This was a fixed-price, not a cost-based, contract, but we then changed the length of the road. Our mistake was not to have prepared an amended contract, but we’ve worked with this contractor before, and we trust him. Nevertheless, fair is fair, and we need to determine how much of the cost overrun each of us should bear. Sometime before tomorrow, I need to prepare a more thorough analysis of the reasons for the variance.
The speaker was Matthew Cohan, Assistant Commissioner of the Department of Public Works of Huntington Beach, South Carolina. He was reviewing the results of a recently completed construction project on Huntington Avenue, a beach front road. The project, which had been completed under a contract with a private developer, had run considerably over budget, and Mr. Cohan wished to determine the reasons for the excessive expenditures.
Because the actual length of the road had exceeded the City’s original estimate, Mr. Cohan knew the contractor would be entitled to some additional compensation from the City. However, he also realized that not all of the extra costs could be attributed to the additional length and had, therefore, asked his accountant to prepare a summary of the reasons for the deviation from the budget.
While the accountant’s summary (Exhibit 1) shed some light on the reasons for the variance, Mr. Cohan was convinced that it did not tell the full story. He knew, for example, that the city had asked the contractor to extend the length of the road by a half mile (880 yards). He also knew that, because of material wastage, the road had required 21 rather than 20 square yards of asphalt per linear yard. Further, in his discussions with the contractor, he had learned that the efficiency of the paving crew had increased by a factor of 20 percent, resulting in some apparent savings which did not show up on the accountant’s report. Finally, since the contractor had given his grading crew a wage increase, the cost per linear yard of grading had increased from $12 to $15.
Mr. Cohan had a meeting the next day with the contractor to determine the additional amount the city would owe. He realized that there were several issues that needed to be addressed at that meeting, and that the contractor would be expecting some additional payments.
- Compute the relevant variances. What do they show that the accountant’s report does not?
- What additional information would you suggest Mr. Cohan obtain about this project? Why?
- How much more should the city pay? How much should the contractor be asked to absorb?