Labour Cost Forecasting – It Won’t Tie You Down
Muli’s Construction Accounting Software encourages the use of labour cost forecasting.
It starts with the raising of a labour order, since you can’t process an employee timesheet unless there is a project setup with a labour order created against the relevant budget of the project to which labour costs may be allocated. (unlimited number in on or many projects & across companies)
Calculates Achieved Rate per Hour – Forecasts Hours & Final Cost
When the Muli administrator raises the labour order they are asked to enter the expected total cost and estimated total hours. This provides an implied cost per hour. As employee timesheets are posted against the labour order, Muli is able to track the hours and cost, and calculate an achieved rate per hour. Muli is then in a position to forecast hours and the implied rate to arrive at a final forecast cost.
One objective of this labour forecasting approach is to encourage management to look at both elements that make up the total cost, so that more predictable outcomes will be achieved.
Basis of Cost Estimates
The original cost estimates can be arrived at in one of two ways:
- “take off” the hours to do the job, or
- “team by duration”.
Using the first method, the estimators are trying to come up with how many hours it will take to do the job, say a square metre of formwork or a square metre of brickwork, and then to multiply it by the number of square metres.
The second method, asks what team are we going to need on this job, and for what duration, times the hours, times the rate.
They both work – they are just different philosophical approaches to coming up with the cost.
However the Muli forensic accounting reviews find that, on most projects, estimators that try to take off the hours to do the job, will come up substantially under the estimators who are looking at a team by duration estimate of what a job cost will be for labour.
In reality we need a team of this size, for this duration to (for example), get a floor in, and if there are ten floors we have a certain cost there. Then there are other employees who are required for the total duration of the project, including wet weather – for example a safety officer, site foreman etc.
Team By Duration Forecast To Completion
It’s worth noting that by going back and checking the values using a “team by duration” approach is a very valid way of verifying the rates that you are allowing – because what we are doing in labour costing is actually team by duration forecast to completion.