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Robust contract valuation methodology a key to ensuring project profitability

Robust contract valuation methodology a key to ensuring project profitability
Many construction contractors have experienced a project that looks as though it’s going to be profitable — until the job is finished, all claims are settled and all costs have been invoiced. The larger and more complex the project, the greater the difficulty in accurately monitoring profit targets and objectives.

“Whether you’re a family-owned sub-contractor or a billion-dollar multinational, the key to accurately manage and deliver objectives and targets is a robust contract valuation methodology,” says Andrew Cole, business development manager, Viewpoint Canada. “You need a solid foundation to assess project performance and identify potential risks and opportunities as early as possible.”

At the end of the day, only one figure matters: the difference between what a company has invoiced the customer and what it cost to build the project. But often, that information is only available after the project has been completed. Instead, companies often resort to creating a distorted picture by taking random snapshots of what has already been claimed and what the company thinks it has spent.

“If your company’s project performance assessment or valuation consists of a monthly review using data compiled from a manual spreadsheet or exported into a spreadsheet from an accounting system, you’re unlikely to be getting an accurate picture of the outcome,” says Cole. “For example, a construction contract may include advance payments or milestone payments that don’t pace the associated costs incurred.” 

Or a construction company may have already incurred a range of costs relating to services or materials that have not yet been invoiced. Effective ongoing project valuation can avoid that trap by providing measurements as close to real-time as possible.” 

The variance between the project valuation and the recorded claim or cost position at any point in time is referred to as Work in Progress (WIP). If an organization is to remain profitable and not overextend itself, it should develop the ability to fully analyze and explain the makeup of the WIP value, to be able to substantiate the WIP position, and accurately validate the forecast final position.

Contract valuation also helps to standardize the way a contractor reports the financial position of a project at any point of progress. When the contract valuation systems and processes are integrated with financial and operational information, companies can create meaningful reports on any project at any time.

“In many instances, the decision on what methodology to use is made at the corporate level,” says Cole. “If they can do it in such a way that they can evaluate these reports against each other, they develop the ability to compare apples to apples on each project.”

However, to realize the operational and business benefits of contract valuation requires a company to adopt enterprise accounting and project management software that fully integrates construction industry-centric job costing and financial information.

“It’s also vital to integrate the huge number of disparate data sources and systems that typically exist in a modern construction company,” says Cole. “All these systems — financial, project management,
job costing, materials and equipment, document control, and payroll information — need to be accurate, up to date and accessible to support integrated contract valuation processing.”

A project can’t stop on a dime to allow for month-end commercial assessment, so any integrated solution must also support the principle of producing a WIP that fully analyzes the financial position of the project in a defensible way.

“An integrated software approach to project finance should establish ‘one version of the truth’ to ensure that operational and financial administration efficiencies are realized,” says Cole.

This content is sponsored by Viewpoint Construction Software in collaboration with ConstructConnect™ Media. Viewpoint provides innovative software to the global construction and capital project industries, offering solutions that help contractors improve project profitability, manage risk, and collaborate effectively. To learn more about Viewpoint, visit www.viewpoint.com. To contact Andrew Cole, email: Andrew.Cole@viewpoint.com.


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