What are Cost Value Reconciliations (CVRs) in construction?
According to the DesignBuildings wiki, cost value reconciliation is used to monitor and measure expenditures against the budget on a construction budget. All of the expenses for the previous period are gathered and added up to see all of the current costs. The current cost value is relevant to see how much has actually been spent on the project already.
In addition, additional data can be included in the reporting to show the project’s final ending point. These can include the actual work done in the field, variations in subcontracts, bids for upcoming jobs, and price adjustments for materials. Using these additional metrics for the report can show potential budget overruns and problem locations already in advance.
Why are CVRs required for construction projects?
CVRs are very important for construction projects because they provide the current status of the project. You are able to somewhat accurately predict the future profitability of the project by putting this report together. It is especially relevant for construction contractors since the sum of their construction project profitabilities adds up to the profitability of the whole project.
Without doing CVRs, you are just going through the project blindly and will only find out the profitability and the total cost of the project when it ends. In many cases, this is too late. It can be very bad for your client as well since they have no way of figuring out how much money they are going to have to pay you during the whole project. And how much during the next months.
Not having this info can easily put you into the 25% of construction companies at risk of bankruptcy. If you do have this information in advance, you can warn your customer beforehand or get credit from the bank. That could help you react early enough to avoid cash flow issues and bankruptcy threats. If you also keep in mind that 9 out of 10 projects experience cost overrun, the necessity will be even more clear.
When you do have the reports without having made any calculation mistakes, life is good. You can use the data from similar past projects and directly account for the estimation mistakes and price increases. Past data will clearly show why something was cheaper or more expensive.
What key metrics do CVRs provide?
The CVR process, in a nutshell, involves taking all client income, expenses, variations, and inputs from the market (subcontractor and vendor bids) and adding them up on a job level in the budget. Once all of the number-crunching has been done, you can use the data to extract various project key indicators.
Depending on the financing model and contract type with the customer, the KPIs might be internal only for the contractor or shared with the client. It is even possible that two different reports are put together since the company might operate with a fixed cost with the client, thus not wanting to share the profit margin.
Value of the project
The value of the project is all of the project income from the client added up. The reporting can include all of the already received amounts in addition to also proposing the likely income at the end of the project. It is good to add up both values so that the actual income change is also known. Construction is a very fluid and changing industry, with up to 35% of projects needing a variation or change order. This can include client variations as well so that’s why it is important.
The current cost of the project
One of the other main jobs of the CVR is to add up the current cost to date. This metric can be used to compare the program or schedule to see where the cost of work done is compared to the done work. These two metrics can already show the possible ending point of the project if jobs are overbilled in advance.
Changes to the total cost at completion
In addition to the current cost of the project, it’s also critical to know the total completed cost. This information can then be communicated to the client or used internally to save on other jobs. Or take credit to cover the potential cashflow issues if no savings can be had.
Construction material costs have increased by more than 30% between 2020 and 2022 and can continue to rise 12% YoY still in the future. This means that your estimates at the beginning of your project are definitely going to be higher at completion. Depending on the material, it could be even more.
This means it is crucial to also track the cost at the completion of each job throughout the project. Every time a new tender ends with bids higher than your estimated budget, you track it. Additionally, whenever a new subcontract or client contract variation is agreed upon, you mark it down somewhere. Afterward, you can refer back to these budget revisions to ensure your complete cost is correct.
total cost at completion = all current costs + all future costs + adjustments due to material costs + adjustments due to subcontractor bids
Current cash flow of the project
Together with the current value of the project and the current cost of the project, you can see the balance of the project. Assuming no mistakes were made in entering the data, you can calculate if there is enough buffer for the project.
Once this number is calculated for all of the ongoing projects of the company, you can be a bit more sure. If all of the projects have enough of a safety margin, the whole company should as well.
current cashflow of a project = current value – current costs
Profitability of the project at completion
Much like cash flow, we can calculate the profitability of the project at completion based on the previous metrics. We just need to subtract the cost from the value at completion. The calculation itself is trivial, but it’s key to include all the information when calculating the two required values.
Just like the project’s current cash flow, when all of the projects are proposed to be profitable, the company will be profitable. It’s actually very important to figure out which projects and jobs are profitable. It just needs a bit of extra effort at the data collection and structuring stage.
profitability at completion = value at completion – cost at completion
Who usually compiles the CVR reports, and for whom?
It depends on the company structure. In general, construction companies do the main contracting on behalf of the customer. In many cases, the main or general contractor is involved, but it can also be the architect or designer.
The person in the company who usually does the CVR depends on the region. In the UK, it is usually the Quantity Surveyor (QS) role. It could also be the Contract Manager (CS) who helps the QS put together the valuations so that variations can also be included. In other markets or smaller companies, the Project Manager (PM) may also be responsible for collecting and compiling all of the information into a CVR.
The CVRs can be for internal use or they can also be external for the customer, to keep them updated. In the internal one, the report is meant for the management or directors of the company. For them, knowing which projects are profitable and which are not is relevant. Additionally, it is essential to know why the projects are profitable or why they aren’t. It helps to know exactly which jobs have changed from the initial estimate by doing job costing.
What should you keep in mind when putting together CVRs?
As we described in the previous sections, you need to stay organized. All of the cost documents should be allocated in a timely manner (ideally immediately) and structured somewhere for simple lookup later on. Since there is usually so much data involved in the process, you need a clear process.
Here is a quick list of pointers for doing so:
- Have a single point of entry for every cost document for each project
- Attach the project information to the document as soon as possible
- Directly update your budget revision in your system or spreadsheet on variations
- Do the same for any material price changes or subcontractor bids that differ from the estimate
- Also, update the values for any adjustments in the client-side billing
- Remember why you need this level of detail, and don’t give up
How often are CVRs put together?
The most common practice is to do CVR reporting at the end of every month during construction and when the project is about to end. In an ideal world, one would do this as often as one likes, but the time needed is just too high. Having a higher frequency than monthly could be beneficial, as you would be able to find problems quickly when something changes. The longer the time period, the more changes happened regarding the project financials.
What are the downsides of compiling CVRs?
With great power comes great responsibility. As mentioned in the previous sections, putting the reports together is A LOT of work. Couple that with the attention to detail and strict following of structure when handing the documents and you have a difficult task on your hands. The reward and the effort of CVRs are very negatively correlated. The more effort you put into it doing it and preparing for it, the more accurate the result will be.
It’s a lot of work even if we assume all of the data was available in a structured way. One still has to add all the incurred costs and sales invoices. And if you want to track the completion cost, you’d also need to scan through price lists, bids, and variations. That is often why contractors hire multiple Quantity Surveyors for the job. There’s just so much data to go through.
Could CVR reporting be made more accessible?
We do think so! That’s why we have created the Planyard construction software package. It’s an automatic construction CVR that is accessible to you anywhere and anytime. All you have to do is manage the whole financial process of your projects on Planyard – estimating, subcontractor bidding, subcontracts, valuations, variations, and costs. Planyard will then use all of the already input information to always calculate the real-time CVR for you. To get the report, you don’t have to do anything more than just a few clicks.