FROM UNDER BUDGET TO UNDERPREPARED: THE IMPORTANCE OF ACCOUNTANTS IN MANAGING BIDS AND CONTRACT COSTS

ROBIN N. ROMANUS ROBIN N. ROMANUS is an assistant professor of accounting at Texas Tech University and has over 10 years of experience as a construction accountant and controller. The example of Roberts Mechanical/National Mechanical Contractors provides specific ways in which accountants can be utilized to strengthen the bidding process as well as manage costs of contracts in progress. For the first 25 years of his professional life, Tom Dobbins was a construction worker and project superintendent for a large regional mechanical contractor in southern Alabama. During his tenure as a superintendent, Tom was very successful and had been generously rewarded for his success. Tom's company, Roberts Mechanical, was owned and managed by Bob Roberts, and Bob strongly believed in incentivizing his employees. Whenever a project superintendent brought a project in under cost, the superintendent was awarded a bonus equal to 10 percent of those savings. Over the years, Tom was the recipient of a number of "under budget" bonuses; so many, in fact, that he used the proceeds to buy a 45-foot fishing boat, which he appropriately named the "Under Budget." During his continued tenure at Roberts, Tom repeatedly managed projects in a cost-effective manner and was generally well-liked and respected by his colleagues. However, after just over 25 years at Roberts, Tom was thrown a curveball when Bob Roberts decided to sell the company to a group of investors who were attempting to form a large national mechanical construction corporation. Tom worried that his opportunities for "under budgets" would soon dry up, but, much to his surprise, Bob had bigger and better plans in store for Tom. Shortly after the sale of Roberts and the subsequent formation of National Mechanical Contractors (NMC), Tom was approached by the newly minted CEO, John Brooks. John offered Tom the presidency of the southeast region of NMC (SE-NMC). Although Tom's experience was limited to the field, he had excelled there for many years, and the management of NMC believed Tom could bring that success to the entire region. Shortly after Tom's acceptance of the presidency, the division began preparing a bid for a large water retention pond desperately needed in the small southern Alabama city of Monroe. The job was potentially the highest-dollar contract ever undertaken by the old Roberts' employees, but Tom was confident they could win the bid. After weeks of preparation, SE-NMC submitted the bid, and much to everyone's surprise, including NMC's upper management, they were awarded the contract.

Unfortunately for Tom, the surprises didn't end there. A week or so after the bid was awarded, Tom was contacted by Monroe's city manager and informed that NMC's bid was almost 15 percent lower than the next closest bidder. The city manager gave Tom the option to withdraw the bid, but Tom, ever sure of his expertise and reluctant to so quickly disappoint his new superiors, declined the opportunity to withdraw. A few weeks later, the Monroe project began, as did Tom's difficulties.

The cover-up: Concealing unbudgeted costs

A major expense in the Monroe water retention pond project was the cost of the pond liner to be installed after the pond had been properly dug and formed. During the bidding process, an estimator incorrectly entered the price per square foot of the pond liner by one decimal point. The actual quoted price was $1.99 per square foot but was bid at a price of $0.199 per square foot. This innocent mistake was in large part the reason SE-NMC was the lowest bid. Despite the costliness of this error, Tom did not pick up on the error until the month the controller, Berta Jones, pointed out to him that the job was substantially under-billed for the period in which the liner was received and paid. This fact prompted Tom to more carefully review the bid versus billing prices of certain contract points and ultimately discover the error. Under normal circumstances, a president would likely bring the error to the attention of both upper management and the controller so the costs-to-complete and profit margin could be adjusted on the contract. This, however, was no ordinary circumstance for Tom. Tom knew very well that as a new divisional president of a national corporation he would be highly scrutinized, and therefore he opted to keep the discovery to himself. He told Berta that recent unexpected rain delays extended the amount of time required to rent large excavating equipment and that the contract permitted change orders for these types of rain delays. Tom assured her they would be able to bill for the overages in the next couple of months. Berta had been a construction accountant for many years, but she had not reviewed the details of the contract and trusted Tom to provide her with the best information. Tom knew he was being dishonest but believed as the king of the "under budgets" he could get the cost back on the underestimated pond liner by saving on labor and other more flexible contract costs. Of course, as fate would have it, rain delays (which were in fact not billable charges) and other on-site problems resulted in the project going over rather than under budget. As the contract neared completion, Berta became more suspicious of Tom's reassurances that the under-billings would be covered by change orders that to date had never materialized. Finally, a call from the corporate controller of SE-NMC prompted Berta to divulge her concerns. The corporate controller asked Berta to consult with the estimating department and job superintendent to determine why the project was substantially under-billed as it neared completion. Berta's consultation quickly revealed that one primary reason for the under-billing was the actual pond

liner cost versus the original bid cost. In the end, SE-NMC lost almost 10 percent of the contract price on the Monroe job and Tom was asked to resign. After over 25 successful years with Roberts Mechanical, in less than a year Tom's career with the company was over. While many may view Tom's lack of management and estimation experience as major contributing factors to the Monroe project financial losses, there are many practices that could have potentially helped SE-NMC avoid the failure.

Suggestions to help accountants maintain the integrity of bidding and contract costs

Involve accountants in the bid process. Many contractor management teams view accountants as bookkeepers, when in reality accountants are often highly trained and skilled individuals with keen eyes for numbers. Although many accountants may lack actual construction knowledge, they are an excellent resource to use to check numbers and verify prices and quantities. Involving the accountants in the bid process also helps them become invested in the entirety of the process and gain a more thorough understanding of the costs involved in a project. Had an accountant verified the material prices for SE-NMC, the pond liner error may have been caught and the contract bid correctly.

Provide accountants with easy access to original bids and contract documents. Most contractors share detailed contract costs and estimates with field superintendents and employees rather than with office workers or the accounting department. Giving the accountants easy and open access to these documents will help ensure the jobs' costs are being tracked properly, and a more accurate cost-to-complete is reflected in the percentage-of- completion schedule. Contract documents also provide accountants with valuable information about billing and change order requirements that can help expedite payments. Had Berta carefully reviewed the contract for the Monroe job, she would have been able to determine that weather-related delays could not be billed as change orders to the project. This may have prevented Tom from overbooking the job costs without adjusting the costs-to-complete and profit percentage appropriately.

Match purchase orders with line-item material costs from the bid documents. Although most contractors require purchase orders for large material acquisitions, the line-item prices should be verified with the original bid documents.

This process will help guarantee that the prices paid for materials will not exceed those quoted by suppliers during the bid process. If prices should differ, this comparison will provide the necessary information for adjusting contract costs-to-complete and profit percentages. If accounting had compared the line-item bid price for the pond liner to the price on the purchase order, the discrepancy would have been detected before the purchase was made. This fact would have given SE-NMC the chance to negotiate with the liner supplier or search for a cheaper alternative before making a final purchase decision. Furthermore, the contract costs could have been appropriately adjusted to reflect the unexpected additional cost.

Schedule regular meetings between estimating, accounting, and field superintendents. Good communication between the office and field employees is key to maintaining accurate financial records during the construction phase. Estimating is often viewed as essential to procuring the contract, but the estimating personnel are also useful in reviewing and communicating information during a job's progress. Discussions between estimators, accountants, and superintendents can often help more quickly identify areas within a contract that account for unexpected and potentially unbillable costs. Furthermore, these discussions will help assure that every last dollar of work and material is being billed during the earliest allowable period. Because Berta relied solely on information from Tom and did not communicate with the field superintendents or estimators, she did not have the appropriate information in a timely manner. As a result, the costs to complete the Monroe project were consistently understated and resulted in significant unbudgeted end-of-contract losses for which SE-NMC had not prepared.

Have accountants make trips to the job site. Many construction accountants specialize in construction accounting rules and regulations, but know little or nothing about the actual process that goes on in the field. The costs, though presented on paper before them, thus remain somewhat in the abstract. Accountants who make fairly regular trips to job sites learn a great deal about the actual phases of construction. This permits a synergy of information wherein the billings, time sheets, and invoices become only part of the picture rather than the accountant's sole focus. In addition, regular field visits help open up the lines of communication between the office and field workers, making cost surprises less likely. Had Berta visited the Monroe job site, she would have noticed that weather delays were not a problem initially, and she might have been better able to ascertain the extent of cost overruns as the job progressed. Berta may also have been able to discuss certain aspects of the job, such as change orders for weather delays, with the field superintendent.

While the failure of Tom Dobbins' management of SE-NMC and the lack of profitability of the Monroe job may not have entirely been avoided or eliminated by these suggestions, the financial damage may well have been minimized. Unfortunately for Tom and SE-NMC, there is no going back and undoing the past. The best SE-NMC, and any other contractor, can do is attempt to utilize the accounting department in a capacity that adds value to the entirety of the process. By taking advantage of accountants' unique and well-developed expertise, contractors can diminish errors and ensure that the most comprehensive information possible is reflected in the financial statements.

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