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By Procore Editorial staff
June 5, 2017
The construction industry is relying more and more on technology to drive operational effectiveness, quality, safety, and revenue growth. Companies and IT Departments are putting less emphasis on the expensive, back-office ERP accounting systems and more on “Field ERP,” a loose federation of technologies improving value to the core business.
Unfortunately, many construction companies struggle to find the time, money, and resources to evaluate new tools, let alone implement them. Ironically, some construction project managers will even push back on new technology (without understanding the value)due to the chargeback that the corporate office may impose to pay for the new technology.
Many industries, including the large contractors in the construction industry use chargeback procedures to fund technology spend. Why is chargeback needed and what is the value? For those that have been in the industry for a long time (e.g. greater than 15years), the only cost that would hit the jobsite/owner in the old days were charges that would typically be identified under the general conditions. This was because the technology typically sat at the jobsite (PC’s, servers, cell phones, etc).
This is not the case anymore. Technology is mobile. Technology is cloud-based. Technology is ubiquitous.
As technology has moved from the office to field,new cost components have been added to projects to help pay for the value provided. This was likely not communicated well to the jobsites, nor was the value proposition. This eBook will work to explain chargeback systems, identify the pros and cons associated with chargeback, and recommend where chargebacks make sense for the industry moving forward.
Construction technology is now seen as a necessary tool for completing a project, the same as a drill or a tape measure however, like electricity,technology’s value cannot always be seen or understood, until it is taken away.
It is only within the last 10-15 years that technology became mainstream at construction sites. But with any tool or service, value understood or not, there is a cost. So who pays for it? The answer to that can only be ascertained by what group(s) receive the resulting value from the tool/service.
Costs that are charged out to job sites should be costs that have direct or indirect value associated with the success of the job.
For example, it makes sense for a project management system to be charged directly out to the employees and/or groups (owner, GC, subs, etc) that use/receive value from the system. Given the sophistication of some of the leading PM systems, value spreads to a number of groups. Without a PM system, the project team would not have a viable method of tracking and recording all activities that occur at the job site.Likewise, the owners would not have a history of all key events that occur at the job site, the general contractor would not have a way to measure subcontractor performance, the project team would not be able to sufficiently bill out for services and materials put in place, and on and on.
In other words, all the business partners in this particular case, receive value. The primary benefactor is the owner whom, without the best technology, would be at the greatest risk of incurring significantly more costs than without this system.
Another example of an indirect cost that might be charged to a job site would be the general contractor’s disaster recovery facility where the GC would have redundant servers and systems to ensure the job site could recover in an event of a catastrophic incident. Adisaster recovery site is set up to ensure the job site and systems can continue to operate in an event of a disaster.
Obviously, with cloud systems, central servers, and corporate-wide software,the cost of the technology must be proportionally allocated to those who use or benefit from the system.It is because of these systems, that the method for costs charged back to jobs be distributed. In general,all direct costs incurred for the job site (PCs, phones,etc) are charged to the job directly and indirect charges (central servers, cloud systems, professional services, etc) that support the job are part of the charge-out rate.
While there are many varieties of technology chargeback across industries, I will discuss the two main methods found in the construction industry:
1. Technology Costs Charged to Company G&A
The idea of technology costs going straight to G&A is that the contractor will then markup new proposals to ensure an adequate margin is established to cover all of their overhead costs.
Don’t confuse markup with profit. Markup is a general term that applies to the overhead and profit that any business needs to realize if the business wants to stay in business. It is the amount a business charges above their direct cost. Markup is NOT the same as profit. Often an owner will ask the contractor to reduce their markup fee. As a result, they are cutting out real costs which then reduces the contractor’s profit margin. If so, it would incent a contractor to tighten their margins on technology spend.This doesn’t help anyone and stifles innovation in the industry plus, it’s not sustainable for the contractor or the contractor employees.
2. Technology Charged to the Project/Owner
A. PERCENTAGE/AMOUNT BASED ON CONTRACT VALUE
In this method, the contractor would charge each project a technology fee (to offset the cost of the technology used at the job site) based on contract value. For example, you might establish a charge out rate of 0.1% of the contract value that would be the basis for technology spend. Thus, if the contract value was $10 million for a new facility, the IT technology charge out to the job would be $10,000. This could be charged to the job on a lump sum basis or spread throughout life of project.
B. PERCENTAGE/AMOUNT PER SALARIED PERSON ON THE JOB SITE
The theory behind this method is that technology cost is closely related to the salaried staffing on a project.In this method, you charge a fixed fee based on the total annual budgeted technology costs divided by the actual number of salaried people who work on the job each month. The hourly (or per month) or per staff member rate is established based on the actual/budgeted technology costs used at the jobsite.
While the above methods sound simple, the typical method is often a hybrid of these two (or other)methods. Sometimes a job site may have to purchase a software package or subscription that is requested by the owner for that specific project. While a singular“cost of technology” rate is simple to administer, it may be challenged if the owner does not have a list of services or a value statement on what the costs cover.Owners should ensure they understand what makes up the charge out rate, how it is derived, and what the value proposition is. Owners are smart people. They have expensive technology themselves and they know what it takes to run a business–they will understand the need for technology if there is communication on what the charge is for.
While technology has moved from the office to the field, the industry is still trying to figure out how to charge for these new costs. Download the rest of this free eBook that explains how to charge back the cost of new technology, the pros and cons of chargeback, and where they make sense for the industry moving forward. Click here to download.
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