In the construction sector, where project timelines can stretch over months or years, maintaining a clear and current picture of project finances is essential. Cost Value Reconciliation (CVR) is a forward-looking tool that helps building contractors assess and manage project costs in real time, setting it apart from year-end financial accounting, which is retrospective. Through CVR, project managers & QS’s compare expected costs with actual spending, giving them a regular snapshot of the financial health of the project. The CVR process comprises of several parts and informs actions to correct issues which have occurred and those which potentially may occur. It provides the detailed information behind the individual positive and negative work in progress (WIP) in the management accounts.
Sources of Information for the CVR
To compile a CVR, contractors rely on several data sources that cover direct and indirect project costs, revenue from claims, and more:
Direct Costs: These include expenses directly tied to construction, such as materials, labour, and equipment. As prices and quantities fluctuate, direct costs need frequent updates to capture the latest costs accurately.
Prelims: Preliminary costs cover non-direct expenses essential for project support, such as site setup, site management, and temporary facilities. Prelims are typically tracked against a budgeted amount and regularly updated to reflect actual spending.
Subcontractor Costs: In projects where subcontractors perform specialized tasks, it’s important to track their invoices and payments, as these represent significant portions of project costs.
Variations and Change Orders: Changes to the original scope of work often arise due to client requests or unforeseen conditions. Each variation impacts costs, and accurately tracking these in the CVR helps prevent budget discrepancies.
Claimed Revenue and Payment Records: Progress claims show the contractor’s financial entitlement for work completed to date. The CVR includes these claims—both paid and unpaid—to ensure revenue projections remain realistic.
The Role of Timing in CVR
Timing is essential in CVR as it allows the contractor to see how actual costs align with the project schedule. A typical CVR is updated monthly to capture current costs, revenues, and project conditions. This timing enables project managers to detect budget deviations early and make timely adjustments. Aligning CVR updates with billing cycles or milestone payments also helps manage cash flow, as contractors can anticipate income and plan expenditure more accurately.
Delayed updates or inaccurate timing can lead to a CVR that doesn’t reflect the project’s true financial state, increasing the risk of cash flow surprises or budget shortfalls. Aligning CVR timing with key milestones helps contractors maintain a clear, current view of their project’s financial health.
Handling Paid, Unpaid, and Contested Claims
Managing project finances includes tracking claims that have been paid, are overdue, or are under dispute:
Paid Claims: These represent confirmed revenue that improves cash flow and helps cover project costs. Paid claims are marked as complete in the CVR, showing the revenue earned to date.
Unpaid Claims: Unpaid or overdue claims can cause cash flow stress. The CVR should include unpaid claims, reflecting any potential payment delays to ensure an accurate projection of cash flow.
Contested Claims: Disputed claims introduce uncertainty into the project’s financials. The CVR should clearly show these claims and potential impacts, helping managers prepare for financial adjustments if the claims remain unpaid.
Positive and Negative Work in Progress (WIP) in the Management Accounts
In construction, payment issues and timing differences in claim settlements often show up as positive and negative WIP in the management accounts:
Positive WIP: When costs incurred are higher than the revenue claimed, this results in positive WIP, indicating that more work has been completed than the contractor has been paid for. Positive WIP reflects unpaid claims and represents a future receivable. It can signal to project managers the need for timely follow-up to maintain cash flow.
Negative WIP: Conversely, if the contractor has claimed more revenue than costs incurred, this shows as negative WIP. Negative WIP can occur if progress claims are submitted in advance or there is an overestimation of the work completed. Although it may temporarily improve cash flow, prolonged negative WIP could indicate potential overbilling or early revenue recognition, creating a financial imbalance if not managed carefully.
By closely monitoring positive and negative WIP in the CVR and management accounts, contractors gain valuable insights into project cash flow and revenue timing. Addressing WIP imbalances helps contractors manage working capital and identify any payment collection risks early, supporting a financially stable project lifecycle.
If you would like help setting up the systems to collate the information for doing CVR’s to help you manage your business, then please contact me. Peter.Searle@ba4cs.co.uk
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