What is it about owners of projects that they allow their budgets to take “baby steps” without ever accounting for the day when the final invoice would demonstrate the substantial consequences of small incremental scope expansions?
“That’s Gonna Cost Ya”
Avoiding the Frustration of “Scope Creep”
It’s no secret that, in spite of your detailed and well-researched cost forecast (schedule of values) that is presented at the signing of the contract, the total cost of the job will begin to change from the very first day when something like differing site conditions or elective changes to the work are added to your scope.
The fact that this is such a common occurrence on construction jobs, has given rise to a new phrase that describes what it is: “Scope Creep.” The term is appropriate because the scope of work creeps up on the contractor and owner and the full weight of the consequences on the budget is not known until the final invoice is delivered at the end of the job.
All of a sudden, the contractor realizes that the owners were not tracking their multiple requests for upgraded tile and countertops, bay window additions, Brazilian hardwood entry doors with sidelights, stamped concrete, and the list goes on.
Not one or two of the upgrades would have killed the budget, but when they are all added together the cost can be staggering. Someone should be watching out for this. All of a sudden, the construction loan is exhausted, savings aren’t enough and the owners are demanding an explanation from their builder. Does any of this sound familiar?
What Are The Available Alternatives?
A couple of alternatives are available at this point:
- the contractor may decide to discount his work thus depriving himself of the profit he would have earned
- the owners may decide to sell an asset or take out another loan on the house to pay for the extras they added.
Regardless of the course of action, there are going to be negative feelings about the project and the contractor and owners will have some resentment for each other. That solid referral that should have come at the end of this job is nowhere to be seen or heard.
What To Do?
The solution is actually very easy and simple. The principle here is to use every invoice to the customer as a complete budget-status-report. This is accomplished by taking the original schedule of values and converting it to an invoice. Typically, a contractor’s invoice will list only the work that has been completed in the current billing period.
So the invoice may have the agreed-upon price of the cost of the concrete forms, reinforcing steel and concrete material, and labor. It may also have happened that during this period of time, the owners decided that they would like to upgrade their plumbing fixtures and add tile roofing. These upgrades will soon be unaccounted for in the owner’s mind because no document would be created that shows the new total cost of the project.
Now, suppose that the contractor knew that these changes would come to haunt him at the final billing along with all the other changes that would be made over the course of construction. What if he added the cost of the upgrades and changes to the schedule of values that were a part of every invoice he delivered?
This easy step would give the owners a monthly snapshot of how the cost of the project was changing before the change was actually installed. The invoice/budget report would now show what the new total cost of the project would be at the end. This would give the owners a chance to rethink their decision as to whether to add the improved roof tiles or plumbing fixtures or not.
In the end, the final invoice would be exactly what the owners were expecting because they were advised each month of the consequences of every little and large change on the total budget. In the example (attached) it is easy to see the benefit of knowing that the changes have increased the cost by over $6,000 and the original budget is now 7.5% higher.
The owner finds this out before the work has been accomplished and before he has even spent the money. At the point of the final invoice, there will not be the, all too familiar, moaning and groaning for explanations.
If you would like a free template of the schedule of values and invoice/budget report on an Excel spreadsheet, simply respond to this post with your name and e-mail address and I will send you each form ready to customize and use on your current and future jobs. Send to firstname.lastname@example.org
About the Author
William F. Dexter is a nationally recognized risk management expert and the former Director of the California Center for Construction Education for the College of Architecture and Environmental Design at California Polytechnic State University, San Luis Obispo.
His professional training and consulting company serve numerous industry associations in the areas of problem-solving and liability mitigation. His overall experience in construction activities spans 40 years as a craftsman, contractor, consultant, educator, and trainer. He serves the Superior Court of California as a Special Master.
Disclaimer: JDi Data’s series of ‘Views from the Expert’ blogs provide information and expanded points of interest for our clients and partners. These are personal blog posts. The opinions expressed here are the authors’ and not those of JDi Data or any other person.