Why Close-Out Matters to Your Margins

On just about every project in the built world, an interesting phenomenon occurs: The line between substantial completion (a legal term used to define the moment a project is sufficiently complete per the contract documents) and final acceptance (the actual moment a project is truly complete) becomes blurred in the customer’s eyes. For many contractors, both trade and general, this block of time represents a source of margin erosion for myriad reasons:

• Personnel swaps—Supervisors and managers are pulled from a project toward the end of a job to focus on new endeavors.
• Misestimated punch list or deficiency list—The punch-list process garners little respect, leaving a small amount of time for a large, important list of tasks.
• Paperwork—The as-built documents, operations/maintenance manuals, training, etc., become a distraction

The common thread in each of these elements is a negative impact on the customer’s business with and perception of the contractor. Pulling personnel too quickly leads to poor punch-list completion, a deluge of incomplete paperwork and clients’ competition for your attention. Failure to observe the sanctity of the close-out process damages relationships and extends a company’s risk profile. Best-in-class businesses are proactive in approaching close-out with the same fervor they did commencement. Three critical elements describe an effective companywide close-out strategy: defined key performance indicators (KPI), a consistent and standardized approach, achievement of the customer’s version of “done.” 

The Metrics

Construction businesses continue the migration towards data-driven strategies, but they fail to use the data to drive decisions and behaviors. For instance: The proliferation of software tools that capture close-out data, such as documentation, and even punch lists, are ubiquitous. The first step to understanding the impact of close-out on a company is to mine the data and show the correlation of time and activities. Other critical aspects of close-out can be measured, including the following:

• Punch-list/deficiency-list dollars—All work associated with close-out is captured in one budget code, separating work packages.
• Close-out compliance—Whether it is the close-out strategy meeting or the gathering of documents, project personnel are recognized globally.
• Change order activity—The close-out phase forces change order closure, in many cases to the detriment of the project budget.

The most important aspect of any KPI is the connection back to the firm and its strategic relevance. For instance, change order measurement may only be important to a business that experiences a high frequency of change orders and has a propensity to engage in high-risk closures. These should be used to place optics on close-out and influence upstream and downstream behaviors.

The Process & Tool

Most companies have some semblance of a preconstruction phase, but lack a defined and consistent close-out process, with the process often triggered by some milestone or oversimplified during the preconstruction phase. 

For instance, firms may have triggers tied to an inspection, man-hour percentage or internal phase, such as landscaping, final grading or final cleaning. The steps from there should include an internal meeting focused on strategizing close-out and an external meeting(s) that involves the customer and/or trade partners. Each item should have its own ranking (by level of importance), discussion on strategy, person in charge of its completion and target completion date. 

Lastly, it is important to note that in most close-out discussions, there is little consideration given to the use of dedicated punch-list teams. As such, these groups are often riddled with problems including the following:

• Cost allocation—There becomes an internal battle over how much time is required, which can lead to a cultural war and/or internal divide amongst operational teams.
• Punch-list punting—When the project team knows a special crew is coming in to close, they relegate imminent tasks to punch-list items, leading to cost-allocation issues. 
• Utilization—The company suffers cost overruns because of failed utilization of the procured close-out team.

The Customer’s Involvement

The most important voice in this process is that of the customer. What does “done” mean to them? This should be nailed down and reinforced during the preconstruction phase, as well as the close-out phase. Below is an example of questions and components that should be defined early and revisited throughout the construction process:

• Document collection—Short of the description in the contract, what will be expected in terms of the as-built documents (manuals, training, etc.) in both electronic and paper versions?
• Punch-list process—Who will do the punch list, and what is their experience with this process? What has frustrated them in the past? Will there be multiple inspections?
• Owner vendors and suppliers—These contractors are professionals but lack the element of specific job knowledge. In addition to notification of the selected parties—assuming they have been selected—it should be incumbent on the lead contractors to execute a coordination meeting as part of the preconstruction and close-out processes, as if said parties were on the team already. In cases where they have not been selected, the savvy contractor develops a proactive coordination timeline, working backwards to illustrate important decisions and considerations (e.g. fabrication, municipality, expectations). 

Close-out is arguably the most important phase of the project because it represents so many milestones and leaves an indelible imprint on a customer’s mind. They may forget a botched start, but failing to complete the nagging punch list can mean the difference in the award of the next project.