The anticipated final cost waterfall, step by step from the GMP

A waterfall is a chart with a starting bar on the left, a finishing bar on the right, and a series of floating bars in between that each add to or subtract from the running total. On a GMP contract the starting bar is the guaranteed maximum price and the finishing bar is the anticipated final cost. The bars between them are the reasons the two numbers differ.

The value of the chart is not the picture. It is the discipline of naming each step. Once every dollar of difference between GMP and AFC has to sit in a labeled bar, the question in the board meeting stops being what is the number and becomes which bar moved since last month.

The steps, in the order they usually appear

The first bar after the GMP is usually buyout variance. Every package bought below its GMP line pushes the total down. Every package bought above it pushes the total up. Early in the project this bar is small and uncertain. By the time buyout is mostly complete it is the largest known adjustment.

Next come allowances. Each allowance is carried in the GMP at an assumed value. When it is reconciled, the difference between the assumed value and the actual cost becomes a bar. An allowance that has not yet been reconciled is shown at its expected value with a note that it is still open.

Then executed change orders, which adjust the GMP itself under most AIA A133 based agreements. Owner scope changes sit here. Then pending change orders and PCOs at their expected value, shown separately because they are not yet agreed. Then contractor contingency drawn to date, and the portion expected to be drawn. Finally, where the contract makes the owner responsible, owner contingency draws. The finishing bar is the anticipated final cost.

A fictional waterfall

A fictional $52 million high school addition has a GMP of $52.0 million. Buyout to date is 78 percent complete and came in $1.3 million under the lines bought, so the first bar is a drop to $50.7 million. Two allowances have been reconciled, one over by $180,000 and one under by $60,000, net plus $120,000, to $50.82 million. Three executed change orders for owner scope add $410,000, to $51.23 million. Four PCOs are priced but not executed, expected to add $350,000 if all are approved, to $51.58 million. Contractor contingency of $1.5 million sits inside the GMP and has been drawn to $900,000, with the remaining $600,000 expected to be used, so nothing changes at this bar. The anticipated final cost is $51.58 million, and the projected gap to the GMP is $420,000.

Written as a sentence, that is hard to follow. Drawn as eight bars, a board member can see at a glance that the buyout savings are real, the change orders have eaten most of them, and the remaining margin depends on four PCOs that have not yet been classified.

What the chart exposes that a table does not

A table of costs shows totals. A waterfall shows direction. A large downward buyout bar followed by a large upward change order bar tells a story: the contractor bought well and the design was not complete. The same net figure in a table tells nothing. The chart also makes the open items visible. Bars for pending PCOs and unreconciled allowances should look different from bars for executed items, so a reader can see how much of the finishing figure is still in play.

The chart exposes one more thing. If a bar has no register behind it, it cannot be drawn. An owner who tries to build a waterfall and finds they cannot fill the buyout bar has learned that they do not have a buyout log. That is useful to know in month six, not at closeout.

Month over month

Keep each month's waterfall. Placing this month next to last month shows which bar grew. A growing pending PCO bar means classification is lagging. A growing contingency bar against a flat percent complete means the fund is being drawn faster than the work is progressing.

Building it from the owner's records

Every bar in the waterfall maps to a register the owner should already keep: the frozen GMP baseline, the buyout log, the allowance register, the change order register with PCO status, and the contingency log. If those registers are current, the waterfall is arithmetic. If they are not, the waterfall is a guess dressed as a chart.

Costwitness draws the waterfall directly from those registers and stores it with each monthly snapshot. Executed and pending items are shown as different bars, and any bar that moved since last month carries a flag. The chart is in inline SVG, so it prints in the board pack exactly as it appears on screen. The software applies the rules. Deciding why the pending PCO bar grew is still the owner's job.

In the product

Anticipated final cost, Buyout tracker, Allowance register. Free tool: Change Order Exposure, Allowance Confidence Band.

Keep reading

Earlier: Why a trend line needs stored snapshots, not recalculated history. Later: Anticipated final cost: the number that matters more than the GMP. All articles on owner reporting.