The Truth is Easy To Hide

Let the games begin. Every month, project managers and superintendents engage in the greatest show on earth—job cost reporting. While this essential financial management process can be fairly simple, some managers might describe the process of job cost accounting as “the reckoning.” This monthly exercise often resembles the hapless chap bellying up to the bar at the end of a raucous evening to settle the tab, only to find lint in his billfold. Project managers stare at reams of tabular job codes reconciling budgets to actuals only to see more negatives than a politician’s approval rating. What will the field superintendent think when he sees all of this red? Well, that depends. Many field managers never see a budget so much as a cost report, so the good news is the manager only has to worry about senior management’s perspective. The most feedback a superintendent or foreman may receive is the drive-by from senior management expressing their extreme disappointment for poor financial results on their project. This would be the equivalent of a basketball team never seeing the scoreboard during a game, only to receive a halftime tongue-lashing from their coach for losing. While highly ineffective, this approach to providing effective job cost feedback occurs every day on construction sites.

However, there is one alternative to presenting such gloomy information. Sandbagging and diamond dusting hardly seem like GAAP-approved accounting terminology. In fact, no accounting book or construction text discusses these finer points of budget manipulation. Rather than have information floating around the firm that is unpleasant, many managers engage in a monthly Kabuki dance that makes everything look rosy. Labor code going astray? Move costs from other areas to cover this overage. General conditions running over? Delay the inevitable cost reporting until the end. To many, one beating at the end of the project seems more practical than eight months of beatings during the life of the project. Unfortunately, this game is hardly uncommon.

The Fear Factor

What is the compelling reason a manager would manipulate a job cost report in such a way to hide the truth? Dishonesty? A lack of integrity? The answer is typically far less insidious. By deeply examining the root cause, one will find several reasons for old-fashioned sandbagging. First, what is the culture of the organization? Put another way, how is bad news dealt with? Can one expect to be pounded for a negative variance, or do firm leaders respond to bad news in an inquisitive manner? Many firms assail the manager with an accusatory tone, asking, “How could you possibly ever go in the red?” It does not take many harsh responses before a manager will game the system. However, is this simply masking a deeper problem? By hiding the truth, a firm may never know the true cost of their work. Could the problem lie in some other area?

• Estimating: Does the firm have a process that provides real-time feedback from the field to the estimators?
• Customers: Not every customer is created equal. In masking cost overruns, can a contractor really know who their great customers are versus the ones who commoditize their services?
• Field productivity: What is the firm’s true core competency? Is the firm pricing a service inappropriately, underselling their capabilities?

To be clear, a manager who routinely produces overages and negative variances probably deserves a frank conversation. Managers should be held accountable for grievous errors and poor judgment. However, if the culture of the firm is such that managers are shot first before a reasonable trial, senior management shouldn’t be shocked to see this new form of budgetary Darwinism.

The Hero Complex

Fear is not the only motivator. Many project managers are eternal optimists. The “make it happen” mentality is alive and well amongst many managers as they scrape every nickel in the project buy-out and purchasing. For every hole, they have a true belief that the hole can be filled. “We’ll make it up by the end” is the rallying cry of many managers as they rationalize fudging the numbers. Most experts would agree that no grim malfeasance is at play to “Enron” the project financials. Saving the project from disaster is every manager’s dream.

When one considers the bigger picture—overall financial health of the firm, bonding capabilities, access to firm-wide financing—the solution might take the form of an educational moment. For instance, when a project manager sees the impact of one manipulation, compounded by eight to 10 managers, then compounded by 15 to 30 other projects, a small “white project lie” begins to look like a black mark on the financial health of the firm. This deleterious effect on the firm’s financial statements becomes very real very quickly when illustrated in this type of setting. All of a sudden, looking like the hero to the firm and to a customer plays a secondary role to the need for realism every month.

Begin with the Budget

The problem with most job cost feedback systems is not the software. Today’s marketplace provides many systems of varying capabilities. Blaming the firm’s inability to accurately forecast a project’s costs and profits on software is downright wrong. It begins with a budget. The budget is the cornerstone of the financial equation. Just as a building that is built on a weak foundation fails, so too does the financial integrity of a company with a wavering budget.

Estimators often desire to code everything to gain accurate performance feedback. From the field’s perspective, one labor code would suffice—call it “labor.” In this case, the best method is somewhere in the middle. Simply put, the budget should reflect how the project will be built in the field. Arguing for an unrealistic number of labor codes will simply lead to labor codes that will never be used. For example, a plumbing contractor should probably have more than two codes—above ground and below ground. Conversely, it would be inappropriate to have labor codes for every water closet, lavatory, urinal, etc.

The following list illustrates fundamentals to consider when establishing an honest and robust job costing process:

1. Realistic budgets from day one — Do not lie to the field. If there are 500 hours in a labor code, show 500 hours. Lying to the field is the worst kept secret in the industry. If your process lacks integrity, do not expect the results to have integrity.
2. Transparent budget development — Once the job is sold, involve the field managers in the budget development. It is uncanny how the accuracy of data improves when the people who will use the information are active in its creation.
3. Real time — As technology improves, so does a firm’s ability to achieve real-time job cost feedback. Making course corrections becomes a great deal easier when you have relevant information.
4. Evaluation vs. interrogation — You must understand why cost over/underruns have occurred. However, impersonating the Spanish Inquisition is one quick way to demoralize a team and also engage a project manager in damage control.
5. Connection to the project — Does your firm have a process that lets you evaluate the schedule or safety or document control from a financial perspective? For instance, the schedule shows a project missing its substantial completion by two weeks, but the cost report shows no overrun on general conditions. Is this realistic?
6. Education — Because many project managers were not formally trained in finance, the firm takes on the responsibility to educate everyone on the intricacies of their system as well as the hows and whys of a strong job cost accounting system.

As contractors migrate from reams of paper to more technological processes, the elements of job cost accounting remain the same. Great project managers view this aspect of a project as a predictive tool to guide them to the finish line. In order to be effective stewards of the project’s financial health, the subterfuge must end. The financial truth can set a firm free and point it toward a more profitable future.