For long-term construction projects, contractors must accurately estimate the cost to complete (CTC) to precisely determine project performance and avoid surprises that could hurt profitability or deter lenders and sureties. Understanding your CTC early on will give you the opportunity to quickly address issues that hinder productivity or increase your overall costs.
Estimating Cost to Complete
As a running estimate, the CTC should correlate to the difference between the total estimated cost and all costs spent on the project to date. However, failure to realize a project’s true CTC can cause a contractor to improperly identify revenue, resulting in profit fade (see the first blog in the 7 Key Metrics of a WIP Series).
On the other hand, if the CTC is estimated accurately, the benefits are twofold:
- Banks and sureties are more likely to provide assistance
- Contractors have the opportunity to find alternative ways to reduce costs and boost profitability.
There are several steps to ensure the accuracy of CTC reports, including:
- Developing and maintaining solid project budgets and labor schedules (e.g., updating CTCs to reflect change orders, unexpected developments, etc.)
- Implementing processes and tools for monitoring and reporting productivity
- Keeping project managers accountable for tracking a project’s financial performance
- Properly estimating direct costs for all remaining work to meet or exceed budgeting and financial expectations
Investing the time and resources into developing accurate CTC estimates is crucial to keep budgets on track and ensure project success. Implementing the right systems and tools can help you make adjustments when necessary to eliminate inaccuracies in estimating your overall project costs. For more information on Cabbage’s solutions and services, contact us today.