I was thrilled last week to set up a calculating table in my database to be able to process Estimate, Period Cost, and Accumulated Cost data in my new version for a digital management system for residential renovations.
This calculating table is at the heart of rigorous project monitoring and control. Collecting and analyzing this data provides information about project progress that is essential for decision support. In the construction industry, it would be unthinkable to implement a commercial or government construction project with a system for these calculations.
There are two situations where these calculations are used, and the ownership of risk is significant with regards to who invests the time and energy into managing them. In a quote or bid contract, the risk is assumed by the contractor. The contract bid reflects this risk, and the contractor uses cost calculation and prediction methodology to monitor and control project progress to ensure there are no issues emerging to jeopardize profitability.
In a cost-plus contract, the client assumes the risk. The client uses cost calculation and prediction to ensure their project is proceeding according to plan and that there is no threat to project completion within the constraints of funds available.
In commercial or government situations, where the client is well-informed and does not hesitate to hire their own project manager, there is no issue with the assignment of the task of collecting data and routinely calculating estimated cost to completion and gain/(loss) values. Whoever assumes the risk assumes the responsibility of protecting their interests in the relationship.
In the private sector, where the homeowner is the client, this system breaks down. In residential renovations, it breaks apart and results in the perpetual problem of project overruns, fund depletion, and homeowner stress. Even when projects are ‘successfully’ completed, it is often because the homeowner was able to access additional funds over and above the worst case scenario predictions.
Even wealthy homeowners can get into trouble funding their custom home build or residential renovation. I have heard stories from more than one contractor of wealthy homeowners, faced with inexorable project overruns, break down in tears when the contractor presented them with a project invoice.
The assumption in the private sector, with residential construction, is that the homeowner is going to: 1) be knowledgeable enough to assess a bid quote for a residential renovation and trust the contractor to assume the risk; or 2) be knowledgeable enough to manage a cost-plus contract and assume the risk. In the first case, a well-known situation arises. The homeowner signs a contract for a bid or quote price. The contractor starts work and discovers a situation that is not covered in the bid/quote price. The contractor has to add scope, time, cost, and risk to the project in order to complete the work in the original contract. The homeowner has no choice but to sign off on the increase. In this situation, the protection from risk for the homeowner is an illusion. If the work is not covered in the original contract, the contractor is under no obligation to increase the scope under the current contract price. However, because there is now a pre-existing agreement and work is underway, the homeowner does not feel they have a choice to seek second opinions or re-bid the original contract.
In the second case, the homeowner is not experienced enough in the residential construction or project management to manage a cost-plus project. The entire contract relationship rests on the homeowner’s trust that the contractor is going to manage the work on their behalf. But rarely has the contractor explicitly priced the work of project management into the cost-plus contract. Because, in this contractual arrangement, the risk is on the homeowner, not the contractor. Technically, the contractor does not have a vested interest in managing the project. In fact, the contractor has a vested interest in not investing time and energy into project management.
At the heart of this situation is the question, “Who is managing the project and who is going to pay for it?” This question leads to additional questions, “What practice standards and frameworks rationalize the project management-related work?” and “What actually work is being done to manage the project?”.
At present, the way the industry is set up, both cases work against the interests of the homeowner. At the same time, according to the CMHC, the homeowner is responsible for managing either of these scenarios in their own interests. What the CMHC does not address is that homeowners are utterly unprepared to manage these relationships and the real project work that needs to be carried out. What the entire industry fails to grasp is that the cost of residential construction, governed by increased labor and materials costs, as well as more stringent building codes goes far beyond a $10,000 deck or a $100,000 new home. Any residential construction project represents a significant outlay of funds and inconvenience to the homeowner.
The argument that residential construction does not need professional project management and rigorous schedule and cost oversight is not supported by the reality of impact of risk to homeowners of unsuccessful residential projects. It is time to change these assumptions. No homeowner should be reduced to tears when they receive the invoice to pay their contractor. And no contractor should have to endure the stress and anxiety of knowing this is going to happen.