Contract Sum Analysis in Construction Projects

Introduction

Contract sum analysis is a critical process in construction project management. It involves thoroughly reviewing and evaluating the contracted scope of work, costs, payments, and change orders over the course of a construction project. The aim is to determine the true standing of the contract sum at any given point in the project timeline. This enables the project team to identify any issues or discrepancies related to the contract value early on and take corrective action if needed. A comprehensive contract sum analysis is essential for keeping construction projects on budget and avoiding unnecessary costs.

This article provides a step-by-step guide to conducting thorough contract sum analysis throughout a construction project. It will examine the key elements involved, including preparing the necessary documentation, evaluating contract terms, analyzing the scope of work, assessing change orders, comparing billings to completed work, and making final recommendations. Following the methods described in this article will help project managers, contract administrators, and other stakeholders understand the true status of the contract sum at any stage of construction. Performing regular contract sum analysis is vital for maintaining control of the budget on any construction project.

Preparing for Contract Sum Analysis

The first step in analyzing the contract sum is to gather all the required documentation. This provides the data needed to conduct a proper evaluation. The key documents to obtain include:

• Contract: The signed contract between the owner and contractor establishes the original terms, pricing, and conditions. This includes the initial contract sum against which all change orders and billing will be compared.
  
• Scope of Work: The detailed scope of work specifies exactly what is included in the contract in terms of materials, equipment, labor, deliverables, and timeline.
  
• Drawings: The construction drawings illustrate and specify the project design. They are critical for determining percent complete for each area of the project.
  
• Specifications: The specifications lay out the exact type, quality, and performance requirements for all materials and systems.
  
• Bid Tabulations: The detailed bid tabulations from the bidding process confirm the original pricing from the contractor for each aspect of the work.
  
• Change Orders: All approved changes orders showing additions, deductions, and changes to the contract terms.
  

In addition to the documentation, the current costs and billing information needs to be compiled, including:

• The original contract sum per the signed contract
  
• The total of all approved change orders to date
  
• Any pending change orders under review
  
• All invoices submitted and payments made to the contractor to date
  

Finally, identify the key personnel to interview who are most familiar with the project status and details. This typically includes:

• The project manager who oversees the contractor
  
• The contract administrator who handles change orders and payments
  
• Field personnel such as the site superintendent who observe work daily
  

Having all this information available will provide the baseline data needed to thoroughly analyze the contract sum.

Reviewing the Contract Terms

The current contract terms must be reviewed to understand the contracted scope and pricing. Examine the basis of payment for each aspect of the work. Construction contracts typically involve:

• Lump Sum: A single fixed price for the total scope of work
  
• Unit Price: Per unit pricing for specific material quantities
  
• Cost Plus Fee: Payment for actual costs plus additional predefined fee
  

Review payment schedules defined in the contract. Most contracts include staged payments tied to completion percentages or milestones. Be aware of any penalty clauses or incentives related to schedule performance.

Understand retainage provisions in the contract. Most construction projects specify retaining a percentage of each payment, often 5-10%, until final completion. Know the specific retainage percentage and release terms.

Gaining a clear understanding of the payment provisions will enable accurate analysis of the amounts billed and paid to date versus the completed work scope.

Analyzing the Scope of Work

Gaining an up-to-date perspective on work progress is essential for contract sum analysis. This involves breaking down the contracted scope into sections or trades and determining the percentage complete for each.

Review construction drawings and specifications to identify all major trades and work items. For example, concrete, carpentry, roofing, electrical, HVAC, and plumbing. Additional sections could include site work, foundations, structural steel, interior finishes, conveying systems, and more.

For each trade or section, assess the work completed to date. Physically inspect the work in place. Review daily construction logs and reports. Interview field personnel to get their perspective on progress. Identify any areas that are only partially complete. Make notes of any outstanding work items or unresolved issues.

Estimate the percentage complete for each trade or section as accurately as possible. For partially complete items, estimate the percentage based on the labor and materials in place.

Use the original bid tabulations and unit price breakdowns to estimate the cost to fully complete each outstanding trade scope. Sum up these projections for the total estimated cost to complete the remaining work.

Comparing the completed percentages against the projected cost to complete will provide important insights on budget adherence that can inform contract sum status.

Evaluating Change Orders

The change order log must be thoroughly reviewed as part of the contract sum analysis. Change orders modify the original contract terms and directly impact the contract value.

Categorize each change order by type – whether initiated by the owner, contractor, or design errors and omissions. This provides perspective on responsibility for any increases to the contract.

Identify the impact that each change order has on the contract sum:

• Additions – quantify increases to the contract for additional work scope
  
• Deductions – quantify decreases for removed scope items
  
• Net Change – sum the additions and deductions to determine the net change for each
  

Add up the net changes from all approved change orders to calculate their total impact on the initial contract sum.

For any pending change orders still under review, examine the documentation and justification to determine their potential cost and schedule impacts if approved.

Factor these potential impacts into the contract sum analysis to anticipate their effects if actualized.

By thoroughly evaluating the change orders, their status, and cumulative impact, an accurate projection of the adjusted contract sum can be determined.

Comparing Billings to Costs

A key aspect of contract sum analysis is comparing the contractor billings and owner payments to the actual work completed. This can reveal discrepancies in the amounts billed versus incurred construction costs.

Obtain copies of all contractor invoices and payment applications submitted to date. Review the line items and amounts billed for materials, equipment, labor, fees, and general conditions.

Compare the billed amounts to the completed work verified through inspection and observation. Check for any costs that seem excessive for the amount of work in place.

Watch for front-end loading of fees, where higher amounts are billed early for mobilization, general requirements, or overhead items. This can skew contract balances.

Check for any unapproved equipment, materials, or labor costs that got billed but were not authorized via change orders.

Scan invoice line items for any duplicate billings that got paid twice incorrectly.

Summing up any overbillings or unsubstantiated costs provides insight into the true amount billed to date relative to the completed work.

By comparing total billings and payments versus the actual percentage complete per the scope analysis, the accuracy of the amounts paid to the contractor can be assessed.

Final Analysis and Recommendations

After thoroughly reviewing the contracted scope, costs, payments, change orders, and billings to date, summarize the key findings and conclusions on the true standing of the contract sum.

Provide an objective opinion on what the fair and reasonable contract value should be at this stage based on the analysis.

Present recommendations to get the contract sum aligned with the actual work completed if discrepancies were identified:

• Negotiate pending change orders that lack proper justification
  
• Enforce retainage provisions to recover overpayments
  
• Require change orders to correct any unapproved costs
  
• Dispute inflated or front-loaded billings
  
• Watch for issues on remaining work that could lead to further overruns
  

Executing on these recommendations per the contract terms will help minimize cost overruns and keep the project on budget overall.

Conclusion

Regular contract sum analysis is a critical best practice for construction project management. Thoroughly reviewing the contracted scope, costs, payments, and change orders provides vital insight into the true status of the contract value at any point in the project timeline. Conducting this analytical process throughout a construction project allows discrepancies to be identified early and addressed before significant cost overruns occur. With proper contract documents, data gathering, inspection, cost assessment, and personnel interviews, an accurate evaluation of the contract sum can be performed. Taking the time to execute contract sum analysis, and acting on the findings, is essential to keeping construction projects on budget. By following the methodology outlined in this article, project teams can effectively monitor contract sums and control costs from start to finish.