What is CVR in construction?
Cost Value Reconciliation (CVR) is a financial tracking method in construction that compares budgeted costs and revenues with actual figures to monitor a project's financial health.
It offers commercial managers, project managers and stakeholders a detailed view of project performance, crucial for profitable and effective decision-making.
Much like a company balance sheet, you compare the actual costs against the total value of works completed - profit included - to product a bottom line figure.
Why is CVR important in construction?
CVR is crucial in construction for financial management, helping to spot early discrepancies between planned and actual performance and can help contractors make decisions early on that will impact overall project profitability. With only 31% of UK construction projects on budget, CVR reports offer timely insights for proactive adjustments, keeping projects on track and within budget. They also improve stakeholder communication by providing a clear, objective financial overview. Ultimately, CVRs enhance project success by boosting efficiency, accountability, and financial control.
What metrics are required to produce a CVR?
The most essential elements of a CVR are the budget, costs, change and value.
The budget (baseline)
- Estimate
- Post-tender adjusted budget
- Resources (labour, plant, material, subcontract, overheads)
Accrued and actual costs
- Project costs (goods receipt notes, invoices)
- The planned schedule or project work breakdown structure (WBS)
- Early warnings and compensation events (NEC style contracts)
Change management
- Variation or change orders
Value of work completed
The earned value analysis (EVA) is calculated using the planned percentage complete of each activity multiplied by its budgeted value. This provides a metric for comparing the actual progress of the project against the planned schedule and allows for adjustments to be made if necessary.
How is a CVR conducted?
Completing a Construction CVR requires key steps to ensure accurate and transparent financial reporting of a construction project. These steps include:
- Preparation of Cost Data: Consolidate all financial documents, including the adjusted budget, all costs, and records of any changes.
- Analysis of Project Costs: Review all costs, aligning them with the project's work breakdown structure to understand fund allocation.
- Evaluation of Change Management: Assess all variations and changes for their impact on the budget and schedule.
- Preparation of the CVR Report: Compile data and analysis into a CVR report, summarising the project's financial status with critical calculations like Earned Value Analysis, Cost Variance Analysis, and Cost-to-Complete Analysis to provide insights into the project's health and financial performance.
Check out our detailed step-by-step guide to producing a CVR.
The CVR report serves as a vital tool for decision-making and should be presented to key stakeholders, enabling them to understand the project's progress, financial health, and areas requiring attention or corrective action.
Why are the benefits of CVR reports in construction?
CVR reports are beneficial in construction for several reasons:- They provide an accurate and timely overview of project financial performance.
- They help identify any discrepancies between planned and actual costs/revenues.
- They enable proactive decision-making and adjustments to keep projects on track and within budget.
- They improve communication with stakeholders by providing a transparent financial view.
Ultimately, cost value reconciliation (CVR) reports are essential for the success of a construction project, enhancing efficiency, accountability, and financial control. These reports enable project managers to make informed decisions, ensuring project profitability and success by requiring accurate and timely data on budgets and costs.
Common problems with producing a CVR
Quantity Surveyors, Contract Managers, and Commercial teams frequently encounter several challenges when generating the monthly CVR, which can be both costly and time-consuming. For contractors experiencing growth, these issues are even more pronounced due to the scaling complexities and the multiplying volume of data to be processed.
One significant problem is the manual collection and consolidation of data from various systems and sources, which is not only time-intensive but also prone to human error. The time required to produce a CVR can mean that the data is already out of date by the time it's processed. This manual process can lead to inaccuracies in the CVR, affecting decision-making and financial reporting. Additionally, the lack of standardised procedures across projects can result in inconsistent reporting, making it difficult to compare project performances or identify trends effectively.
Another challenge is managing changes and variations in project scope. These changes need to be accurately captured and assessed for their financial impact, a process that can be complex and contentious without a clear and agreed-upon method in place.
Furthermore, for growing contractors, the ability to scale their processes to accommodate an increasing number of projects without sacrificing accuracy or timeliness of CVRs is a daunting challenge. As businesses expand, they face the complexities of a more intricate resource and organisation structure, necessitating greater flexibility to meet evolving demands. This often requires investing in technology capable of offering an unlimited structure along with training—a substantial initial expense that is crucial for achieving long-term efficiency and profitability. Addressing these challenges requires a proactive approach, including the adoption of more sophisticated software tools, establishing standardised processes, and continuous training for staff. By doing so, companies can enhance the accuracy, efficiency, and value of their CVR process, supporting better financial management and project outcomes. Learn more about digitalisation can improve the process here.
Why do contractors implement CVR software?
Do contractors need to use software to produce a CVR, the short answer is no, many small businesses cope with using spreadsheets and other pre-existing systems to report on project performance. However, as contractors grow it's strongly advised to review and consider technology options available to more efficiently produce a robust CVR report and safeguard against common reporting problems that may impact long-term profitability. A good example of this is construction and property developers Starship Build who achieved greater visibility and control over ther procurement and delivery schedule by implementing cost management software
How Technology Addresses Common CVR Challenges for Contractors
The integration of technology can significantly mitigate common cost management challenges faced by contractors, enhancing the overall efficiency and accuracy of financial management within construction projects. Cost management software solutions designed to manage construction specific accounting play a pivotal role in overcoming the limitations of traditional manual methods by offering a host of benefits:
- Reducing Risks in Manual Data Entry and Calculations: Automated software removes the risks associated with manual data entry and calculations found in spreadsheets. By streamlining data collection and integrating directly with project management and accounting systems, technology ensures data accuracy and consistency, reducing the likelihood of human errors that can lead to costly financial discrepancies.
- Increasing Efficiency through Automation: Automation of repetitive and time-consuming tasks such as data collection, consolidation, and reporting not only boosts CVR process efficiency but also frees up valuable resources. This re-allocation of manpower from administrative tasks to more strategic, value-adding activities enables teams to focus on areas that more directly contribute to project success and business growth.
- Enabling Business Scalability: Advanced construction cost management solutions are designed to grow with your business, allowing for the efficient management of an increasing volume of projects without compromising the accuracy or timeliness of financial tracking. This scalability is essential for contractors looking to expand their operations, as it provides a robust foundation for managing complexity and volume without the need for proportional increases in administrative overheads.
- Effectively Managing Change: Construction cost management software, with its real-time data and analytics, tracks and updates any change or variation to a project, providing utmost visibility and ensuring effective management of changes and variations in project scope. Instant access to up-to-date financial information allows for swift adjustments to project plans, ensuring that financial impacts are accurately forecasted and controlled.
- Improving Decision Making with Real-Time Data: The ability to access real-time financial data and insights is a game-changer for contractors. It enables more informed decision-making, allowing project managers and stakeholders to respond proactively to emerging trends, issues, and opportunities. By harnessing the power of real-time data, contractors can improve the precision of their financial forecasting, leading to better managed and more profitable projects.
- Facilitating Better Communication Across Teams and Stakeholders: Adopting technology not only improves internal processes but also significantly enhances communication among all project stakeholders. With shared access to real-time financial data, teams can ensure transparency and foster a collaborative environment. This seamless flow of information helps in aligning the expectations of project managers, contractors, and clients, thereby facilitating more effective and efficient decision-making processes. Furthermore, clear and accessible financial insights enable stakeholders to address issues promptly and collaboratively, reducing the likelihood of disputes and misunderstandings related to project finances.
In summary, the adoption of specialised construction cost management technology to support the CVR process addresses the core challenges contractors face in project accounting. By reducing manual errors, increasing efficiency, enabling scalability, managing change more effectively, and improving decision-making with real-time data, contractors can significantly enhance project profitability and ensure long-term business success.
Conclusion
Maintaining accurate and timely financial oversight is crucial for project success. Implementing an effective CVR process, supported by advanced cost management software, can significantly enhance efficiency, accountability, and financial control. By addressing common challenges, automating time-consuming tasks, and providing real-time data insights, contractors can ensure projects remain on track and within budget.
Learn more in our What is the best software for producing a cost value reconciliation (CVR) report? blog.
