Jacob Austin 00:00:00 Hi all, Jacob Austin here from QS.Zone, and welcome to episode 97 of The Subcontractors Blueprint, the show where subcontractors will learn how to ensure profitability, improve cash flow and grow their business. Today's episode, number 97, is all about the importance and value of cost reporting and monitoring. If you're new to the show, please subscribe for more user friendly advice on all things subcontracting. Before we dive into why cost reporting and monitoring are so crucial, let's clarify firstly what these terms mean. Cost reporting in construction is basically the practice of tracking all of the costs on a project and comparing them to the budget on a regular Basis. It's like a financial health check for your project. You gather information on what you've spent so far, be it labor, materials, sub subcontractors, plant and so on. And then you forecast out what you expect to spend until the end of the job. To get a picture of where the job is heading. Typically, on larger projects, a quantity surveyor or cost consultant would prepare a monthly cost report to help keep the client informed and control costs.
Jacob Austin 00:01:30 But even if you're a small subcontractor without a dedicated SHS, cost monitoring is something you should do internally to keep your eye on the ball and to keep that project on track. You could think of it as a reality check between where your finances currently stand and where they should be. It can be as simple as a spreadsheet or a notebook where you list. Here's what we thought the job would cost. Here's what it cost us so far, and here's what we'll need to spend to finish it. It can also include a bit of forecasting. So getting ahead if you continue to spend at the current rate, will you come in under budget or over it? In essence, it's about comparing your actual costs to what you estimated it would be at the start when it's done right. This process highlights any gaps between what should be happening financially and what is happening. So you're not flying blind, and you're not at risk of getting to the job and wondering where your profit is gone. Now, all this might sound a little bit dry, because numbers and reports are not the most exciting part of construction.
Jacob Austin 00:02:40 But stick with me, because understanding this could mean the difference between making a profit or a loss on your next job. And as the old saying goes, if you can't measure it, you can't manage it. And that holds very true for your project costs. And don't worry, this isn't going to be a lecture on Electron accounting. I'll keep it punchy and practical. Now, you might be thinking I already keep an eye on my spending. I roughly know what's going in and coming out, and that's good. But knowing roughly isn't always enough. In the UK construction industry, profit margins can be razor thin on many projects. In fact, a recent study found that the UK construction sector had the lowest profit margins in the world. And a 2019 study in the Journal of Building Engineering even found that 44% of construction projects end at a loss. Let's let that sink in for a minute. Nearly half of projects lose money with odds like that, not monitoring your costs can be like walking a tightrope without a safety net.
Jacob Austin 00:03:48 For subcontractors and especially SMEs. One bad job could be enough to put your whole business in jeopardy. Unlike big contractors, you might not have huge reserves to cushion a loss or huge overdraft facilities even. And that's why cost reporting isn't just a nice to have. It's an essential for survival and for success. It gives you the warning signs if a project is slipping into the red so you can take action before it's too late. In a previous episode, I likened that to navigating at sea. First, you need to understand where you are. Then you need to understand where you're going. When you've got those two points, you can try and navigate in between the two. Now you might well think, well, I know how to make money and that's fine. But are you making the margin you set out to? Are you rolling on to the next job and hoping that makes more? Would you set off up the motorway with your fuel gauge covered, so that you couldn't tell how much was left in the tank? Because that's effectively what you're doing.
Jacob Austin 00:04:49 If you don't cost report. You're setting off with perhaps what you think is enough. With no idea of whether you'll actually get to the other side or not. So let's look at some concrete benefits that you, as a subcontractor, could get from doing regular cost reporting, and why making these a habit will literally pay off. Firstly, you get early detection of problems by comparing actual spend to budget on a frequent basis. You can catch cost overruns early if labor costs are up, say 10% of a budget on the first month. Your cost report will flag that an early warning means you can take early action. You might be able to adjust your labor level. Find a cheaper supplier for materials, or you might just have identified that you're being held up on the job. And that might prompt a conversation with the main contractor about how you can complete your work more efficiently. It lets you fix small issues before they snowball into budget busting crises. Secondly, you get controlled cash flow. Regular cost monitoring helps you manage cash flow by aligning your project expenditures with your income.
Jacob Austin 00:06:02 You'll know just how much cash is tied up in a project at any given time, and you can forecast when the next infusion is going to be. That's crucial for scheduling your own bill payments to your suppliers and labor force. For example, if a cost report shows you completed work worth 50 grand this month, it offers a sense check to see whether you've applied for enough money. No more Guesstimating you have solid figures, and healthy cash flow means paying your guys on time, keeping your suppliers happy, and having the confidence that you've earned your worth. Thirdly, when you monitor costs closely, you're also keeping tabs on any extra work or changes that come up. That means you can promptly notify the contractor of variations and then claim what you're entitled to. A detailed cost report gives you exactly the right info to identify that you're overspending, to dig into the detail about why you're overspending and help you identify additional work so that you can raise it as a variation. Then, of course, you've got all the cost backup that you need to justify the additional payment, and so it helps you to ensure that you get paid properly for everything you do.
Jacob Austin 00:07:14 Reducing the chance of unpaid work. Eating into your profit. Fourthly, good cost reports turn raw data into actionable insights. They let you and your team make informed decisions on the project. For example, if you discover at week, say, six, that you've used up 80% of your budget for concrete, with only 50% of the concrete work done, you can decide how you respond to that. You might be able to allocate more junior staff to less critical tasks to save you cost. You might be able to see if you can negotiate a discount on the concrete. It might prompt you of a variation that you didn't know about. The key is having clear information to help guide those choices rather than just a gut feel. The more comprehensive view you take when you complete your cost reporting gives you more information on which to guide your decisions. Fifth, we have improved profitability and protecting your margin. At the end of the day. The goal of all this reporting is to protect that profit when margins are already slim, as we discussed.
Jacob Austin 00:08:22 Any overspend can directly cut into that small slice of profit. By monitoring costs, you can protect that slice. You can even find ways to improve it. For instance, a cost report could reveal an efficiency. Maybe you're completing certain tasks quicker than expected, so your labor costs are lower. That might signal that you could come out ahead of program, or perhaps even take on a small job concurrently. And of course, on the flip side, if you start seeing margin erosion, then you're going to try and stop the bleeding. Steering that ship towards the destination again. Sixth, you get accountability and a level of professionalism. Having a regular cost reporting process instills discipline in your team. Everyone knows that costs are being watched, so there's a tendency to be more mindful of waste and to drive for efficiency. It also means that if something's going overbudget, you can try and pinpoint that to work out why, or perhaps who is responsible in a non-confrontational way, because you've got numbers that will speak for themselves.
Jacob Austin 00:09:31 And finally, there's the element of contract compliance. Having a robust cost reporting method will enable you to work on cost plus or target cost. Contract with confidence. Under those kinds of contracts, you need to tip up to your contractor all of your costs to date in a transparent fashion. This will help you do that, or help you do it professionally and in a way that satisfies your subcontract conditions so that you can get your hands on the money that you're properly due. So in summary, this is like having a Swiss Army knife in your back pocket that cuts through a bunch of potential problems cost overruns, cash crunches, missed opportunities for variations earning a lower than you should margin, and even helps you out if you get into a dispute. It keeps you proactive rather than reactive. It helps you identify problems when you can do something about them, rather than finding out you're in trouble when the project's over and the accountant breaks the bad news. At this point, hopefully you can see the benefits of cost reporting for your business.
Jacob Austin 00:10:37 So now let's talk about how you can implement it without drowning yourself in paperwork. Implementing cost reporting doesn't have to be that complicated, but it can be as complicated as you make it. The first step is always to establish a baseline. We're talking as soon as the project has kicked off. Take your estimate. Your tender build up and break it down. How much have you allowed for the constituent parts? Labor materials? Plant sub subcontractors, overheads on the job? This is the baseline that you need to measure against. It can be high level if you want it to be. Whatever level of detail you think you can manage. The key is having a target to compare your actual costs to. Next, you need to track your costs consistently. This is the core of the monitoring process. Keeping that running tally of what you're spending. You might use accounting software, or it might be as simple as a few columns on an Excel sheet or a Google document that you update regularly. Record here all your major cost items, wages, subcontractor payments, materials delivered and paid for, materials delivered that you haven't paid for.
Jacob Austin 00:11:50 Plant tyre fuel that extra skip that you've had, even the tea and biscuits. Well, maybe you can leave out the biscuits. Unless they're a significant expense. You're doing this monthly or weekly if you've got the time. Regularity is key. It's not just a start up at the very end. It's at meaningful milestones all the way through. If you just do it at the end, then it's a post mortem and all you're doing is seeing what did happen, why your margin isn't what you thought it would be. Doing it regularly is going to help you make those adjustments. So now you've got those two components your budget and your actual costs. Then you need to compare them and work out the differences between the two. For example, by this point of the job, we should have spent £10,000 on materials and we've actually spent £12,000. So you've got a £2,000 overspend or a 20% variance. Do this for each category of the project and for the project as a whole. You don't need to panic if some are up and down against others.
Jacob Austin 00:12:57 What matters is the net effect and understanding why tallying where those variances are tells you where to focus. This is the diagnostic step of cost reporting. It answers where are we overspending and where are we underspending. The next step, of course, is to understand those variances and investigate them if you have to. If something is a bit off, then ask questions. Was there a mistake in the estimate? Maybe you just under budgeted for an item. Did prices increase beyond expectation? Was their wastage to an unreasonable level? Or perhaps there was some theft off the site? Did we do extra work that wasn't in the original scope? Identifying the cause is important for two reasons. A if it's something you can address now, like excessive overtime hours, you can still fix it for the remainder of the project. B if it's something to claim, like client changes. Then you've got data to back up your variation request. It's also, of course, a learning opportunity. The next job you price, you'll remember this issue and adjust your estimates or your approach.
Jacob Austin 00:14:10 Next we want to forecast the future costs. Good cost reporting isn't only backwards looking, it's looking forward. After a few weeks or months of work, you'll be able to project out fairly accurately how much you're going to spend to the end of the job. A basic example you've spent 80 grand to finish 50% of the work. You might estimate another 80 grand to finish it. Assuming all the variables are the same. That could be fine if you're within budget or scary. If your budget was 140 grand and it's now coming in at 160. Forecasting helps avoid those end of the job shocks. It's essentially saying, given what we know now, are we going to hit the budget by the end of the job? If the forecast shows potential budget overrun, you can still try and mitigate it, or at least prepare for it before you get there. When you are forecasting, you need to include committed costs and risk allowances. This is a pro tip. You're not just looking at what you've spent to date, but you're also considering how much you've got left to spend, what you've committed to on the orders that you've placed.
Jacob Austin 00:15:19 So if you know you've issued a big purchase order for a big ticket item, that cost can be counted as part of your forecast, even if the invoice hasn't arrived yet. Similarly, if you expect some risks, you can include allowances for those such as. We might need extra supervision if the weather is bad and we spend longer on site. Risk allowances appear as little contingencies in your report. It sets aside little sums of money for things that could happen, or things that are likely to happen, so that you don't spend them or take them to profit. Perhaps those risks never materialized. In which case you make a bit more money. But if they do, then you won't be shocked. What you've then got is a report that you can discuss with your team. If you have project managers, foremen, or people assisting, then you can share that cost data with them to help them understand the financial impact of what they're doing and motivate everyone to stick to their budgets. It's about creating a culture where cost awareness is part of the job for everybody, not to the point of compromising quality or safety, but eliminating things like careless waste because everybody knows that the till is being watched.
Jacob Austin 00:16:33 Some other thoughts. Keep your documentation organized. A good cost report is only as good as the data in it, and it can be a case of garbage in, garbage out if you do it half cocked. So save your invoices, your receipts, your timesheets, your delivery notes, etc. this isn't just about accounting. It's about having a record in case of disputes or contractors queries. Documentation transforms your cost report from just numbers on a page into the story of the project that you can tell with confidence if you need to. And if you ever have to go to adjudication or legal proceedings, then a detailed cost report could be your best friend. Adjudication is a fast tracked remedy, and the party, with their paperwork in order can often have the upper hand. Also, use this information to learn and improve. After the project you can do a post-mortem using your cost report. Where did we do well? Where did we go over? Was it preventable or was it not? Perhaps you discover that you consistently underestimate how long certain installations will take, or now you've got the information to be able to notice that, and you've got real world data to tell you how much it's costing you so you can adjust your estimates accordingly.
Jacob Austin 00:17:56 Perhaps you might find out that a certain type of work always incurs a lot of small extra costs that you weren't charging for. Bits of waste. Bits of setting out. Bits of standing time. You can now build them into your price or take your viewers whether you have to. You might even think you don't have to do anything with your estimate, but now you've got some information that could help you win the next job. You know how much money you made. So you've got a view as to whether you can offer a discount to secure the next site. Because the cost report isn't just about the project you're doing, it's about feedback to make your future jobs more profitable too. And having the information to make key decisions accurately and quickly when it counts, because you've done the work in advance. Now, you might well be thinking, this is a lot. Do I really have to do all of that? Well, as I said earlier, it can be as detailed or as complicated as you want.
Jacob Austin 00:18:52 So start small. Something is better than nothing. Maybe you just start with a simple cost versus value. Table for each job on a monthly basis. Then you can refine and add detail as you get comfortable with it. Once you've started that process, it will start to become second nature. When you settle in, you'll start getting a strange satisfaction from seeing the numbers line up and start to enjoy the challenge of making them line up. It's a bit like keeping a score in a game, and your projects turn into a game where you don't just get finished, but you finish in the black. And hey, if you really hate dealing with numbers, you can always bribe your accountant or hire a part time SHS to set up a system for you. But at the end of the day, nobody's going to care about your profit as much as you do. And after all the sweat and skill that goes into earning that money and less on number crunching is a small price to pay to actually keep it. So to wrap up, cost reporting and cost monitoring might not be the most glamorous part of subcontracting, but it is absolutely one of the most important.
Jacob Austin 00:20:00 It's the unseen work that makes that physical work worthwhile, because what would be the point of building something great if it secretly puts you in a financial hole? By regularly keeping tabs on your costs. You ensure that profitability isn't left to luck. You gain control over your project's financial outcomes rather than being at their mercy. The bottom line is that cost reporting is about empowering you as the subcontractor to run a healthier and more resilient business. It shines a light on problems whilst they can still be fixed. It can help you get paid what you are owed and it guards the hard earned money that you make. It can be simple. It can even be a bit of fun if you turn it into a challenge. And it's something you can start doing right now. No matter the size of your operation. So my challenge to you after listening to this episode is take one active step towards better monitoring on your current or your next project. My mission with the show is to help the million SME contractors working out there in our industry.
Jacob Austin 00:21:10 If you've taken some value away from today's episode, I'd love it if you'd share the show and pass that value on to someone else who'd benefit from hearing it. And of course, subscribe yourself if you haven't already. Thanks for tuning in. If you like what you've heard and you want to learn more, then please do find us at www.QS.Zone for more information or you can check us out on all your favourite socials. Again at @QS.Zone. Thanks again. I've been Jacob Austin and you've been awesome!
