The start-up phase of any major construction project can be chaotic with so much that needs to be done in such a short period of time. Amid all of the planning, meetings, and start-up activities, it’s tough for all parties to ensure that every “i” is dotted and “t” is crossed. In the eagerness to get construction started, owners can often be taken advantage of if the party responsible for reviewing and approving the schedule of values doesn’t take the time or have the skillset to review details thoroughly. At that point, the first payment becomes the basis for all subsequent payments, which can leave the project off-base right out the gate.
You can already see why having a trusted construction expert review and approve the schedule of values is important before a single check is cut to the Contractor. This element of the construction project is the most vital component to tracking the progress of work for payment purposes.
Ok, Let’s Back Up – What is a Schedule of Values?
The schedule of values is the basis for calculating the owner’s progress payments to the contractor. When contractors prepare their budget for a project, they allocate the total contract price among various line items or segments of work. This allocation takes the form of a schedule of values, which is presented to the architect for review and approval prior to submitting the first payment application. Once approved by the architect, it becomes the basis for all of the contractor’s subsequent applications for payment.
The most important step in the payment process that an owner can take to protect their interest is a careful and correct review of the Schedule of Values.
So, Why Focus on the Schedule of Values?
Although the schedule of values is designed to be a project controls system, it is often used as a tool by the contractor to improve their cash flow. Front-end loading is the practice of overstating the values of the work that will be completed early in the project and understating the values of the work that will be completed later in the project. Once this is set into the schedule of values it has the effect of overpaying the contractor for work it has performed. They can then use the extra cash to fund this project, another project or even their general overhead. Or in the worst case, it can be used to fund losses in their operations. NOT GOOD.
When front-end loading is cleverly done, it is nearly impossible for the architect to detect. As a result, architects usually perform a casual review of the contractor’s schedule of values, which allows the practice to occur.
What you need is a construction professional who can review a Schedule of Values at a level that ensures the best interests of the owner are represented.
The Difference a Construction Expert Can Make
When performed skillfully, the Schedule of Values review process can set the right tone with the contractor. It shows that the owner and architect are interested in open, honest, and fair communication both ways, and it demonstrates a robust attentiveness on the part of the owner. When owners are highly engaged in the payment process—either on their own or through a construction manager—accountability improves on both sides. Owners avoid overpaying their contractor, but they also have greater assurance that charges are appropriate and fair, which is also good for success of the project.
A good construction expert will:
- Prevent a distorted schedule of values from being approved.
- Work with the contractor to produce a highly detailed Schedule of Values that breaks down large amounts into smaller segments of work that can be more easily verified for costs.
- Review the contractor’s subcontracts, purchase agreements, and quotes to justify amounts listed in the Schedule of Values.
- Require transparency as to where and how the contractor has allocated overhead, profit, and general conditions costs. Are these costs loaded on the front-end, or are they spread evenly over all the line items?
- Evaluate the Schedule of Values in conjunction with the construction schedule to ensure payment can be properly measured as the work progresses.
Other Benefits of an Expert Review of the Schedule of Values
A careful and correct review of the Schedule of Values prior to beginning construction has many benefits:
- Owners receive assurance that the monthly application for payment they’ll be receiving from contractors are accurate and closely tied to the actual progress of the work. Their financial investment in the project will be less at risk.
- Architects end up with a tool that will help them make more informed judgments about how much work has really been done. They can then certify the contractor’s monthly application for payment with confidence before they present it to the owner for payment.
- With control of the payment process, owners have control of the purse strings, which gives them greater leverage when addressing performance issues with the contractor and their subcontractors.
- Architects end up with an accurate picture of costs for the project that can be used when budgeting future projects. Too many architects rely on past Schedule of Values to predict costs on future projects, never realizing that the Schedule of Values they are using provides bad information.
Performing a thorough and comprehensive Schedule of Values review before the project begins protects the bottom line for the owner and ensures transparency and engagement of all the parties from groundbreaking to final inspection. A construction expert can oversee this process and ensure that everyone’s best interests are represented.
eight31 Consulting provides Construction Management services to Owners and Construction Contract Administration Services to Architects. If you are embarking on the journey of a major building project, give me a call to discuss a custom solution for you.