Project Administration, Procedure No: 1

PROJECT COST CONTROL

SECTION 1 - INTRODUCTION
General

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

a. Planning and Organising 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 organising 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,
organising 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.

Section 2 Cost Code Numbering system and the Estimate Split
Summary.
Section 3A Labour (Manhour reporting).
3B Labour (Cost reporting).
Section 4 Plant Cost Reporting.
Section 5A Commitment Reports.
5B Historical Cost Reports.
5C Escalation.
5D Project Assessment & Summary.
Section 6 Variations and Extras.
Section 7 Exceptional items.

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.

October 2007 Page: 1 of 6

 Project Administration, Procedure No: 1
PROJECT COST CONTROL

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 refered 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
NAME”’s 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 alloweds into this system.
b. Prompt accurate reporting of commitments and/or costs against alloweds,
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 authorised 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).
October 2007 Page: 2 of 6
 Project Administration, Procedure No: 1
PROJECT COST CONTROL

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.
October 2007 Page: 3 of 6
 Project Administration, Procedure No: 1
PROJECT COST CONTROL

• 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.

12. 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:

• Small material and subcontract items, that although suitable for

commitment type 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.

13. 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.

October 2007 Page: 4 of 6

 Project Administration, Procedure No: 1
PROJECT COST CONTROL

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
October 2007 Page: 5 of 6
 Project Administration, Procedure No: 1
PROJECT COST CONTROL

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.

October 2007 Page: 6 of 6

 Project Administration, Procedure No: 1
PROJECT COST 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.

October 2007 Page: 1 of 4

 Project Administration, Procedure No: 1
PROJECT COST CONTROL

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
October 2007 Page: 2 of 4
 Project Administration, Procedure No: 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.

October 2007 Page: 3 of 4

 Project Administration, Procedure No: 1
PROJECT COST CONTROL

SECTION 2 –COST CODES & ESTIMATE SPLIT

INTRODUCTION

1. The principles for effective cost control are stated in section 1 of the procedure.
The key framework around which cost control is built is the project Cost Code
numbering system.

2. This section covers the following steps involved in the design of the cost code
numbering system and in splitting the estimate.

a. Examine the Estimate.

b. Determine cost code block names.

c. Select cost codes

d. Allocate alloweds from estimate to cost codes.

e. Prepare estimate split summary.

f. Check totals with estimate.

g. Review cost codes and estimate split Summary.

h. Publish cost code list.

Cost Code Numbering System

3. The following points must be taken into account when designing the system:

a. Each cost code on any project will have the same number of digits. The
number of digits will be 4.

b. The numbering system should comply with the following general

standard unless strong reasons exist to the contrary, when approval
should be obtained from the Branch/Division/General Manager.

1000 - 1999 Indirect Costs - Non recurring.

2000 - 2999 Indirect Costs - Recurring.
3000 - 4999 Labour Costs.
5000 - 5999 Plant Costs.
6000 - 8999 Materials & Subcontracts.
9000 - 9999 Contingencies, Provisional Sums, Insurance claims
etc.

October 2007 Page: 1 of 4

 Project Administration, Procedure No: 1
PROJECT COST CONTROL

4. “COMPANY NAME”. TREATS COST CODES 3000 - 4999 AS LABOUR, i.e..

THESE NUMBERS ARE USED TO SEGREGATE LABOUR MANHOUR AND
LABOUR COST REPORTS.

“COMPANY NAME”. TREATS COST CODES 5000 - 5999 AS PLANT, I.E..

THESE NUMBERS ARE USED TO SEGREGATE PLANT COST REPORTS
FOR ALL PLANT USED ON A PROJECT.

“COMPANY NAME”. TREATS ALL OTHER COST CODES AS EITHER (A)

"COMMITMENTS" OR (B) "HISTORICAL COSTS" TYPE.

Examining the Estimate

5. Before selecting cost codes examine the estimate to identify the critical few that
will determine the structure of the cost code system. In particular examine the
labour items of the estimate and, if the value of labour warrants the use of
separate labour cost reports, list those items:-

a. which have the largest dollar amounts alloweds.

b. Where the risk of error (e.g.. quantity, productivity, manhour allocation,)

could cause significant variation.

c. where the concentration of labour will be high.

6. Examine the plant items of the estimate and, if the value of plant warrants the
use of separate plant cost reports, list those items:-

a. which have the largest dollar amounts alloweds.

b. where the risk of error could cause significant variances.

c. where plant productivity depends on factors such as survey or inspection.

7. Examine the estimate and identify the major materials and subcontract items of
the estimate that will be controlled on a commitment basis.

8. Examine the estimate and identify the temporary materials, consumables etc.
that will be controlled on an invoiced cost basis.

Determining Cost Code Block Names

9. After examination of the estimate, the next step is to determine names or titles
for blocks of cost codes. These block names will be those as reported in the
final cost report i.e. the Project Assessment Summary. Block names may
reflect the physical nature of the project e.g.. Building A, Building B, etc.
Alternatively block names may be used to reflect the trade to which the cost
codes apply e.g. civil, building, mechanical, etc.

October 2007 Page: 2 of 4

 Project Administration, Procedure No: 1
PROJECT COST CONTROL

If the Labour and Plant reports are being considered then Labour and Plant
block names will be required.

Selecting Cost Codes

10. Having named blocks of cost codes, a list of cost codes should be prepared. It
is unlikely that the final list will be established first time and it will require
revision as the estimate split progresses and cost control documents are
finalised.

11. The following points must be taken into account when selecting cost codes:-

a. Within the series 1000 - 2999, the allocation of numbers should relate to the
sequence used in the estimating check list, (refer procedure Estimating and
Tendering). A suggested standard cost code system is given in Attachment
#.

b. Within the series 6000 - 9999, the direct work can be split either by trade,
(mainly applicable to building work), or by area (more applicable to
engineering work).

c. A separate single cost code number should be allocated to each major

supplier or subcontractor to facilitate comparisons between cost reports,
forecasts and accounting documentation.

d. If the Client requires cost reporting as for example in a cost reimbursable

contract, the system must cater for his requirements.

e. Cost codes should be kept to a minimum consistent with effective control.

As a guide any cost code should not represent less than 0.5% of the
contract value.
f. Cost codes must relate to identifiable activities, e.g.. if it is not simple for a
Supervisor to decide how many hours a rigger has been erecting beams or
erecting purlins, don't give them separate cost codes.
g. Cost codes must distinguish between those that are to be controlled as
“commitment” items, i.e. controlled at time of writing order, and those that
are to be controlled by “historical costs”, i.e. controlled by invoiced cost
method.

Splitting the Estimate and Preparing the Estimate Split Summary

12. Having prepared a cost code system the next step is to split the estimate and
allocate estimate alloweds against each cost code. This is done by annotating
the estimate to show the relevant cost code for every item. Summarise the
estimate in order of cost code numbers. Refer to Attachment # for a typical
"Estimate Split Summary" in order of cost codes. Note that for the purposes of
this exercise, the expression "estimate" is used to cover either the original
estimate or a revised estimate as appropriate.

October 2007 Page: 3 of 4

 Project Administration, Procedure No: 1
PROJECT COST CONTROL

13. In summarising the estimate for the non-critical items that have been grouped
together under a single cost code (to minimise proliferation of cost codes),
each estimate item should be shown separately even though they are grouped
under one cost code. This will allow measurement of work done for each cost
code to be more readily ascertained later.

14. Check that the totals and sub-totals still conform with the tender estimate.

Reviewing the Cost Codes and Estimate Split Summary

15. Having prepared the estimate split summary it may be necessary to review the
cost code system to be sure that the requirements of para 11 above have been
met.

16. Review all allocations to check conformity with the principles for effective cost
control.

17. Again check that totals and sub-totals still conform with the tender. The
estimate split summary becomes the base document for the preparation of the
various reports in the cost control system. It is also the document that will be
regularly referred to as the contract progresses to establish value of work done,
effects of method changes, etc. The original estimate split summary should be
kept intact and any changes made on duplicate copies.

THE BASE DATA TOTALS MUST EQUAL THE TENDER/ESTIMATE TOTAL.

Publication of Cost Code Numbering System

18. A list of the cost codes allocated with their individual descriptions must be
prepared and published for all project staff who are involved in cost reporting
and recording or in financial forecasting, and relevant Head Office personnel.

The list should have separate sections for:-

a. Labour
b. Plant
c. Materials and Subcontracts.

19. The description against each cost code should contain both a brief title and
some explanatory remarks as to what is included or excluded. A suggested
format is given in Attachment #.

20. It is usually advisable to spend time with each member of the project staff to
explain the system and as far as possible resolve ambiguities etc.

21. The published list must be reviewed regularly and updated to include any
changes due to variations, method changes etc.

October 2007 Page: 4 of 4

 Project Administration
PROJECT COST CONTROL

Attachment #A

SUGGESTED STANDARD COST CODES FOR INDIRECT COSTS

The following sets out a standard cost code numbering system for indirect
costs. In many cases it will not be necessary to utilise all these numbers; e.g.
all "Utilities and General Services" could be grouped into one number, "1500";
in other cases it may be desirable to split further.

If the administration costs (22** series) are subdivided, the numbers should as
far as possible correspond with “COMPANY NAME” Administration ,cost code
numbers.

1000 Non Continuous Costs

10** Project Staff - Removal add Resettlement Costs

11** Supervision and General Labour - Removal and Resettlement Costs

12** Administration Costs - Non recurring or Lump Sum (includes Bonds,

Insurance, Fees etc.)

13** Site Buildings - Establish and Remove

14** Camp and Housing - Establish and Remove

15** Utilities and General Services Establish and Remove

150* Power
151* Water
152* Sewerage
153* Air
154* Heating and Air Conditioning
155* Site Roads and Drainage
156* Security Fences, signs and lights

16** Special Temporary Works - Mobilise and Demobilise

17** General Plant, including vehicles - Mobilise and Demobilise
18** Special Services - Non recurring or Lump Sum
19** (Spare)

2000 Continuing Costs

20** Project Staff - Salaries, allowances and oncosts

21** Supervision and General Labour - Wages, allowances and oncosts

22** Administration Costs - Continuing Costs

October 2007 page 1 of 58

 Project Administration
PROJECT COST CONTROL

23** Site Buildings - Operate and Maintain

24** Camp and Housing - Operate and Maintain

25** General Services - Operate and Maintain

250* Power
251* Water
252* Sewerage
253* Air
254* Heating and Air conditioning
255* Site Roads and Drainage
256* Security fences, signs and lights
257* General Supplies
258* General Transport

26** Special Temporary Works - Operate and Maintain

27** General Plant, including vehicles - Operate and Maintain

28** Special Services - Continuing Costs

29** (Spare)

October 2007 page 2 of 58

 Project Administration
PROJECT COST CONTROL

Attachment #A
ESTIMATE SPLIT SUMMARY

Prelims and Overheads

1300 (A) Mobilise and demobilise site offices. 7600
Mobilise Plant 800
Furniture 2000
Power 3000
Water 1000
Demobilise Plant 800
2200 (A) Office running cost (consumables) 3900
2900 (A) Small tools & protective clothing. 3200
Pipe slings 2000
Tools (Area1) 600
Tools (Area 2) 600

Labour
3010 Mobilise and demobilise offices etc. 9000
Mobilise 4500
Demobilise 4500
3060 Supervision. 25500
Area 1 Supervisor 16 weeks 12000
Area 2 Supervisor 18 weeks 13500
3070 Crane operator. 14 weeks 10500
4000 Construct foundations. 170 m2 41040
4100 Erect Steel Area 1 560 Tonnes 15280
4200 Erect Steel Area 2 1020 Tonnes 21845
Plant
5000 Sheds. 4 No. for 24 weeks 12240
5100 Mobile crane. 14 weeks 26600

5200 Prime Mover. 12 weeks 15960

Materials & Subcontracts
6000 (A) Concrete consumables. 4950
Formwork 1550
Oil, chairs etc. 3400
7000 (P) Foundation materials. 5720
Concrete 51 m3 4590
10% waste 450
Mesh 170 m2 680
7010 (P) Steel supply Area 1. 560 tonnes 170000
7020 (P) Steel supply Area 2 1020 tonnes 306000

October 2007 Page 1 of 4

 Project Administration
PROJECT COST CONTROL

8000 (P) Protective Coating Area 1 S/C. 560 tonnes 22900

8010 (P) Protective Coating Area 2 S/C 1020 tonnes 41700
8020 (P) Design & Draftings S/C. Area 1 4 weeks 8500
8030 (P) Design & Draftings S/C. Area 2 8 weeks 17000
Sub total 769435
Margin & Contingency 90000
TOTAL 859435
(A) = Actual Costs (Invoices)

(P) = Committed (Purchase Order)

October 2007 Page 2 of 4

 Project Administration
PROJECT COST CONTROL

Attachment #
PROJECT COSTCODE LISTING
PROJECT: PROJECT NUMBER:

PROJECT MANAGER: DATE:

COST DESCRIPTION TENDER QTY VARIATIONS TOTAL $ R&F FORMULAE
CODE $ ALLOWED UNIT ESCALATED UNESCALATED ALLOWED COMMITS ALLOWEDS
1300 MOBILISE &DEMOBILISE SITE OFFICES (A) 7600 7600 n/a A
2200 OFFICE RUNNING COSTS (Consumables) (A) 3900 3900 n/a A
2900 SHALL TOOLS & PROTECTIVE CLOTHING (A) 3200 3200 n/a A
3010 MOBILISE & DEMO & SITE OFFICES 9000 4 WEEK 9000

3060 SUPERVISION 25500 34 WEEK 25500

3070 CRANE OPERATOR 10500 14 WEEK 10500

4000 FOUNDATIONS 41040 170m2 41040

4100 ERECT STEEL AREA 1 15280 560 TONNES 15280
4200 ERECT STEEL AREA 2 21845 1020 TONNES 21845

5000 SHED HIRE 12240 24 WEEK 12240

5100 CRANE HIRE . 26600 12 WEEK 26600

5200 PRIME MOVER HIRE 15960 14 WEEK 15960
6000 CONCRETE CONSUMABLES (A) 4950 4950 n/a A

7000 FOUNDATION MATERIALS 5720 5720 n/a A

7010 STEEL SUPPLY AREA 1 170000 306000 01 A
7020 STEEL SUPPLY AREA 2 306000 170000 n/a A
8000 PROTECTIVE COATING SUB-CONTRACT AREA 1 22900 560 TONES 56100 n/a A

8010 PROTECTIVE COATING SUB-CONTRACT AREA 2 41700 1020 TONNES 8500 n/a A

8020 DESIGN & DRAFTING SUB-CONTRACT 8500 4 WEEKS 25500 n/a A

8020 DESIGN & DRAFTING SUB-CONTRACT 17000 8 WEEKS 25500 n/a A
$ 769435 0 0 769435

October 2007 Page 1 of 4

 Project Administration, Procedure No: 1
PROJECT COST CONTROL

SECTION 3A – LABOUR ( MANHOURS)

INTRODUCTION

1. The purpose of the labour cost control reports is to control those components of
the estimate that have been allocated to labour cost codes, i.e.. cost codes 3000-
4999.

2. Whilst labour reports must ultimately be expressed in dollars, it is preferable to

report labour in two stages, firstly manhours in detail and then dollars in total.

3. This procedure covers the setting up and routine production etc. of two reports,
namely:

a. Labour Manhour (productivity) report.

b. Labour Cost Report.

4. Each of these reports provides a comparison between the actual expenditure, in

manhours and then dollars, and the alloweds for the same amount of work done.

5. The Labour Manhour Report provides a detailed comparison for each relevant
cost code. Details are reported in manhours because this unit is the most readily
understood, measured, controlled and forecast by the staff having direct control
of labour, namely the Supervisor. Reporting in manhours does not reflect the
effects of excessive overtime, bonuses, labour on-costs or other factors affecting
pay rates and thus in itself does not provide adequate overall control.

6. The Labour Cost Report provides an overall comparison in dollars for total
labour. The comparison is between the actual labour cost in dollars and the
alloweds dollar amounts, such alloweds dollars amounts being adjusted to take
account of escalation as explained later in this procedure. This report, read in
conjunction with the Labour Manhour Report, will direct attention to excessive
overtime, high bonuses or other factors. It provides a safeguard against
unwarranted (and dangerous) complacency in the situation where the Labour
Manhour Report shows favourable trends but the Labour Cost Report shows an
adverse dollar comparison, due to the actual manhour rate being higher than the
alloweds manhour rate for any reason.

October 2007 Page 1 of 4

 Project Administration, Procedure No: 1
PROJECT COST CONTROL

LABOUR MANHOUR REPORT

Initial Set-Up

7. The layout of the standard report form is shown in Attachment #. This is the
report layout as produced by “COMPANY NAME”.

8. Standard Project Information such as the project name etc. are inserted on the
form, and Base Data is entered into columns 1, 2, 3, 4, 5, 6 and 7 from the
estimate split summary. (Refer Section 2 of Project Cost Control procedure.) In
entering this information onto the form it is advisable to include provision for sub-
totals if required. Also provision should be made in the form of a spare line for
each cost code, or additional pages, for items such as variations, miscellaneous
sales, insurance repairs etc. as explained later.

9. Columns 3 and 7 must be checked against the estimate split summary. If errors
are found, further detailed checking is carried out until all errors are eliminated.

10. Once this base data is established there should be no need to change it except
for the effects of variations, change in work methods, or similar.

Source of Data

11. Data to produce the Labour Manhour Report is obtained from the following
records which must be regularly maintained:

a. Actual manhours expended for each cost code, either for the period or to
date. This information is recorded on Time Sheets and is usually
summarised in the Labour Costing Report from the payroll. This applies to
direct hire labour and external hire labour also.

b. A schedule of measured total quantities completed to date for each cost

code. The tendency is to measure quantities for the period for convenience,
however this should be avoided as any errors will compound over a period
of time.

Completing the Report

12. Refer to Attachment # for details as to how to complete the Labour Manhour
Report and the calculations required.

October 2007 Page 2 of 4

 Project Administration, Procedure No: 1
PROJECT COST CONTROL

Treatment of Contract Variations and Extras

13. Refer to Section 6 of Project Cost Control Procedure - Variations, Extras and
Delays.

14. Where a variation or extra is to be costed against existing cost code numbers,
Cols. 3, 5, and 7 will have to be amended for each cost code affected and Cols. 3
and 7 for the total and relevant sub-total. Also Col. 6 may require amendment.

15. Where a variation of extra is to be costed against new specially allocated cost
codes, details shall be added in Cols. 1, 2, 3, 4, 5, 6 and 7 and the total and
relevant subtotals shall be amended in Cols. 3 and 7.

16. When using manual control methods a very methodical approach is required
when amending base control documents. Preferably enter only those variations
that have been approved to avoid unnecessary alterations at a later stage.
Regularly check totals and ensure that these are carried through to all other
related control documents.

Treatment of Method Changes

17. The Labour Manhour Report could become invalid as a relevant document if
changes in plan are not reflected in the alloweds in the report. Such a change in
plan could be a change in the construction method or a decision to use a
subcontractor for some of the work instead of using direct labour, or vice versa.

18. The general procedure for reflecting such changes in all reports is outlined in
Section 7 of this procedure.

Treatment of Back Charges and Insurance Work

19. Work done by “COMPANY NAME”. labour for subcontractors or others and for
which we can charge them should be allocated to a cost code number or
numbers entitled "Misc. Sales ....".

20. Work done by “COMPANY NAME”. labour on reinstatement of damage for which
it is intended to submit a claim under an insurance policy should be allocated to a
cost code number or numbers entitled “Insurance Repair…….”

21. These cost code numbers are grouped at the end of the report immediately after
a subtotal, which thus shows the position for the contract work only.

22. To avoid negative variances distorting the Labour Manhour Report (and
subsequently the Labour Cost Report), alloweds can be made to equal actual
(i.e.. Cols. 12 and 13 respectively).

October 2007 Page 3 of 4

 Project Administration, Procedure No: 1
PROJECT COST CONTROL

This is technically incorrect however as backcharges etc. do not increase

alloweds, but are normally credited to costs. The preferred method is therefore to
balance negative variances by forecasting negative manhours to complete,
(which will then appear as future credit to costs in the labour cost report). When
the invoice for backcharges, or claim, is finally paid and labour costs have been
credited with the due amount, the respective cost code(s) should be deleted in its
entirety from the Labour Manhour Report. Any adjustments necessary between
hours incurred and hours paid will be automatically taken care of in the Labour
Cost Report. Refer to Section 7 for further details of administering Backcharges
and Insurance Work.

23. Special care must be taken in forecasting manhours as with any other
forecasting exercise. When forecasting manhours to complete, the following
points must be taken into account:

a. Assess the productivity rate to complete any item by reviewing the

average productivity rate for the cost code item for the last period versus
the productivity rate for the past 2-3 periods, and consider any factor that
may influence production in the future. (Productivity curves are sometimes
useful here.)

b. Make allowance for clean up tasks on completion if they have not been
alloweds in another cost code.

c. Make allowance for any time extensions that may affect the duration of the
cost code item.

Any other contingency items for unscheduled circumstances, such as

possible industrial action, should be assessed at the Project Assessment
stage.

Regular Production and Distribution

24. The Project Manager shall determine the required frequency of regular Labour
Manhour Reports. This will usually be weekly unless the labour component of the
contract is minor and cannot significantly affect the financial outcome of the
contract.

25. The Project Manager shall determine the timing for the production of regular
Labour Manhour Reports. Completion of the report should be achieved within two
days of the end of the pay week if the Report is to have any benefit to the users.

26. The Project Manager shall determine the required distribution of the regular
Labour Manhour Report. This distribution will usually be such that at least the
senior Supervisors will receive those subsections of the report that cover their
work. The distribution will include the General Manager, Project Accountant or
Estimator (but this would not be usual).

October 2007 Page 4 of 4

 Project Administration, Procedure No: 1
PROJECT COST CONTROL

SECTION 3B- LABOUR (COSTS)

Labour Cost Report

1. The layout of the standard form is shown in Attachment #. This is the layout as
produced by “COMPANY NAME”. Note that this report is a summary report and
does not report against individual cost codes. The number of categories of labour
used in the Labour Cost Report should be as small as possible in order to
minimise the workload. A category of "Supervision" should always be used. It will
generally be sufficient to group all other labour categories into the one
classification of "Other". However if unusually highly paid tradesmen are a
significant part of the labour force, a separate category should be established for
them.

“COMPANY NAME”. REQUIRES A MAXIMUM OF 4 CATEGORIES OF

LABOUR, THE FOURTH CATEGORY BEING "ALL OTHER LABOUR".

2. Standard Project Information such as project name is entered on to the form etc.
and Base Data entered into col. 3 which is obtained from col. 7 of the Labour
Manhour Report.

3. Col. 6 is completed using the average dollars per manhour of the relevant
category of labour as used in the estimate. Note that it is important to total the
manhours (Col. 3) x Estimate alloweds dollars per manhour (Col. 6) to ensure
that it equals the total alloweds dollars for labour as per the estimate split
summary.

Source of Data

4. Data to produce the Labour Cost Report is obtained from the following records:

a. The Labour Manhour Report.

b. The Weekly Labour Costing Report from the payroll, summarised to show
the total cost for each category of labour. Completing the Report

5. Refer to Attachment # for details as to how to complete the Labour Cost report
and the calculations required.

Treatment of Escalation

6. The labour cost escalation factor entered in Col. 7 should be the escalation factor
as determined from the Head Contract escalation formula if there is one.

There may be circumstances when an alternative factor is desirable that truly

represents the cost increase in labour. This may achieve a more accurate picture
of the cost of labour compared to the estimate but will give an inaccurate Project
Assessment if totals using these fictitious factors are carried forward.
October 2007 Page: 1 of 3
 Project Administration, Procedure No: 1
PROJECT COST CONTROL

7. If an escalation factor other than that generated by the Head Contract formula is
used it would be usual for the Project Manager to specify the basis of calculation
of the factor in the form:

Escalation Factor = Tender average rate + average increases

Tender average rate

8. If the contract makes no provision for adjustment of contract price on the basis of
wage increases, the Escalation Factor shall be 1.0. If a contingency amount was
alloweds in the estimate to cover wage increases the Project Manager should
follow para. 7 and keep the total escalation included in the alloweds under review
against the contingency amount alloweds.

Treatment of Contract Variations and Extras

9. No special treatment is required because the details have already been included
in the totals transferred from the Labour Manhour Report. However if any
variation has been priced with an alloweds manhour rate that is not the same as
the estimate alloweds manhour rate, then the alloweds man hour rate in the
labour cost report will have to be adjusted accordingly. Alternatively labour
associated with variations could be costed separately.

Treatment of Method Changes

10. No special treatment is required because the details have already been included
in the totals transferred from the Labour Manhour Report. It is important,
however, to check the alloweds manhour rates following any adjustments for
method changes.

Treatment of Back Charges and Insurance Work

11. No special treatment is required because the details have already been included
in the totals transferred from the Labour Manhour Report.

12. These items may be costed separately in the Labour Cost Report for the reason
explained under Variations and Extras above.

Forecasting

13. Forecasting of the final cost of labour is done using the Forecast Final Labour
Cost Report, refer Attachment #. Forecasting of labour manhours to complete the
contract will have already been carried out in the Labour Manhour Report. These
manhours are entered into Col. 3 of the Forecast Final Labour Cost Report. To
forecast the final cost of labour the current average actual man-hour rate for each
category of labour is used. (The current average actual manhour rate should be
October 2007 Page: 2 of 3
 Project Administration, Procedure No: 1
PROJECT COST CONTROL

carefully assessed and should not necessarily be based on the last payroll
alone.)

Refer to Attachment # for details of how to complete the Forecast Final Labour
Cost Report and the calculations required.

Regular Production and Distribution

14. The Project Manager shall determine the required frequency and timing of
regular Labour Cost Reports. This will normally be the same as the frequency of
the Labour Manhour Reports.

15. The Project Manager shall determine the required distribution of the regular
Labour Cost Reports. This will usually be only to the Project Manager himself but
may also include the General Manager/Company Acountant.

October 2007 Page: 3 of 3

 Project Administration, Procedure No: 4
PROJECT COST CONTROL

SECTION 4 – PLANT (HIRED ITEMS)

PLANT

Introduction

1. The purpose of the Plant Cost Reports is to control those components of the
estimate that have been allocated to plant cost codes, i.e.. cost codes 5000 -
5999.
2. Plant Cost Reports provide a comparison between the costs of plant used in
doing work and the alloweds for the same amount of work done. Refer Section 1
for the definition of what is included as "plant".
3. This section of the procedure covers the setting up and routine production etc. of
Plant Cost reports.

Intial Set-Up

4. The layout of the standard report form is shown in Attachment #. This is the
report layout as produced by “COMPANY NAME”.

5. Standard Project Information such as the project name etc.. as inserted on the
form, and Base Data is entered into columns 1, 2, 3, 4, 5 and 6 from the Estimate
Split Summary. In entering this information onto the form it is advisable to include
provision for sub-totals if required. Also provision should be made in the form of a
spare line for each cost code, or additional pages, for items such as variations,
miscellaneous sales, insurance repairs etc.. as explained later.

6. Note that the units used in Col. 3 should as far as possible be measurable units
of work, not units of time. This point should be checked before the entries in
Cols. 4, 5 and 6 are finalised, realising that the figures in Col. 6 should not be
changed substantially and that the total of all Col. 6 figures must not change at
all.

7. Once the base data is established there should be no need to change it except
for the effects of variations, change in work methods or similar.

Source of Data

8. Data to produce the Plant Cost Report is obtained from the following records
which must be regularly maintained:

a. Weekly Hired Plant Time sheets, (refer Attachment #). These time
sheets are used to record hired plant on site for the period; estimated
costs obtained from orders placed for the respective item of plant, or
from plant hire rate schedules; and finally the cost for the period for
hired plant for each cost code. Adjustment should be made
progressively for actual costs obtained from invoices and the Cost
Ledger if these do not match the estimated costs recorded on the time
sheets.
October 2007 Page: 1 of 5
 Project Administration, Procedure No: 4
PROJECT COST CONTROL

b. A schedule of measured total quantities to date for each cost code.

The tendency is to measure quantities for the period for convenience
however this should be avoided as any errors will compound over a
period of time.

Completing the Report

9. Refer to Attachment # for details on the method of completing the Plant Cost
Report and the calculations required.

Treatment of Contract Variations and Extras

10. Refer to section 6 of this procedure, Variations, Extras and Delays.

11. Where a variation is to be costed against established cost codes Cols. 4 and 6
will have to be amended for each cost code involved and Col. 6 will have to be
amended for the total and relevant subtotals. Col. 5 may also require
amendment.

12. When a variation is to be costed against new specially-allocated cost codes,

details shall be added in Cols. 1, 2, 3, 4, 5 and 6 and the total and relevant
subtotals shall be amended in Col. 6.

13. When using manual control methods a very methodical approach is required
when amending base control documents. Preferably enter only those variations
that have been approved to avoid unnecessary alterations at a later stage.
Regularly check totals and ensure that these are carried through to all other
related control documents.

Treatment of Method Changes

14. The Plant Cost Report could become invalid as a relevant control document it
changes in plan are not reflected in the alloweds in the report. Such a change in
plan could be a change in the construction method or a decision to use a
subcontractor for some of the work instead of using direct labour, or vice versa.

15. The general procedure for reflecting such changes in all reports is detailed in
Section 7 of of this procedure.

16. The Plant Cost Report is adjusted as above in respect of Plant alloweds etc.

Treatment of Back Charges and Insurance Work

17. Work done by plant owned, or hired, by “COMPANY NAME”. for subcontractors
or others and for which we can charge should be allocated to a cost code entitled
"Misc. Sales ".
October 2007 Page: 2 of 5
 Project Administration, Procedure No: 4
PROJECT COST CONTROL

18. Work done by plant owned or hired by “COMPANY NAME” on reinstatement of

damage for which it is intended to submit a claim under an insurance policy
should be allocated to a cost code(s) entitled “Insurance Repair….”.

19. These cost codes are grouped at the end of the report immediately after a
subtotal, which thus shows the position for the contract work only.

20. To avoid negative variances distorting the Plant Cost Report, alloweds can be
made to equal actual (i.e.. Cols. 10 and 11 are completed using same figures as
in Cols. 12 and 13 respectively).

This is technically incorrect however, as backcharges etc.. do not increase

alloweds, but are normally credited to costs. The preferred method is therefore to
balance negative variances by forecasting negative costs to complete (i.e..
forecast a credit to costs). When the invoice for backcharges, or claim, is finally
paid and plant costs have been credited with the due amount, the forecast cost
should be corrected back to zero value. This will then automatically adjust the
report for any variation between costs incurred and costs paid. Refer to Section 7
for further details of administering Backcharges and Insurance Work.

Escalation Factor

21. The Escalation Factor to be entered in Col. 9 should be the escalation factor as
determined from the Head Contract escalation formula if there is one.

There may be circumstances when an alternative factor is desirable that truly

represents the cost increase in plant. This may achieve a more accurate picture
of the cost of plant compared to the estimate but will give an inaccurate Project
Assessment if totals using these fictitious factors are carried forward.

22. If a factor other than that produced by the Head Contract Formula is used the
following guidelines should be used in arriving at a suitable factor:

a. In contracts of short duration, or where the plant cost content is relatively

low, it will normally be acceptable to keep the Escalation Factor at 1.0
throughout the contract.

b. In other cases, if the majority of plant is hired at fixed rates, the Escalation
Factor should be kept at 1.0.

c. If however, plant cost rises become significant, the Escalation Factor

should be applied to the relevant plant items and should be based on the
actual increases in hire rates. (Note that this applies both to Group plant and
to external plant).

Forecasting

23. The Plant Cost report provides space in Cols. 18 and 19 for figures for
October 2007 Page: 3 of 5
 Project Administration, Procedure No: 4
PROJECT COST CONTROL

forecasting the costs to complete each cost code item. Col. 18 is the total
outstanding alloweds calculated by multiplying the alloweds quantity yet to be
completed by the alloweds rate escalated by the current escalation factor. Col.
19 is the Project Manager's forecast of the cost required to complete the cost
code item. If the outstanding work can be completed as estimate then cols. 18
and 19 will be the same.

24. Special care must be taken in determining the forecast plant cost as with any
other forecasting exercise. In the case of the Plant Cost Report, when forecasting
the following points must be taken into account:

• Assess the productivity rate to complete any item by reviewing the

average productivity rate for the cost code item for the last period with the
productivity rate for the past 2-3 periods and consider any factor that may
influence productivity in the future. (Productivity curves are sometimes
useful here).

• Allow for clean up tasks on completion if they have not been alloweds in
another cost code.

• Allow for any time extensions that may affect the duration of the cost code
item.

25. The forecast final cost is the total of the actual dollars to date (col. 12) and the
forecast to complete (col. 19). This total is carried forward to the Project
Assessment.

Reconciliation with Project Cost Ledger

26. The Plant Cost Report is a form of control by commitments, since data is
obtained from the Weekly Hired Plant Time Sheets which record commitments as
a result of orders for hired plant. This provides a more up-to-date report than
having to wait for actual costs from the Project Cost Ledger.
27. Actual costs can differ from commitments recorded on the Weekly Hired Plant
Time Sheets, however, due to a variety of reasons. It is therefore necessary to
periodically reconcile the plant costs recorded in the Project Cost ledger with the
costs recorded in the Plant Cost Report and may any necessary adjustments.

Regular Production and Distribution

28. The Project Manager shall determine the required frequency of regular Plant
Cost Reports. This will usually be weekly unless the plant component is minor
and cannot dramatically affect the financial outcome of the contract.

29. The Project Manager shall determine the required distribution of the regular Plant
Cost Report. This distribution will usually be such that at least the senior foremen
receive those subsections of the report that cover their work. The distribution
could include the General Manager, Accountant or Estimator (but this would not
be usual).

October 2007 Page: 4 of 5

 Project Administration, Procedure No: 1
PROJECT COST CONTROL

SECTION 5A – COMMITMENT REPORTS

Commitment Reports

Introduction

1. The purpose of the commitment reports is to control those components of the

estimate that have been allocated to cost codes other than for labour and plant,
and also are appropriately controlled at the time of commitment i.e.. placing the
order.

2. Commitment reports provide a comparison between the recorded commitments

(orders placed) and the alloweds for the same goods and services covered by
the commitments.

3. Commitment reports should be maintained for those cost code items where the
alloweds dollars can be specifically identified in the estimate, (and can be
similarly identified in the estimate split summary), which then can be directly
compared with any commitment made in respect of that item. Where it is
impractical to determine from the estimate the specific alloweds dollars for any
item for which an order is placed, then the items concerned should be controlled
by historical cost reports, (refer later).

Initial Set Up

4. Commitment reports are set up in the form of a Commitment Allocation Record

for each cost code and the layout of this record is shown in Attachment #. This is
the layout as produced by “COMPANY NAME”. If a manual method of cost
control is employed a Spreadsheet record as per Attachment # may be preferred.

5. The record is divided into three broad areas. On the left, space is provided to
record current alloweds, including the original alloweds as per estimate, changes
in alloweds due to variations plus any change in alloweds due to escalation. In
the centre, commitments (i.e.. purchase orders) are recorded, together with
additional commitments due to variations, and escalation due on the
commitment. To the right of the record the alloweds committed corresponding to
each purchase order are recorded together with the proportion of escalation due
on the committed alloweds. Finally in the right hand column actual costs as per
the project cost ledger are recorded. Space is provided at the bottom of the
record for forecasting calculations.

6. Standard Project Information such as the project name etc.. is entered on the
record, and Base Data from the estimate split summary is entered in location 1,
i.e.. the original alloweds for the cost code item.

7. A Commitment Allocation Record is established for each appropriate cost code.

Alternatively each cost code is entered on the alternative layout as per
Attachment #. The total of all alloweds entered into the commitment records must
October 2007 Page: 1 of 4
 Project Administration, Procedure No: 1
PROJECT COST CONTROL

be checked with the estimate split summary. If an error is found further detailed
checking is carried out until all errors are eliminated.

Source of Data

8. Data to complete the Commitment Allocation record is obtained from the

following records:

a. Purchase orders identifying purchase order number, date, vendor

description of services, total value of order. A system must be maintained to
ensure all orders written on, or for, the project are entered into the
Commitment Allocation Record.

b. The Estimate Split Summary to identify the alloweds corresponding to the

commitment made.

Completing the Commitment Allocation Record

9. Refer to Attachment # for details as to how to complete the Commitment

Allocation record.

Treatment of Contract Variations and Extras

10. Details of the change in alloweds for any particular cost code due to a variation is
obtained from the Variations - Cost Code Split (refer section 6) and entered into
the Commitment Allocation Record under alloweds.

11. Details of additional commitments due to variations, such as change orders, are
entered into the Commitment Allocation Record.under commitments. The
corresponding amount of alloweds for each change order is entered into the
alloweds committed column.

12. Refer to Attachment # for details as to how to complete the Commitment

Allocation Record to account for variations.

Treatment of Escalation

13. The method of calculating escalation is covered in detail later in this Section of
the procedure. If manual cost control methods are being used it is normally
impractical to adjust the alloweds by spreading the changes generated by the
Head Contract escalation formula over all the appropriate cost codes. Instead it
is easier to include such changes in alloweds as a single line entry in the final
Project Assessment Summary. Location 18 on the Commitment Allocation
Record will therefore remain blank in manual control systems.

14. If any purchase order (commitment) is subject to an escalation formula, the

escalation due is entered under commitments at location 19. The method of
calculating escalation on commitments is discussed later in Section 5c.

15. The corresponding proportion of total escalation due on alloweds committed to

date is entered at location 20. This is calculated as follows:

October 2007 Page: 2 of 4

 Project Administration, Procedure No: 1
PROJECT COST CONTROL

Alloweds committed to date (locn 11)

------------------------------------------- x Escalation on all'ds
Total all'ds inc. var'ns (locn 9) (locn 18)

16. The subtotals and totals are recalculated.

Treatment of Method Changes

17. The Commitment Allocation Records could become invalid as a relevant

document if changes in plan are not reflected in the alloweds. Such a change in
plan could be a change in the construction method or a decision to use direct
labour instead of a subcontractor.

18. The general procedure for reflecting such changes in all reports is outlined in
Section 7 of this procedure.

19. The Commitment Allocation Records are adjusted in respect of the estimate
alloweds for each cost code.

Reconciliation with Project Cost Ledger

20. The Record provides for recording monthly Cost Ledger amounts to compare
actual costs with current commitments. The accounting month and Cost Ledger
amount is entered at Loc'n 21 (refer Attachment #). The monthly totals are
totalled at Loc'n 22.

21. In the case of Commitment Allocation Records the actual costs recorded have no
significance except that total actual costs should not exceed the total
commitments (loc'n 13). If the total actual cost does exceed the total commitment
it could be due to one or many of the following reasons:

a. Incorrect cost code allocation of costs.

b. Commitments not recorded.

c. Variations paid but not recorded under commitments.

d. Escalation on commitments paid but not accounted for under

commitments.

The reason must be investigated and corrective action taken as appropriate.

Forecasting

22. The Commitment Allocation Record provides space for figures for forecasting the
final commitment for each particular cost code.
Refer to Attachment # for details of how to complete the record when
forecasting.

23. Special care must be taken when forecasting as with any other forecasting
October 2007 Page: 3 of 4
 Project Administration, Procedure No: 1
PROJECT COST CONTROL

exercise. When forecasting outstanding commitments on the Commitment

Allocation Record the following points must be taken into account and included in
the forecast yet to complete:

a. Any items included in the alloweds that have yet to be committed.

b. Any commitments yet to be made in respect to variations shown on the

record under alloweds.

c. Any future forecast escalation due on a purchase order or subcontract

shown under commitments, for which an allowance has been calculated in
the alloweds.

d. Any as yet undocumented future claim e.g.. for delays, likely from a
supplier or subcontractor.

Regular Production and Distribution

24. As discussed earlier Commitment Allocation Records are not an effective control
document. Their main purpose is to assist in forecasting the financial result of the
project.

25. Commitment Allocation Records should be updated monthly and should be

reviewed monthly by the Project Manager. Further distribution is not required
except in exceptional circumstances.

October 2007 Page: 4 of 4

 Project Administration, Procedure No: 1
PROJECT COST CONTROL

SECTION 5B – HISTORICAL COSTS REPORTS

HISTORICAL COSTS REPORTS

1. The purpose of the historical cost reports is to control those components of the
estimate that have been allocated to cost codes other than for labour and plant,
and are not suitable for controlling by means of commitment reports.

2. Historical cost reports provide a comparison between the recorded costs from the
Project Cost Ledger, and the alloweds for the same goods and services covered
by the costs.

3. Historical cost reports should be maintained for those cost code items where the
alloweds dollars corresponding to an order cannot be specifically identified in the
estimate, (and similarly cannot be identified in the estimate split summary),
and/or costs are incurred without orders necessarily having been placed (e.g..
telephone charges).

Initial Set Up

4. Historical cost reports are set up in the form of a Cost Allocation Record for each
cost code. Using the “COMPANY NAME”. manual method of cost control a
spreadsheet is employed to record data as per Attachment # accepted layout
required.

5. The Cost Allocation Record is identical to the Commitment Allocation Record.

The method of completing the record is exactly the same as for the Commitment
Allocation Record except as detailed below.

YOU SHOULD CREAT THE SAME RECORD FOR BOTH COMMITMENT

ALLOCATION RECORDS AND COST ALLOCATION RECORDS. IT SHOULD
BE TITLED COMMITMENT/COS.T ALLOCATION RECORD. WHEN SETTING
UP EACH COST CODE FOR PROJECT COST CONTROL. YOU HAVE TO
IDENTIFY THE COST CODE AS A COMMITMENT TYPE (P) FOR PURCHASE
ORDER OR HISTORICAL COST TYPE (A) FOR ACTUAL COSTS. THESE
SHOULD BE SHOWN ON ALL THE REPORTS.

Source of Data

6. Data to complete the Cost Allocation Record is obtained from the following:

• The Estimate Split Summary to assess value of alloweds completed for

each period.

THE COST ALLOCATION RECORD SPREADSHEET HAS IN THE

BOTTOM RIGHT HAND CORNER A SUMMARY OF THE ESTIMATE
SPLIT FOR THE PARTICULAR COST CODE FOR EASY REFERENCE.

• The Project Cost Ledger to obtain recorded costs for each cost code for
each period.
October 2007 Page: 1 of 4
 Project Administration, Procedure No: 1
PROJECT COST CONTROL

Completing the Cost Allocation Record

7. Refer to Attachment # for details as to how to complete the cost Allocation

Record. The method is identical to completing the Commitment Allocation
Record except as follows:

• No details of purchase orders are entered into the commitment section of

the record.

• For each period an amount is entered in the alloweds committed section

of the record. The alloweds for the period is assessed on quantity, or
percentage of work done, or time, or similar, corresponding to the costs
recorded for that period. Note that Project Cost Ledgers usually record the
costs as at one month prior to the time that the record is updated. This
must be taken into account when assessing the alloweds.

• The variance between alloweds and costs is then calculated, not alloweds
and commitments as with the Commitment Allocation Record.

8. Refer to Attachment # for further details as to how to complete the Cost

Allocation Record.

Treatment of Contract Variations and Extras

9. Variations and extras are treated exactly in the same way as in Commitment
Allocation Records. The alloweds for each period must be assessed taking into
account the effects of any variation, and whether or not the variation has been
paid for and the costs included in the Cost Ledger.

Treatment of Escalation

10. Escalation is treated exactly the same way as in the Commitment Allocation
Records. However with manual control methods any escalation due under the
Head Contract formula will not be entered under the alloweds section of the
record. Also since commitments are not recorded there will be no entry for
escalation on commitments.

11. Any increase in cost, due to escalation, of historical costs cost code items will
show up as actual costs in the Cost Ledger. A negative variance will result which
will be balanced by any revenue from the Head Contract formula when entered in
the Project Assessment Summary.

THE SPREADSHEET SHOULD BE SET UP TO AUTOMATICALLY

CALCULATE THE PROPORTION OF THE TOTAL CHANGE IN ALLOWEDS
DUE TO ESCALATION THAT IS ATTRIBUTABLE TO A PARTICULAR COST
CODE, AND ENTER IT AT LOCATION 18. THE SPREADSHEET SHOULD
ALSO AUTOMATICALLY CALCULATE THE ESCALATION DUE ON THE
ALLOWEDS COMMITTED AT LOCATION 20 (REFER PARA 14 SECTION 5A
FOR METHOD OF CALCULATION).

Treatment of Method Changes

October 2007 Page: 2 of 4
 Project Administration, Procedure No: 1
PROJECT COST CONTROL

12. Refer to Commitment Allocation Records.

Forecasting

13. The Cost Allocation Record provides space for calculating the forecast final cost
for each cost code. Refer to Attachment # for details of completing the record
when forecasting.

14. Special care must be taken when forecasting as with any other forecasting
exercise. When forecasting the final cost to complete a historical costs cost code
the following must be considered:

• Assess any trends that can be determined from an analysis of costs over
the past say 2-3 periods compared to the average cost for all periods, and
assess any factors that may affect trends in the future.

• Make allowance for any time extensions to the contract that may affect the
duration of the cost code items.

• Allow for any likely increase in costs of goods and services that are not
covered by any Head Contract Escalation formula.

• Allow for any other foreseen item, such as variations, claims, that will
affect the final cost. (It may be worth perusing orders placed and not yet
paid for to identify exceptional orders that could upset trends established
in a. above).

Regular Production and Distribution

15. As for Commitment Allocation Records.

ALTERNATIVE METHOD FOR HISTORICAL COST REPORTS

16. Project Cost Ledgers are a historical document in so far as they are produced at
least one month after an order is placed. Therefore the Cost Allocation Records
do not provide as accurate a report as do Commitment Allocation Records.

17. To treat Historical Costs in a similar fashion to Commitments, i.e.. record all
orders placed, is impractical as Historical Costs normally consist of a large
number of small orders. To record every one as a Commitment would be an
onerous administrative task.

18. One solution is to collect all the orders for historical cost items for a period, add
them together and show them as a single line entry in the form:-

"Miscellaneous orders for the month of …… "

October 2007 Page: 3 of 4

 Project Administration, Procedure No: 1
PROJECT COST CONTROL

The Historical Cost record could then be completed in the same manner as a
Commitment record.

The difficulty with this concept however is that it requires every miscellaneous
purchase to be covered by an order and every order must be priced. Experience
shows that this is impractical. Many items e.g.. fuel, are subject to a blanket order
at the commencement of the contract and a separate order is not written out for
each delivery.

A system of this nature therefore requires very strict administrative controls which
experience has shown are difficult to achieve.

19. Another alternative is to record invoices for the period before passing them on to
accounts for payment. Totals of invoices are calculated for each cost code and
entered into the Historical Cost record under commitments as a single line entry
in the form:

"Invoices for miscellaneous items for month "

The Historical Cost record is then completed in a similar manner to the

Commitment record.

By this means the problem of using historical data is overcome and the records
present a more accurate picture of the current situation.

20. IF EITHER OF THE ABOVE TECHNIQUES ARE USED THEN AS FAR AS

“COMPANY NAME” IS CONCERNED HISTORICAL COST RECORDS ARE
THE SAME AS COMMITMENT RECORDS. EACH HISTORICAL COSTS COST
CODE SHOULD BE IDENTIFIED AS A COMMITMENT TYPE (P) FOR
PURCHASE ORDER).

ALSO IF EITHER OF THE ABOVE TECHNIQUES ARE USED A VERY

METHODICAL APPROACH TO THE COLLECTION AND RECORDING OF
ORDERS OR INVOICES MUST BE ADOPTED.

October 2007 Page: 4 of 4

 Project Administration, Procedure No: 1
PROJECT COST CONTROL

SECTION 5C - ESCALATION
ESCALATION

1. Many contracts provide for adjustment of the contract value as the cost of labour
and materials increase during the course of the contract. Adjustment to the
contract value is usually calculated using a formula defined in the contract
documents. This formula has been referred to as the Head Contract Escalation
Formula throughout this procedure. (Also known as Rise and Fall formula, price
variation formula etc.)

2. Escalation formula come in many forms but the most common, expressed in its
most simple form, is:

Factor for adjustment to Contract Value for period =

Indices (for labour and materials) for period

--------------------------------------------
Indices as at date of tender

The indices used are normally calculated (for labour) or as published by the ABS
(materials).

3. Furthermore the formula usually splits the contract into categories, e.g.. labour,
material and fixed, and applies a different indice for each category.

Hence a typical rise and fall formula would appear as:Factor for adjustment of
contract value for period =

LI(period) MI(1)(period) MI(2)(period) )

35---------- + 25 ----------------- + 30 ---------------- + 10 ) / 100
LI(tender) MI(1)(tender) MI(2)(tender) )

LI, MI(1), MI(2) etc. represent the indices for various categories of labour and
material. 35, 25, 30 etc. are the proportions of the contract value corresponding
to the particular indice. In the above 10 represents the fixed portion of the
contract value not subject to an escalation factor.

“COMPANY NAME” CALCULATES ESCALATION BASED ON THE ABOVE

FORM OF FORMULA. IT WILL ACCOMMODATE A FORMULA WITH UP TO 10
ELEMENTS WHERE AN ELEMENT IS LABOUR, MATERIAL(1), MATERIAL(2),
ETC.

Calculation of Escalation due under Head Contract Formula

4. Escalation due under the Head Contract Formula is calculated using a

calculation sheet shown in Attachment #. This calculation sheet is as produced
by “COMPANY NAME” and is called the Escalation Detailed Listing.

October 2007 Page: 1 of 3

 Project Administration, Procedure No: 1
PROJECT COST CONTROL

5. Standard Project Information, such as project name etc., is entered on the sheet.
Base Data including formula base date, formula elements, proportions, and base
indices are then entered.

The indices are updated for each period and the contract value, (subject to
escalation by the Head Contract formula), and payment for the period entered.
(Note that certain items in the Head Contract may not be subject to escalation, or
may be subject to a different escalation formula as in the case of nominated
subcontracts. These must be excluded in the contract value amount, and
payment, for the period).

Refer to Attachment # for further details of completing the Escalation Detailed

Listing and the calculations required.

Forecasting using the Frozen Indices Principle

6. Attachment # also shows the calculation of escalation due on the balance of the
contract at any particular period. This forecast is done using the indices for the
last period. No attempt is made to forecast future indices.

BY USING A SPREADSHEET SPECIFICALLY SET UP THE CALCULATION OF

ESCALATION EASY, IT IS POSSIBLE TO FORECAST ESCALATION USING
FORECAST INDICES. THIS IS DONE BY ENTERING PROVISIONAL(P)
INDICES FOR FUTURE PERIODS AND FORECASTING CONTRACT VALUES
FOR EACH FUTURE PERIOD. THE PROVISIONAL INDICES ARE ADJUSTED
LATER WHEN PUBLISHED. THIS CAN BE VALUABLE ON A MANAGEMENT
TYPE CONTRACT TO ASSIST THE CLIENT IN DETERMINING FUTURE CASH
REQUIREMENTS IF ESCALATION IS A MAJOR FACTOR.

Spreading Escalation over Cost Codes

7. For concise cost reporting it is ideal to be able to spread the escalation due
under the Head Contract Formula over the cost code items that are covered by
the formula. With manual cost control methods this is impractical due to the
nature of the task. Instead the escalation will appear as a single line entry in the
Project Financial Summary and will be balanced by negative variances in each
cost code due to the costs, or commitments, having included in them the effects
of escalation.

THE SPREADSHEET IS SET UP WHERE IT SPREADS OVER EACH

APPROPRIATE COST CODE THE TOTAL ESCALATION CALCULATED FROM
THE ESCALATION DETAILED LISTING (TO DATE AND BALANCE). THIS
TOTAL ESCALATION IS SPREAD IN PROPORTION TO THE CURRENT
ALLOWEDS FOR EACH COST CODE (INCLUDING VARIATIONS IF
DESIGNATED AS SUBJECT TO ESCALATION). THESE PORTIONS OF THE
ESCALATION APPEAR IN THE COMMITMENT/COST ALLOCATION
RECORDS, OR THE PROJECT ASSESSMENT SUMMARY AS IN THE CASE
OF LABOUR AND PLANT.

Other Head Contract Formula

October 2007 Page: 2 of 3
 Project Administration, Procedure No: 1
PROJECT COST CONTROL

8. If there are other Head Contract Formulae for items such as nominated
subcontracts a separate Escalation Detailed Listing is maintained for each
formula. The calculations etc. are exactly as above except that the contract value
and payments for any period would relate to only those items of the estimate
covered by the particular formula.

Escalation on Commitments

9. If any particular commitment, such as a major material order or subcontractor, is

subject to escalation an Escalation Detailed Listing must be maintained for each
separate order or subcontract. Providing the escalation formula for the
commitment is similar to the form of the Head Contract Formula the procedure is
exactly as above except that the contract value and payment for the period
relates to the value of the order or subcontract.

10. The values of escalation for each commitment (to date and balance) are entered
into the Commitment Allocation Record as shown in Attachment #.

THE FACILITIES FOR COMMITMENT ESCALATION FORMULAE ARE

SIMILAR TO THOSE FOR THE HEAD CONTRACT FORMULA. AGAIN THE
REPORT SHOULD AUTOMATICALLY CALCULATE RESULTS INTO THE
APPROPRIATE COMMITMENT ALLOCATION RECORD.

October 2007 Page: 3 of 3

 Project Administration, Procedure No: 1
PROJECT COST CONTROL

SECTION 5D – PROJECT ASSESSMENT

Project Assessment

Introduction

1. One of the requirements of the cost control system is to produce a financial

summary that gives Group management an accurate forecast of the final
financial status of the contract.

2. It is part of the Group's standard reporting system that the following two financial
reports are submitted by each project each month:

• Project Assessment Summary.

• Costs and Claims Forecast.

The following relates to the preparation etc. of the Project Assessment Summary.
Refer to Procedure # for details on the Costs and Claims Forecast.

Project Assessment Summary

3. The two page Project Assessment summary provides data relevant to:
a. Forecast Final contract value. )

b. Forecast Final costs. ) For each block of cost codes

c. Codes as defined earlier. ) as defined earlier, including

d. Forecast Final margin. ) labour and plant if used.

e. Forecast Final completion times/dates.

f. Sundry other summaries.

4. If costs have been recorded accurately and allocated correctly, if quantities of

work done have been properly evaluated, if all commitments have been recorded
and the corresponding alloweds correctly assessed, if progress claims have been
lodged in the maximum permissible amounts and if the forecasts to completion
have been carried out realistically, the information shown on the Project
Assessment Summary should be mutually consistent. If, however, some of the
information is discordant with the rest, it will indicate that one or more of the
above conditions has not been met and thus investigation is needed to identify
and remedy the cause of the discrepancy.
I
5. Most data entered in the Project Assessment Summary comes either directly
from the cost reports (labour and plant) and the commitment and historical costs
allocation records. The remainder comes as explained in the following.

October 2007 Page: 1 of 4

 Project Administration, Procedure No: 1
PROJECT COST CONTROL

6. The format of the Project Assessment Summary is as per Attachment #. This

format is as produced by “COMPANY NAME”. An alternative format, may be
preferred where manual methods of cost control are used. (Refer attachment J).

7. The method of completing the financial aspects of the Project Assessment

Summary (Page 1) is noted in detail in Attachment #.

8. An interim step may be necessary, to complete the Project Assessment

Summary, depending on the number of cost codes used. This interim step
involves the collection of data from the Commitment and Cost Allocation Records
and sub-totalling into cost code blocks. A record lay out identical to the Project
Assessment Summary can be used for this purpose.

Additional Summary Information

9. Refer to Attachment # for additional details required to be submitted as part of

the Project Assessment Summary (page 2).

Reviewing the completed Assessment Summary

10. On completing the Project Assessment Summary, and before distributing it, it is
good practice to review it as follows to be sure that there are no inconsistencies
that throw doubt on the accuracy of the document.

• Have any Client contingencies or provisional amounts been included in

the current alloweds? As explained in Section 7 Client contingencies,
or provisional amounts for work that may not be done, should be
balanced by a negative variation at the start of the contract and
progressively introduced as variations if and when the Client issues the
appropriate variation order. If this is not done the contract value can be
exaggerated as the contract progresses especially if the Client does
not use the contingency.

• Do the variations allow for future known costs for Client provisional
sums and provisional amounts? If not the final contract value will be
underestimated particularly since such provisional sums often occur
towards the end of the contract.

• Has there been a significant change in any of the totals since the last
reporting period? Such changes may have a straightforward
explanation, on the other hand it may show up an error in forecasting
or similar.

• Has the actual commitment to date changed since the last period? If it
hasn't, either no orders have been placed or the commitment records
are not being maintained.

• Have the alloweds to commit changed since the last reporting period?
If they haven't then commitment records have not been kept up to
date.

October 2007 Page: 2 of 4

 Project Administration, Procedure No: 1
PROJECT COST CONTROL

• Has the forecast final cost changed during the past period? If not when
did it last change? Is this because the forecast hasn't changed or is it
because a proper forecast hasn't been done for some time?

• Does the calculated final commitment vary substantially from the

forecast final cost? If it does a reasonable explanation is required
particularly if the contract is say more than 50% complete. As the
contract progresses, actual commitment (which equals actual cost in
the case of historical cost codes and commitments in the case of
commitment cost codes) should equal the forecast final cost. Any
discrepency can only be due to commitments not being recorded, or
alloweds being incorrectly assessed.

• Does the claim to date less the costs to date confirm the forecast final
margin? At the start of the contract this is unlikely due to establishment
costs, the effects of learning curves etc., or alternatively claims may be
inflated due to claim items being front loaded. However as the contract
progresses the claim less costs figure should start to confirm the final
margin as forecast by the Project Manager.

• Is the percentage complete by time comparable to the percentage

complete by alloweds? If the percentage complete by time is greater
than the percentage complete by alloweds it suggests that the project
is behind schedule. Have time extension costs been alloweds in the
forecasts, or instead acceleration costs if necessary?

• Do the current original alloweds (col. 2 Attachment #) equal the original

contract value (col. 1)? If not, why not?

Timing and Distribution

11. The Project Assessment Summary is a key document in “COMPANY NAME”’S

control system and thus it warrants careful attention. Even though some detail
(e.g.. materials and subcontracts actual costs) cannot be entered until a few
weeks after the close of the relevant accounting period, much of the detail can
and should be entered earlier in the month. In particular, project managers
should schedule their time so that the work of forecasting the final situation is
done at a time clear of the pressures of end-of-month reporting. If the actual
costs of materials or subcontracts contain any surprises, the effects on the
forecast final figures can still be brought in at the last moment. Note that a
system based on commitments should minimise the risk of such surprises and
should facilitate forecasting of final results.

12. In respect of manual cost control systems all dollar amounts in the Project
Assessment Summary should be in full. Figures relating to firm data shall not be
rounded off, but those relating to forecasts should be rounded off to the nearest
$1,000.

October 2007 Page: 3 of 4

 Project Administration, Procedure No: 1
PROJECT COST CONTROL

13. Does the calculated final commitment vary substantially from the forecast final
cost? If it does a reasonable explanation is required particularly if the contract is
say more than 50% complete. As the contract progresses, actual commitment
(which equals actual cost in the case of historical cost codes and commitments in
the case of commitment cost codes) should equal the forecast final cost. Any
discrepency can only be due to commitments not being recorded, or alloweds
being incorrectly assessed.

October 2007 Page: 4 of 4

 Project Administration, Procedure No: 1
PROJECT COST CONTROL

SECTION 6 – VARIATION, EXTRAS & DELAYS

VARIATIONS, EXTRAS & DELAYS

Introduction

1. It is vital that variations, extras and delays to any contract be recognised,

measured, priced, claimed, approved and paid for with minimum delay. This is
necessary to preserve a proper profit situation and proper cash flow.

2. This section of the cost control procedure sets out the standard method of
controlling variations. It does not cover aspects of pricing, claiming etc. nor
aspects relating to extensions of time, both of which are covered in other
procedures.

3. In cases where the Client specifies detailed control procedures for the handling
of variations, extras and delays, this procedure may need to be modified
accordingly.

General

4. As discussed in the procedure on administration of variations the action steps in

processing a variation are:

a. Identification.
b. Notification of Intention to Claim.
c. Obtaining Client recognition.
d. Measurement.
e. Pricing.
f. Claiming and obtaining Client approval.
g. Treatment of escalation.
h. Cost control.
i. Payment.
j. Filing and recording.

During this process any variation can have the following status:-

a. Not yet submitted (but costs may well be being incurred).

b. Submitted to Client for approval but not yet approved by him.
c. Approved.

The method of control of a variation does not vary according to its status.
However it is important to identify within the control documents the status of a
variation since until such time a variation is approved the final value is not known.
Hence the alloweds for a submitted variation, and included in the control
documents, may have to be adjusted when the variation is finally approved.

5. The other factor that influences the method of control is whether of not the
October 2007 Page: 5 of 4
 Project Administration, Procedure No: 1
PROJECT COST CONTROL

variation is subject to escalation. When a variation is priced and submitted, it will

usually be stated as being one of the following:-
a. not subject to escalation.

b. subject to escalation with effect from the date of the submission of the
price for the variation.

c. subject to escalation with effect from the same date that is used for
calculation of escalation under the Head Contract escalation formula.

6. The choice between the above three must take account of the Client's stated
requirements if any. From the point of view of convenience in cost control either a. or
c above are preferred.

Cost Control

7. As soon as a variation has been identified, a decision must be made as to

whether the labour, plant, materials and subcontracts involved will be costed to
new specially-allocated cost codes or to numbers within the established system.
In addition to the factors normally considered during design of a cost control
system, account must be taken of the expected amount of backup information
that the Client may require in substantiation of the claim for the variation.

8. To avoid a proliferation of cost codes, small variations may be lumped together

under a code termed "miscellaneous variations".

9. Foremen, Accounts and other associated personnel must be advised when a

new cost code is raised.

10. When the estimate of a variation has been completed it shall be split into the
alloweds for the relevant labour, plant, materials and sub-contract cost codes as
decided in accordance with the above.

11. The split of this estimate into its various cost codes together with margin and
total is then entered on the form as per Attachment 6A "Variations - Cost Code
Split".

The labour dollars alloweds should be based on the estimate labour rate and
these amounts are those to be allocated to each cost code number as relevant.
The difference between the above labour dollars alloweds and the amounts in
the labour part (at current rates) of the estimate of the variation should be shown
in the column "Escal. incl.". Note that this form also makes provision for recording
the amounts finally approved by the Client. If these are different from those
submitted, the Project Manager shall decide whether the difference is of sufficient
significance to warrant adjustment of cost control documents, etc.

12. The split of estimate as entered on the "Variations - Cost Code Split" should be
transferred to the relevant cost control documents at the time appropriate to the
maintenance of proper cost control. For example, details of a major variation
shall be transferred immediately before costs are to be incurred even though it
may still have a status of not submitted. Details of minor variations should be
transferred on a regular basis, e.g.. monthly. However, if costs are not being
October 2007 Page: 6 of 4
 Project Administration, Procedure No: 1
PROJECT COST CONTROL

incurred in the meantime, it is preferable not to transfer variations to the cost

control documents until they have been approved. This minimises the effort of
having to update the documents in the event that the approved variation does not
equal the submitted variation. Each item on the "Variation - Cost Code Split" shall
be ticked when transferred to the cost control documents.

13. When variations and extras become numerous, there may be a need to keep a
record of the changes made to the value of each cost code. A system is
suggested in Attachment # which can also be used as a summary to date of the
project's alloweds.

14.All costs incurred (labour, or extra material and subcontract) in carrying out a
variation shall be debited against the cost codes used in the "Variations - Cost
Code Split". It is important to ensure that those responsible for writing and check
in time sheets fully understand what cost codes are to be used.

Reporting Variations in the Project Assessment

15. Once variations data is transferred into the cost control documents their influence
on the contract value etc. will automatically flow through to the Project
Assessment Summary except as follows:-

a. Extra over margin generated by variations must be added to the original

contract margin in the Project Assessment Summary.

b. Escalation on variations must be carefully examined if of significance.

When variations are not subject to escalation, or are subject to escalation
as per the Head Contract, then inclusion of the variations in the payment
for the period as per the Escalation Detailed Listing will effectively allow
the correct escalation amount in the Project Summary. Variations subject
to a different basis of escalation must be calculated separately and
included separately in the Project Assessment Summary if of significance.

16. When controlling variations it is essential to be realistic as to the amounts that

the Client is expected to approve. Do not include contentious claims for
variations, or any other similar forms of claim, in the control documents. Leave
these for comment by the Project Manager in the space provided at the end of
the Project Assessment Summary - sheet 2.

PROJECT COST CONTROL AND VARIATIONS

17. VARIATION DATA IS FED INTO PROJECT COST CONTROL AFTER THE
"VARIATIONS - COST CODE SPLIT" STAGE.

18. VARIATIONS SHOULD SHOW THE STATUS OF APPROVED, SUBMITTED OR

NOT SUBMITTED. THIS DOES NOT INFLUENCE THE METHOD BY WHICH
THE VARIATION IS CONTROLLED BUT GIVES THE ABILITY TO PRINT
VARIATION REPORTS FOR THE CLIENT, OR THE PROJECT'S, USE
ACCORDING TO THEIR STATUS.

19. A VARIATION IN “COMPANY NAME”. PROJECT COST CONTROL SHOULD

BE IDENTIFIED AS BEING EITHER FIXED OR SUBJECT TO ESCALATION AS
PER THE HEAD CONTRACT FORMULA. ESCALATION CALCULATIONS. THE
October 2007 Page: 7 of 4
 Project Administration, Procedure No: 1
PROJECT COST CONTROL

SPREADSHEET DESIGN SHOULD BE SUCH THAT THE VARIATIONS ARE

AUTOMATICALLY CALCULATED AS DATA ON ESCALATION IS FED INTO
THE SYSTEM PROVIDING THE PAYMENT FOR THE PERIOD CONCERNED
INCLUDES THE APPROPRIATE VALUE OF VARIATIONS INCLUDED IN THE
PAYMENT.

20. THE CONTRACT MARGIN SHOULD BE AUTOMATICALLY ADJUSTED WHEN

VARIATION MARGIN IS ENTERED AFTER THE “VARIATION COST CODE
SPLIT’ STAGE

October 2007 Page: 8 of 4

 Project Administration, Procedure No: 1
PROJECT COST CONTROL

SECTION 7 – EXCEPTIONAL ITEMS

EXCEPTIONAL ITEMS

Introduction

1. This section of the procedure discusses different types of contracts, and

particular contract items, that require either a modified cost control procedure, or
a method of control that has not been discussed in detail in the previous
sections.

SCHEDULE OF RATES CONTRACTS

2. Confusion sometimes occurs in Schedule of rates contracts due primarily to the

fact that at the start of the contract quantities of work required are not firm (in
contrast to the situation in a Lump Sum contract). As the work proceeds the
estimates of quantities become firmer and firmer, usually involving changes from
the original estimated quantities. Such changes are not variations in the accepted
contractual sense. However, true variations can occur in a Schedule of Rates
contract, as for example when the specified quality of work is altered or changes
in method are necessitated as a result of a requirement or action by the Client or
if the Client changes the programme logic or schedule timing requirements.

3. True variations on a schedule of rates contract are treated in accordance with

Section 6 of this procedure.

4. A further difficulty with Schedule of Rates contracts is that the schedule is usually
much condensed compared to the estimate. In other words, changes in one
schedule item will usually require changes in several of the project cost code
items. For example changes in rock excavation quantities will influence not only
direct, labour and plant involved but also miscellaneous costs for explosives,
steels, etc. Also the Indirect Costs and margin amounts included in the tender
amount for rock excavation will be affected.

5. The following general approach is described as a guide to the Project Manager

who shall detail the procedure to be used taking account of the particular
characteristics of the project including any unbalancing of tender rates and
inclusion of establishment items.

a. When preparing the Estimate Split Summary a more detailed summary is

required to record the various cost code items to which each schedule
item has been allocated and the corresponding alloweds. A format similar
to Attachment # "Variations - Cost Code Split" would be appropriate for the
purpose.

b. When initially setting up the labour, plant, commitment and miscellaneous

costs reports, enter the original contract quantities and related alloweds as
if these were firm. Wherever practical, use units and quantities which
appear in the Schedule. For example, for items such as explosive and drill
October 2007 Page 1 of 6
 Project Administration, Procedure No: 1
PROJECT COST CONTROL

steels which depend on rock excavation quantities, use the rock

excavation unit and quantity against explosives and drill steels. It may be
desirable to include explanatory notes in the description column.

c. Operate the cost reporting system as normal as far as possible. This

applies particularly to items where the quantity of work done can be
accurately identified. Where cost code items cannot be readily associated
with specific work items, e.g.. typically, supervision, it will usually be
adequate to devise and use a percentage complete type assessment of
"alloweds" based on realistic groups of specific work items. Alternatively a
percentage complete based on the ratio of total claim to date to final
contract value may be appropriate. This approach should identify areas
where productivity rates are below estimate. Note that if the quantities of
work done exceeds the original quantities alloweds, this should merely be
noted at this stage and the actual quantities should be used in the cost
reports.

d. The Project Manager shall decide when to adjust the "total quantity
alloweds" figures and the relevant dollar amounts. This will depend on the
details of the work, how predictable quantities are, etc. However, in
general, when the final quantity for a particular item is known fairly
definitely, the adjustment should be made.

e. Whilst the above should provide a regular spotlight on current

performance, it will not provide much indication of the forecast final result.
Thus it is necessary to carry out a separate assessment of the overall
situation, broadly as follows:

i. Based on the latest forecast of final quantities, calculate the

forecast final income, including escalation, variations, etc.

ii. Based on the same quantities as above, calculate the

quantities of work still be performed and estimate the costs of doing
this work using up to date productivity information.

iii. Add the recorded costs to date to the above estimate to

complete.

iv. Review the above to ensure that like is being compared to

like.

MANAGEMENT CONTRACTS (PROJECT AND CONSTRUCTION)

6. The majority of Project Management and Construction Management contracts

consist of:

• A fee for management. The fee is often a lump sum, or based on a

percentage of the direct cost.

• A sum for direct costs in the form of a budget, or provisional amounts for
subcontracts, or a guaranteed maximum price based on a budget etc. This
sum can vary significantly, or at least the items within the sum can, as orders
October 2007 Page 2 of 6
 Project Administration, Procedure No: 1
PROJECT COST CONTROL

are progressively placed.

7. To control these types of contracts separate control documents should be

prepared for the fee and the direct costs. Project Costs Ledgers should be
similarly maintained as if they were two separate contracts.

The fee component of the contract is controlled in the normal manner. Any
changes to the fee resulting in a change in the scope of the direct work should be
fed into the control documents as variations.

The direct cost component of the contract should be similarly controlled with the
alloweds being the provisional sums, or budget estimates, for the various items in
the contract. Most contracts of this type require all direct work to be
subcontracted so it is relatively easy to identify subcontract packages and control
them accordingly.

MAJOR MATERIALS WITH WASTAGE

8. As discussed earlier in this procedure major material supplies should be

controlled by means of Commitment reports. Providing wastage is controlled, and
providing quantities supplied match quantities measured and paid for, no further
control is required.

9. The technique is illustrated by the following example of concrete purchased for a

contract.

• The estimate alloweds for 1000 m3 of concrete at a price of $75.00 per m3.
The estimator also assumed 5% waste and hence alloweds for a total of 1050
m3 to be supplied.

• A Commitment Allocation Record is established for the supply of concrete.

The total alloweds is $78,750 (1050 m3 x $75).

An order is placed on a supplier for 1000 m3 of concrete at $73 per m3. The total
commitment of $73,000 is recorded. Thus the variance assuming no wastage
occurs is +$5,750.

A second dummy order is entered under commitments for concrete wastage, i.e..
$3,650 (50 m3 x $73). The variance including allowance for wastage is now +
$2100 (78,750 - (73,000 + 3650)).

• From now on control should be centred on ensuring that wastage is kept within
the 5% alloweds. This is where the foreman's daily record of concrete pours is
relevant. Also as the contract proceeds progressive totals of concrete placed
should be compared to the estimate quantities to ensure that they are the same.
If not there may be cause for a variation, or it may show up as an error in the
estimate.

• If the wastage varies from the 5% then a variation should be made to the dummy
October 2007 Page 3 of 6
 Project Administration, Procedure No: 1
PROJECT COST CONTROL

order for waste concrete. If the actual quantities vary from those alloweds in the
estimate a variation order should be placed on the supplier. In both cases the
variance should be adjusted accordingly.

CONTINGENCY (“COMPANY NAME”.)

10. Any contingency alloweds in the estimate should be highlighted as margin until
such time the contingency is used up through costs occurring for the reason that
the contingency was there in the first place. Contingencies should not be put into
alloweds as they become buried, lost, and their original purpose forgotten.

CONTINGENCY (CLIENT)

11. The Client usually specifies a contingency in a contract to cover unforseen costs
and to provide money for likely variations. Such contingencies should not be
considered as part of the Final Contract Alloweds until such time they become a
variation.

Client contingencies should be included in the original estimate alloweds to

ensure that the alloweds balance with the tender. A dummy negative variation
should then immediately be generated equal to the value of the contingency. This
will avoid the contingency being carried forward into Project Assessments and
inflating the Final Contract Alloweds.

PROVISIONAL SUMS, AMOUNTS, QUANTITIES

12. Provisional sums, amounts, quantities etc. appear in contracts in a variety of

forms. The description of the provisional item in the contract must be studied
carefully to determine how best to treat it in the control documents as described
below.

13. One common form of provisional sum is for nominated subcontracts.

The exact value of the nominated subcontract is not known at the time of tender
and a provisional sum is nominated in its place.

Even though it is a provisional sum the feature of this type of provisional sum is
that there is no doubt that the work covered by the provisional sum will be done,
unlike some other forms of provisional sums. This form of provisional sum is
treated like any other alloweds in the control document. The alloweds
(provisional) amount is subsequently adjusted when the Client issues a variation
order when the nominated subcontract is finalised.

14. Other provisional sums often allow for items that may never be carried out under
the contract. They are in fact another form of contingency for specific items that
may or may not eventuate. An example might be "Allow the provisional sum of $x
for dewatering, if required, to be carried out under separate contract". Sometimes
they are in the form of provisional quantities that have had to be priced at the
tender stage. An example of this type is "Disconnection and removal of
uncharted services encountered during excavation - Provisional Quantity 10 No."
With this type of provisional sum a variation order, or Client instruction, is
required at the time of doing the work.

The method of controlling these provisional sums, or quantities, is the same as

for Client contingencies. They are included in the original alloweds in the control
October 2007 Page 4 of 6
 Project Administration, Procedure No: 1
PROJECT COST CONTROL

documents to balance with the tender. They should then be negated by dummy
variations. If and when the work is eventually done the alloweds are adjusted by
the variations that the Client should issue for such provisional items. This avoids
the Final Contract Alloweds being over-inflated as the contract draws to a
conclusion due to the provisional items having been overlooked.

PC SUMS

15. PC sums are often nominated in the contract for items which had not been
completely specified at the time of tender. They are another form of provisional
sum although contractually they are sometimes interpreted differently. Items
subject to PC sums are not normally subject to being deleted from the contract.
They will have to be supplied eventually, it is just a matter of what price is finally
paid for them.

PC sums are normally the subject of some form of variation order which contains
details of the precise item to be purchased. The PC sum is included as an
alloweds in the control documents and is subsequently adjusted as result of the
variation order if the change in value warrants such adjustment.

METHOD CHANGES

16. The various reports and records in the cost control procedure could become
invalid as a relevant control document if changes in plan are not reflected in the
alloweds in each report. Such a change in plan could be a change in the
construction method or a decision to use a subcontractor for some work instead
of using direct labour or vice versa.

17. The general procedure for reflecting such changes in all cost reports is:

a. Make an estimate of the changed method and allocate cost codes (new or
existing as considered most appropriate).

b. List the items in the various reports and records which are redundant due
to the adoption of the changed method.

c. Check that the total cost in a. is equal to or less than the total cost in b.
and if relevant decide whether to treat the difference as extra margin or to
show it somewhere in the cost reports as a contingency.

d. Amend the various reports and records by deleting all items listed in b.
and inserting all items in a. and adjusting totals and relevant subtotals.

BACKCHARGES, MISCELLANEOUS SALES AND INSURANCE WORK

18. The usual accounting procedure is to treat revenue for backcharges,

miscellaneous sales and insurance work as a credit to costs, not as an increase
in alloweds.

New cost codes should be allocated for backcharges etc. and labour, plant
reports and commitment, costs records modified or established accordingly. The
reports or records are maintained in the usual manner. As costs are incurred for
October 2007 Page 5 of 6
 Project Administration, Procedure No: 1
PROJECT COST CONTROL

backcharges etc. negative variances will result which will distort the period and
to-date reports and records. Two alternative methods are possible for control of
this type of cost, these being by the adjustment of alloweds, or the forecast cost.

19. Adjusting the alloweds to equal the costs to date will overcome the distortion of
to-date and period reports due to negative variances. When invoices for
backcharges, or claims for insurance work, are finally paid and credited to each
respective cost code, the alloweds for each cost code has to be adjusted back to
zero value. Any difference between monies invoiced, or claimed, and monies
paid will then be automatically taken care of. If in the meantime, however, the
alloweds have been carried forward to the Project Assessment the final contract
value will be incorrectly overstated.

20. Alternatively, instead of adjusting the alloweds, the negative variances can be
"corrected" by forecasting a future negative cost (i.e.. a credit). When invoices for
backcharges, or claims for insurance work, are finally paid and credited to each
respective cost code, the forecast yet to commit/spend for each cost code is
adjusted back to zero value. Any difference between monies invoiced, or
claimed, and monies paid will then be automatically taken care of. This is the
preferred method since it correctly reflects the situation of costs being incurred
resulting in negative variances, ultimately offset by revenue that reduces the
cost, hence variance, without adjustment of the alloweds.

October 2007 Page 6 of 6