument provided that adequate care has been taken with the calculation of alloweds used, and recorded costs are up-to-date.The reports must be studied to identify significant variances. Guidelines for development of corrective action plans 26. Generally it is in the area of labour and plant that the project staff are able to apply the most effective corrective action. And starting with the critical item which is showing the worst variance, the situation must be analysed as follows: a. Has the cost coding of time sheets or invoices been correctly carried out? b. Is the actual method being used exactly what was intended? c. If not, why not? d. Apply work study techniques to the method looking for the elimination of unnecessary work, idle time, inefficient techniques, etc. Call in assistance if required. e. Is the Supervisor motivating his crew as well as possible? f. Is access and working space adequate and safe? g. Are materials supplies adequate?

h. Are plant breakdowns causing too much lost time? i. Are any other site factors holding down productivity?

28. The answers to the above questions will usually indicate at least one possible course of action, and thus provide the basis for a plan to be made. 29. The plan must be communicated to all concerned in an effective manner. 30. In the areas of wastage of permanent materials, and control of variations and extras on subcontractors, the corrective action is usually more readily seen, decided upon, and acted upon. 31. The control of historical cost items, such as temporary materials and consumables is usually much more difficult and in most cases the solution lies in more detailed and effective planning, or better stores control.

ATTACHMENT 1A TERMS AND DEFINITIONS The following terms and definitions are relevant within the Group in the context of cost control and reporting and financial aspects. 1. "Labour" includes the workforce directly employed by "Company Name" plus the Supervisor plus any labour hired on an hourly basis from another employer (usually referred to as external labour). Note that labour hired on an output basis from another employer is treated as a sub-contractor, e.g.. labour-only Riggers/Scaffolders being paid an agreed amount per hour. (However, in a contractual context all externally hired labour, on an hourly or output basis, should be treated as a sub-contractor). 2. "Plant" includes the main items of plant and equipment hired by the project whether from "Company Name" or elsewhere and it could also include hired equipment such as buildings, scaffolding and formwork if the estimate split and cost codes have been established accordingly. The dividing line between "plant" and "small tools and equipment", which are treated as "historical cost" items, is left to be defined by the Project Manager, at the time of producing the estimate split and cost code system, in such a way as to provide effective control with minimum effort. 3. "Subcontracts" include all agreements whereby persons or firms undertake to perform specified work on the project site with or without related work off-site. Labour hired on an hourly basis is not considered as sub-contract. Usually the work covered by a subcontract is permanent work, or closely related there to, such as formwork and does not include work related to overhead items such as installation of services. 4. "Materials" includes all other items not covered by "labour", "plant" or "subcontractors". "Permanent" materials are those materials required for the permanent works, and "temporary" materials is used to describe all other materials. 5. "Cost" means the amount in dollars that we are obligated to pay for labour, plant, materials or sub-contracts. 6. "Direct Cost" means a cost related to and readily identifiable with an item of work specifically required by the Contract. 7. "Indirect Cost" means a cost related to the overall running of a contract but not obviously identifiable to a direct work item.

8. "Commitment Control" , (also known as "Committed Cost") refers to a control system in which the emphasis is on controlling materials and sub-contract costs (and other costs if desired) at the time of making the commitment, i.e. placing the order, rather than using invoiced costs as prime data in the control system. 9. "Manhours" means the number of actual hours worked (inclusive of normal non-productive time, e.g.. teabreaks) by each employee and includes the sum of such hours for several employees. 10. Manhours Actual means the amount in manhours that has been expended on an item of work. 11. "Manhour Rate" means the average dollar cost per manhour, averaged out over a pay period. It includes the effects of overtime penalty rates, bonus and other on-costs and can be either "allowed" or "actual". 12. "Allowed" means the amount in dollars or manhours, as relevant, allowed in the estimate (adjusted for any post tender negotiations included in the 'contract') for the quantity of work to which it refers. 13. "Actual" means "cost", "manhours actual", or "manhour rate" as appropriate to the sense. 14. "Variance" means the difference between the allowed and the actual for the same item or quantity of work. 15. "Tender price, quantity, rate, etc". means the price, quantity, rate etc. nominated in the tender. Note that whilst normally these will be the same as those in the contract, this is not necessarily so, e.g.. where post-tender negotiations are incorporated in the contract. 16. "Estimate" means the documents, e.g.. summaries, costing sheets, programmes, schedules, method statements and quotations on which the tender was based. 17. "Estimate amount, quantity, rate etc". means the amount, quantity, rate etc. shown in the estimate. 18. "Variation" & "Extra" means a change to the specified quality, quantity, method or time of work specified in the contract or on the contract drawings. However, changes solely in quantity in a Schedule of Rates contract are not included, nor are escalation amounts treated as variations. 19. "Variation Submission" means a submission for approval of price for a Variation or Extra. 20. "Progress Payment Claim" or "Progress Claim" means a claim for a regular progressive payment in accordance with the contract conditions for work done

Project Administration, ProcedureNo: 1 PROJECT COST CONTROL in an agreed period. In relevant cases, it also includes material on site. 21. "Variation Payment Claim" means a claim for payment in respect of the stated variations and extras. 22. "Escalation Payment Claim" means a claim for payment as reimbursement of the effects of wage and materials price increases since the date of tender, such reimbursement being calculated in accordance with the contract conditions. Such claims may relate to progress payment and variation payment either separately or together. 23. "Retention" means an amount in dollars withheld from a payment claim. 24. "Margin" means the amount of money added in an estimate to cover Branch overheads, Head Office overheads and Group profit. It also is equal to the difference between contract receipts and contract costs. 25. "Estimate Split" is the activity of allocating allowed in the estimate to appropriate cost codes. 26. "Estimate Split Summary" is the final document resulting from the estimate split and summarises the allowed dollars from the estimate that have been allocated to selected cost codes.