In the past year we have seen building projects being cancelled, put on hold, and otherwise disrupted by shortages of both materials and labour. There are no shortages of explanations though, as it has been blamed on everything from Brexit to the pandemic, not to mention shipping problems and material scarcities. But in spite of that we are now seeing a steep rise in construction demand as various lockdowns ease and contractors rush back to work. It's a compound problem and needs a comprehensive solution.

Simplifying the issue greatly, Brexit problems stem from the 60% of imported construction materials that come from the EU and the red tape that now accompanies them, causing mayhem at the docks. And global shipping was already in chaos as a result of the pandemic causing labour shortages at Asia-Pacific docks, container shortages, incidents like the Suez Canal blockage and rising shipping costs.

Some materials - steel, timber and concrete rebar - have risen dramatically in price because of international demand and rising shipping costs, a trend that is beyond the reach of both Brexit and COVID and which will be with us for years to come. New tenders and contracts should reflect this.

The result is that contractors, who are already running on tight margins, are going to find them tightening still further. Schedules will need to be adjusted or workers temporarily laid off while they wait for the materials they need. This brings with it its own risk, as workers may need to go to other projects and may not be available again when needed. Prices will continue to rise and suppliers, who are being hit just as hard as builders, will be rotated more frequently as companies search the market for supplies. And, to put the icing on the cake, we have a shortage of lorry drivers to actually deliver what we manage to come up with!

Comprehensive CVR
If you are a contractor of any size, you should already be running Cost Value Reconciliation (CVR) software, which is the basis of statutory accounts. It should allow you to calculate the retained profit in a contract on a regular basis based on what's left after you have subtracted costs and retentions from its gross certified value. These include things like subcontractor's costs, materials, human resources and labour, plant and other running costs.

It's normally the job of the contractor's Quantity Surveyor (QS), supported by the cost clerk to add costs and subcontractor's liabilities as they occur, covering all on-site disciplines and including snagging and defects and the costs associated with clearing them. All other costs, such as labour, materials and plant are normally supplied to the contractors QS by the contractor's Finance Controller. Integrating both sets of data results in the production of a final residual value, or profit margin.

There are, of course, many other costs that may not be included in the general running costs, but provision needs to be made for them as well. These include adjustments for elements left off the original costing or measurements not picked up by the clients QS, date adjustments and variations or contractual claims not agreed by the client's QS, and even the possibility of liquidation damages being charged by the employer.

You also need to remember the subcontract liability scheme, where contractors have to take into account a subcontractor's tax status as determined by HMRC's construction industry scheme (CIS) and deduct that portion from payments, less the cost of materials.

In the normal course of events a comprehensive CVR solution, like that provided by Access Construction, will cover all of these eventualities, and provide a regular update for management with an accurate and up-to-date final residual value or profit to date figure for the project. It should allow calculations to be made which balance increased material costs against delivery dates and work out, for example, whether paying more for earlier delivery will be cheaper than a fortnight's delay which entails laying off the workforce for that period.

Exceptional Times
I doubt that we will ever have to go through another period like the last couple of years, but we should have learned valuable lessons from our experiences. In substance, that means that the CVR software we choose should be flexible enough to handle any all and changes, react in real-time to problems as they occur, provide an up-to-date database of suppliers and other resources, and to use the information to update running costs and valuations to calculate a final retained value.

Keeping in mind the legal aspects of delays, liabilities and penalties, you also need to check existing and future tenders and contracts to ensure they have provisions to deal with the fluctuation of materials, which may need completion dates to be put back and other hold-ups without incurring unnecessary penalties. To avoid incurring punishing liquidated damages for running behind the master program, contractors should either renegotiate contracts or seek extension of time (EoT). When budgets are tight, it is worth remembering that just one penalty not covered by the provisions in a contract could turn a profit into a loss.

Keeping a tighter rein on CVR also gives contractors the ability to 'play the game'. As suppliers are themselves seeing a much-reduced throughput, they will naturally favour preferred customers. Some have raised prices to maintain their profitability, but the majority understand that the whole industry is under pressure and are willing to work with customers to maintain supplies at the right price and to maintain their goodwill for the future. If you know your current and future liabilities you can pay early to 'jump the queue' - hardly unethical, just good business practice.

Getting More out of CVR
If a CVR is run as it should be it will give you greater control over expenditures and budgets. It should also be a straightforward process and easy to use, and that is exactly what you get with Access ConQuest Estimating. Pricing the work in each construction element (subcontractors, materials, human resources, plant, labour, etc.) enables you to track the value and costs against your accounts and costing system. With an accurate budget, broken down under cost centre headings, you will be able to purchase material and plant and allocate all costs associated with a project, providing easy and accurate Cost Value Reconciliations.

Budget costs are usually revised monthly, based on the remeasured and amended internal valuation detailing what you should have spent, while the costing system calculates what has actually been spent. Access ConQuest Estimating gives you a number of simple ways to bring this information together to generate the final cost value reconciliation sheet.

Statutory Compliance
Cost Value Reconciliation is fundamental to a project's statutory compliance and subcontractors are one of the single biggest areas of cost on a project. Access Construction ERP software comprises Enterprise Resource Planning (ERP) EasyBuild and ConQuest Estimating. EasyBuild informs you of your subcontractor costs and liabilities during each monthly reporting period, with both the commercial manager and the contractor's QS keeping on top of costs and identifying variations and additional works required. With better controls they can ensure that accurate information is available to substantiate monthly client applications.

All of the key financial components of a project can be accessed from one smart dashboard, using information from authorised personnel who can input and adjust profitability, costs, revenues, subcontractor liabilities and valuation adjustments in a secure and controlled environment. CVR data is, of course, maintained for the whole of a project's life, and CVR summary data can be used from all of a contractor's projects to prepare monthly management and period end financial accounts.

www.theaccessgroup.com/construction