THE CONTRACTORS' GUIDE TO OPERATIONS AND PROCEDURES

THE CONTRACTORS' GUIDE TO OPERATIONS AND PROCEDURES

INTRODUCTION The purpose of this guide is to document general procedures a contractor might implement for the (1) Bidding, Planning and Scheduling Functions, (2) Contract Administration Activities, and (3) The Accounting Duties. Each contractor has their own procedures, written or unwritten, for the above mentioned activities. It is my intent to provide the users of this guide a means to compare their company procedures with those on the following pages in order to determine the completeness of the readers' operation procedures. BIDDING The first question the contractor should ask is whether or not he or she should bid a specific job. Some of the issues that should be addressed are Timing, Company Resources, Type of Work, and Location of Work. TIMING * Is the company already operating at capacity or is there a need for additional work? * Are other jobs, perhaps better suited to the type of work the contractor normally performs, on the horizon? * Does the company have sufficient bonding capacity? * Is the company's cash flow adequate? How much cash will be needed to handle the job? What is the anticipated collection date on existing retention (Monthly cash flow

projections should always be performed)? * Is there, or will there be, adequate staff available to do the work in an effective and efficient manner? RESOURCES * How long will the job last? * What are the payment and retention provisions? * Are there any liquidated damage provisions? * Does the job lend itself toward unusual or high risk? * Does the profit potential offset the risk factors? * Will known subcontractors be available? * Cash availability? What is the available amount on the company's credit lines and other borrowing sources? TYPE OF WORK * Has the contractor operated primarily in the public sector and the work is in the private sector (or vice-versa)? * What is the size of the project? Is the project much larger or smaller than the contractor is use to building? * Project complexity. Perhaps the project is a clean room for an electronics manufacturer. Does the contractor have experience in this type of construction? LOCATION OF WORK

* Is the job in the geographic area where the contractor operates? If not, then: * Can the contractor manage and control the project? * Is there an experienced project superintendent or manager available and is willing to relocate for the duration of the project? * If so, do you have an adequate replacement for the local jobs which no longer have the relocated staff(s)? * Is the contractor familiar with the foreign location's price structures for materials, labor, payroll overhead items, subcontractors, equipment rentals, etc. * What are the location's regulatory practices? * What is the areas labor resources? ESTIMATING PRE-BID PROCEDURES * Plans and specs should be acquired as soon as they are available in order to eliminate errors due to time restraints. * The plans and specs should first be read to get an overview of the project. They should then be read in detail paying special attention to potential problems and risks. The estimator should note all unusual or unfamiliar items as well as familiar and unfamiliar

construction processes. * The estimator should review the plans and specs for: * Minority requirements. * Warranty obligations. * Liquidated damage provisions. * Incentive provisions. * Substitute materials and/or processes where the job could save costs and still meet the plans and spec requirements. * Payment provisions such as paid when paid. * The estimator should visit the job site and attend pre-bid meetings. BIDDING THE JOB * The estimator should obtain historical data for similar projects done by the company. * What work items were profitable? What work items were unprofitable? * A cover sheet should accompany the bid (for internal use only). The following cost components should be summarized on the cover sheet: * Labor

* Labor overhead * Materials * Equipment, company owned * Rental equipment * Subcontractors * General conditions * Indirect costs * General and administrative allocation * Interest expense * Profit * The bid should be defined by work items (phases). The criteria for defining the work items are: * The work items should be defined compatible with the concept that if a unique set of resources are required to perform the work, a work item is defined for the work. (For example, if carpenters are needed to form job built wall forms, and laborers are needed to place a steel ply forming system for wall forms, then the fact that two different types of crews perform the work, even if they are both wall forms, should result in the definition of two work items). * The work items should be defined such that any work that results in a substantially different productivity, even if the same resources are required, should be defined as a separate work item.

(For example, if a substantially different productivity results when a specific crew of masons place brickwork for a straight wall versus walls with many blockouts, then masonry straight walls and masonry wall with blockouts should be defined as two separate work items). * The work items should be defined compatible with industry terminology. (For example, walls, beams, slabs, columns, etc.). * The work items should be defined such that accurate data can be collected at the job site for the specified work items. (For example, it may be feasible to require a foreman to record the amount of time a craftsman works on footings versus slabs in a given day. However, it may not be realistic to require the foreman to record the number of hours a craftsman works on 2 by 4 concrete footing forming versus 2 by 6 concrete footing forming. As such, 2 by 4 concrete footing forming and 2 by 6 footings should not be defined as separate work items. Instead, consideration should be given to defining one work item called concrete isolated footing forming). * The work items should be defined compatible with the construction industry's movement towards standardization. (For example, the Construction Specifications Institute (CSI) has defined work items or categories. While such a list may be too detailed for estimating, the definition or work items or codes compatible with such a criteria is useful). * The work items should be defined compatible with a defined project billing system as set out by the

project owner. (For example, the state highway department may set out 30 or 40 billing items that are used for paying the contractor. If such is the case, the contractor should consider defining the work items/codes compatible with the billing items). * The work items should be defined compatible with the concept that whatever is a work item for estimating, is an activity on the project schedule (bar chart or CPM diagram, and a cost object in the control system). (This is important in light of the movement towards computer software that attempts to integrate the entire information system for the contractor. The estimate, schedule and cost system should all tie together; they should not be viewed as independent functions). * The work items should be defined compatible with the fact that the quantities for the defined work items must be able to be determined from the project drawings. (For example, it is not possible to quantify the amount of grout to be needed from the project drawings. As such "grout" should not be defined as a separate work item. Instead, the grout should be determined as a function of another work item; for example, the number of bricks). * The work items should be defined compatible with the concept that if a certain percentage (for example 50%) of the work is in place then if no problems exist, 50% of the labor effort should be expended. Such a criteria is necessary if the firm is to be able to monitor and control the work process via comparing percent complete versus percentage of effort expended. (For example, if concrete wall forming and the placement of the concrete in the

walls is defined as one work item that is subsequently measured in cubic yards, it follows that a significant number of labor hours will be expended before a corresponding percentage of concrete is placed. The end result is that the firm would not have a good means of monitoring or controlling the work via a comparison of work in place versus effort. The end result is that the two types of work should be defined as two different work items). * The bid should be reviewed and checked for accuracy and completeness, then approved by management. * The contractor should establish bid withdrawal criteria, and know the last day he can safely withdrawal his bid. CONTRACT AWARD * The estimator should review the contract documents to determine if there are any discrepancies with the plans and specs. * Management should review the contract documents to ascertain if contract provisions comply with company contract criteria. If there are questions, the contractor should consult with legal counsel. * The bonding agent should be notified in order to obtain payment and performance bonds. * Purchase orders should be faxed to confirm material and subcontractor commitments in order to allocate risk. * A project budget should be prepared, prior to any work commencing. As previously mentioned, the estimate,

scheduling and cost system should tie together. * Following are examples of job cost controls. The contractor should strive to obtain example 3. THREE LEVELS OF CONTROL: THE NEED FOR INTEGRATION 1. Monitoring After The Affect Work Description Budget Labor Hours Actual Labor Hours to Date Status Place wall concrete 500 300 In Process Place beam concrete 200 180 Complete Place column concrete 100 110 In Process Note: Can only tell you have a problem when budget is exceeded. 2. Monitoring Effort Versus Work Performed Work Description Budgeted Budgeted labor Actual quanity Actual labor Projected labor quanity (cy) hours (cy) hours hour overrun Place wall concrete 500 500 250 300 100 Place beam concrete 150 200 150 180-20 Place column concrete 50 100 40 110 37.5 Note: Problem is detected whenever percentage of labor hours expended is greater than percentage of work in place. 3. Monitoring Schedule and Cost Control Work Budget Budget Budget Calc. Actual Actual Actual Project- Variance Variance Descrip- quanity labor Crew duration quanity labor Crew ed hours duration tion (qy) hours size (qy) hours size duration Place 500 500 8 7.81 250 300 14 5.35 100-2.46

Wall days days days conc Place 150 200 6 4.16 150 180 6 3.75-20 -0.41 beam days days days conc Place 50 100 4 3.125 40 110 3 5.73 37.5 2.61 column days days days conc Note: The integration allows for monitoring duration as well as costs. It is possible for a work activity to be under budget in regard to duration but over budget in regard to cost or under budget in regard to cost but over budget in regard to duration. PRE-PLANNING * The contractor should meet with the owner, construction manager or general contractor. This meeting should address: * Planning and scheduling. Problems such as right of way should be resolved. This is a time to ask for additional money. * A review of the construction methods should determine if any reengineering is necessary. This is a time to ask for additional money. * Change orders and change order dispute procedures must be established. THIS IS ESSENTIAL!!! PRE-CONSTRUCTION

* The estimator hands the baton off to the project manager. The following activities are addressed at this phase: * Staffing the project * Equipment requirements * Budgets, report types and frequency * Record keeping requirements and frequency. What forms will be used to record the project activities, e.g. time cards, foreman reports, equipment logs, work authorizations, change orders, claims, etc. It must be established when these records are turned in for processing and when the output will be received. CONTRACT ADMINISTRATION * A job file should be assembled. The file should contain: * Contract and purchase order copies * Insurance certificates -expiration dates should be noted in a tickler file * License confirmations with expiration dates -a tickler file should be used to note expiration dates * Change order and extra work authorization procedures -determines time of billing these items * Preliminary liens * Billing and lien release procedures

* Reports and other requirements by owners, general contractors or others * Job cost accumulation data * Time cards * Material receivers and invoice copies * Equipment use -a company policy should be established re: costing of company equipment, e.g. idle equipment on a job site should be charged to that job. The superintendent and project manager are then motivated to eliminate equipment charges to their jobs due to idle equipment. * Rental equipment -daily reports * Subcontractors -daily reports if invoices aren't timely * Allocation of indirect costs * A reconciliation of quantities to cost and billings should be performed. The contractor should sit down with the owner or general contractor if the billing is in dispute. This reconciliation is a valuable aid when billing disputes arise. * A job completion reconciliation which should consider: * Quantities

* Scope changes, i.e. work authorizations for extra work * Unapproved change orders and claims * Back charges * Unpaid invoices * Notice of completion * Completeness procedures ensuring all notices and reports have been filed and copies of the notices and reports * Copy of the owners acceptance * Retention releases * A post job review should be performed. Significant variances, both favorable and unfavorable, should be analyzed. Any comments from the owner or general contractor, suppliers, subs, superintendents, foreman, crews, and other interested parties should be evaluated. If there are no comments, the contractor should solicit them through open ended questions. ACCOUNTING * Job Reporting * The cost reporting should interface with contract administration. Many contractors have their accounting departments perform the contract

administration function. * Preparation of payroll reports including certified or minority * Reconcile purchase orders, receivers, and invoices * Calculate percent complete. This function should interface with the company's operations. Work item estimates of cost to complete should be determined by field personnel not assigned to the job in question. * Review job and work item coding * Generate management reports * Input and pay invoices * Billings and collections * Record billings and cash receipts in the proper period. Establish cut-off procedures. * Reconcile payments and cash receipts * Establish and/or adhere to work authorizations, change orders, claims, and back charge accounting procedures. * Retention tracking * Cash flows and financial reports * Prepare monthly cash flow report -must be compared with the budget and revised monthly.

* Prepare monthly balance sheet and income statement and compare with the budget. * Prepare and/or review monthly billings and compare with the budget. * Prepare monthly open job report. Prepare monthly under and over billings report.