Owner ledger and contractor cost report: reconciling the two once a month
Every month the contractor sends a cost report. Every month the owner's ledger says something slightly different. The owner's representative spends an afternoon finding out why, and most of the afternoon is spent on differences that were always going to be there.
The two records are not supposed to match. They are kept by different parties for different purposes, and the reconciliation is not a search for the error. It is a sort: which differences are structural and expected, and which are the ones that need a question.
Why the two records differ by design
The contractor's cost report is organized around the contractor's obligations: cost codes, commitments, costs to date, cost to complete, projected final. It counts what the contractor has committed and spent. The owner's ledger is organized around the contract: the GMP baseline, the two contingency funds, the change register, the allowances, the buyout position and the anticipated final cost. It counts what the owner is exposed to.
So the contractor's projected final cost for the mechanical package is what the contractor expects to pay its subcontractor. The owner's figure for the same package is the GMP line, adjusted by executed changes, with the buyout variance noted against the savings pool. They will differ by the buyout variance, by the contractor's contingency draws against that package, and by any pending changes the contractor has counted and the owner has weighted. All three differences are expected.
The four expected differences
Timing: the cost report is cut on a date, the pay application on another, and the ledger on a third. A change order executed on the 28th is in one and not the other. Reconcile to the dates, not to the totals.
Pending items: the contractor usually carries pending changes at full value in its projection. The owner weights them by likelihood. On a fictional $44 million hotel, $900,000 of pending changes might appear as $900,000 in the cost report and $520,000 in the ledger. Both are defensible; they answer different questions.
Contingency: the contractor's report shows its contingency as a line being spent down. The owner's ledger shows the same draws with causes. The balance should match to the dollar on the same date. If it does not, that is the first real question.
Owner side items: the owner's contingency, the owner's soft costs and the owner's own change decisions are not in the contractor's report at all. The ledger carries them. Nothing to reconcile, but the totals will differ by them, and the board should not be shown the two totals side by side without that said.
The differences that need a question
A contingency balance that differs. A change order in the cost report that is not in the register, or in the register but at a different value. A buyout award in the cost report that the owner never saw. An allowance shown as reconciled that the owner has not agreed. A percent complete in the pay application that does not match the cost to date in the report. Each of these is a specific email with a specific number in it, and the reconciliation exists to produce that list and nothing else.
The monthly routine
Line up the two on the same cut off date. Take the contractor's contingency balance and check it against the ledger; if it matches, most of the month is fine. Take the change order list from each and match by number; anything unmatched is a question. Take the buyout schedule from the cost report and check each award against the tracker; anything new is a question. Take the allowance status and do the same. Write the questions down with the numbers, send them, and record the answers when they come.
On a project that has been reconciled monthly since the first application, this takes an hour. On one that was not, the first reconciliation can take a week, because every month of difference has compounded, and the afternoon becomes an archaeology.
What the board gets
The board does not need the reconciliation. It needs to know that one happened, and that the differences between the contractor's projection and the owner's were understood. One line in the report, stating the contractor's projected final and the owner's anticipated final cost and the reasons for the difference in a sentence, is enough. The month the sentence cannot be written is the month the board should hear about.
What to do this month
- Cut both records to the same date before comparing anything.
- Check the contractor's contingency balance against the ledger first; a match clears most of the month.
- Match change orders by number, buyout awards by package and allowances by name, and list every unmatched item with its amount.
- Put one sentence in the report saying what the two projections are and why they differ.
Questions on this
Should the owner's ledger match the contractor's cost report?
No, and it should not be made to. They count different things. The contingency balance and the executed change orders should match on the same date; the projections will differ for known reasons.
What is the first thing to check?
The contractor's contingency balance against the ledger, on the same cut off date. If it matches, the draws were all seen. If it does not, there is a draw the owner did not record or did not know about.
How long should a monthly reconciliation take?
About an hour, on a project that has been reconciled every month. Considerably longer the first time on a project that has not, because the differences compound.
In the product
Monthly owner report, Contingency ledger, Payment applications. Free tool: Contingency Runway.
Keep reading
Earlier: Allowance or contingency: which fund a surprise should draw from. Later: Corporate owners building a headquarters: a one time owner on a GMP contract. All articles on owner reporting.
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