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Construction Supply Chain post-COVID

There’s no question that the effects of the COVID pandemic are being felt across many industries. For construction, two major pain points were labor shortages and supply chain disruptions. Now, post-COVID, the push to build again has further strained the supply chains and have forced contractors to re-think or re-design their supply chains, and it’s […]

The Schedule of Values: don’t skim over this important document

/in Editorial/by Dayhill Group

A project owner typically negotiates with a contractor over several months to finalize a construction project’s scope, schedule, price, and other important project details. Then the culmination of these efforts gets memorialized in the construction contract. Among the many details that are outlined in the contract is a Schedule of Values. The Schedule of Values […]

Construction Supply Chain post-COVID

/in Editorial/by Dayhill Group

The Schedule of Values: don’t skim over this important document

/in Editorial/by Dayhill Group

Full Sized Blog Element (Big Preview Pic)

Construction Supply Chain post-COVID

/in Editorial/by Dayhill Group

Paul Hill, Chief Operating Officer Dayhill Group

External Disruptions Matter

Recently with post-pandemic needs in construction supply, coupled with other issues like the bottle neck of cargo ships blocked by a grounded vessel in the Suez Canal, the construction industry’s heavy reliance on a global supply chain has shown how sensitive it is to these external disruptions. The domino effect of this discontinuity results in increased costs, job delays, and even effects construction lending.

One example of a major component in construction being affected is the cost of lumber. Lumber prices have risen by as much as 375% over the past year, and prices are just beginning to come back to earth. Other supplies like specialty items, flooring, tile and more, which are typically sourced from global manufacturers, have been delayed if not completely unavailable. This has forced construction companies to look more regionally, which has put a strain on that supply as well.

Rethinking and Making a Stronger Supply Chain

If we don’t learn from all of this, then we’ve wasted the experience. I know, it’s not an experience we want to go through again, but my years in the military have taught me that if you plan for the worst, you’ll never be disappointed. This experience has forced many to rethink the Just-in-Time (JIT) supply chain methodology. This isn’t a call for scrapping it completely as it’s a very effective and cost-efficient way to supply the much-needed materials without having to have large stocks on hand. That said, another saying we have in the military is that you can never be really ready, but you can be prepared. Your level of preparedness matters, especially when major unforeseeable events happen. Most manufacturers were not anticipating a virus to shut down their plant or cause labor shortages for long periods of time, and I’m sure contractors weren’t either. Rethinking the supply chain for both manufacturers and contractors to include a hybrid of JIT and on hand stock at both levels has to be more common moving forward. Any new methodology must also include a more diverse supply chain as well.

The Schedule of Values: don’t skim over this important document

/in Editorial/by Dayhill Group

Kevin Deasy, CPA
Chief Executive Officer
Dayhill Group

The Schedule of Values is often seen by the owner simply as a schedule used as part of the payment application when the contractor submits the monthly pay application. While it certainly functions in this capacity, an owner should be careful to review the Schedule of Values as it would the other important components of the construction contract.

An owner may view the Schedule of Values and see some items that look a bit high but then see others that seem well priced, and overall, the lump sum is a price the owner is happy with. So why worry about individual line items if the lump sum price is satisfactory?

Some of the potential problems with a Schedule of Values that contains line items with values that don’t match well with the market value of what that line item should be priced at can come into play if the contractor is terminated or if there are change orders.

It is common for a contractor to put more profit in the scope items that will be completed early in the construction schedule and less profit, sometimes no profit, in the items near the end of the construction schedule. Why does a contractor do this? Generally, it’s done so the contractor can use the owner’s money to help cash flow the project. As an owner, you are either not aware of this practice or perhaps you accept this practice because you want to help the contractor. But what if you need to part ways with the contractor in the middle of the project? And the remaining items on the schedule of values have very little profit in them? The chance of the owner getting a new contractor to complete the remaining work for the money left is going to be very difficult. Even if the Owner can find another contractor to do the work for the remaining contract value, is it fair that the first contractor received payment on the items that had bigger profit margins? Side note: If a contactor is in funds control, the profit and overhead is paid out based on the actual cost of the line items and not the “value” placed on them.

Another thing to consider is a change to the scope of work that results in a change to the contract value (change order). Almost every project has them. It is very important that there is language in the contract that is very specific as to how a change order is priced. You certainly don’t want the price tied to an inflated Schedule of Values line item.

These are just some of the reasons that overlooking the importance of analyzing the Schedule of Values can cause an owner heartburn down the road. It’s easy to understand why this document may get overlooked after months of negotiation and deal fatigue but it is certainly worth taking a hard look at. The Schedule of Values can be created to handle cash flow concerns and still maintain credible values on the line items in the Schedule of Values.

Half Sized Blog Element (Single Author Style)

Half Sized Blog Element (Multi Author Style)

Construction Supply Chain post-COVID

The Schedule of Values: don’t skim over this important document

Construction Supply Chain post-COVID

The Schedule of Values: don’t skim over this important document

Full Sized Blog Element (Big Preview Pic)

Construction Supply Chain post-COVID

External Disruptions Matter

Rethinking and Making a Stronger Supply Chain

The Schedule of Values: don’t skim over this important document

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