Which came first: the chicken or egg? A similar question in construction is, which comes first: work or money? While the owner is a source of funding, constructing a building requires plumbers and electricians. A mason can build a masterpiece, but a contractor can go bust due to productivity issues.

And although we have come a long way from the days of bartering in the street, the core interchange remains: currency is a means to measure and transfer value. The role of a construction financial professional (CFP) is to manage and oversee this exchange of currency at the company and project levels. While the money management itself is a challenge, linking the money to its source may be the biggest hurdle.

This article explores how work and money are tightly linked and how both need to be managed accordingly throughout a company’s projects. 
By looking at the behavior of work and money as leading and lagging indicators, the measurement and management of a company’s vitals can be improved.

Money Measures Value Transfers

Capital plays two roles: means of commerce and means of wealth.

As a means of commerce, it is a medium of exchange for goods and services. For construction, this means transferring materials, tools, and know-how into a building or infrastructure with which the consumer pays for and is satisfied.¹

Contrary to the Lean methodology of value-added and non-value-added activities,² natural laws tell us that matter and energy are neither created nor destroyed. Since trade knowledge and experience are part of that matter and energy, the same principle applies.

For example, there is nothing to add or take away from the knowledge of a carpenter. Their experience is an expansion of their trade apprenticeship, and that knowledge and experience is transferred as a value to the final product.

So, how is that value ultimately transferred? A company’s vitals are determined by how effective this transfer, in the form of work, is directly related to the flow and balance of money into and out of the project.

The Energy Balance

Just as available energy equals the sum of kinetic energy, potential energy, and entropy (losses), in construction, the energy balance is also a zero-sum equation of labor power (work and effort), capital and material (assets), and lost productivity. It’s beneficial to all parties when the productivity losses are reduced.

To manage this zero-sum game, balancing the equation throughout a project is necessary. Every project starts with an estimate or budget and needs a validation of how the variables of the construction energy balance will transfer to construction energy. Furthermore, this balance must be reassessed every time the scope or plan changes.

For example, change orders are typically managed as part of the capital and material variable, but the labor power and lost productivity will need to adjust accordingly. The link between work and money always exists and must be visible and managed among the jobsite, CFP, and customer.

Here are three cases in which the linkage between work and money is faulty.

Change Orders & Productivity

Productivity has nothing to do with whether change orders are approved or paid for; rather, the labor is doing the work, then productivity needs to be measured.

Measuring productivity via ASTM E2691 requires:

• Accounting for change orders
• Adding or subtracting the budgeted labor hours associated with change orders to the job baseline labor hour budget
• Noting the reason for change orders³

Many project managers (PMs) and forepersons will explain their productivity declines are related to not having the change orders in to measure against. Any change in scope, whether paid for or not, must be tracked and measured. But without measuring them, the work and productivity is invisible.

Exhibit 1 shows an example of job productivity measurement using Job Productivity Assurance and Control (JPAC®) where the foreperson said for months that “once we get the change orders in, we’ll be okay.” Clearly, as reality settled in, they weren’t okay.⁴ The job productivity continued to decline after the change order work was added to the baseline labor hour budget.

The same situation can happen with money, where a PM reports in their monthly work-in-progress (WIP) review that “once I get paid for the change orders, my projected profit will go up.” But because of the same root cause of lost work productivity, this does not always happen due to the construction energy imbalance.

Profit & Productivity

Work productivity has nothing to do with how the job was estimated, and even less to do with its margin on bid day. The estimate is a baseline for profitability on a project, but no matter how much the estimate was for, how the money is spent will determine the true profitability.

A highly profitable job can still lose money if resources are mismanaged, either in the form of fade from the estimated profit, or if the lost productivity is large enough, in a total loss. Similarly, a job with a tight estimate could be very profitable if work and money are managed productively.

Favors & Bartering

Favors and barters can occur on the jobsite when the trades don’t have what they need to transfer value and finish their tasks. Without access to money as means of exchange, labor can use their skills or access to other goods (e.g., tools, material, space) as a means of exchange for something in return. However, using the company’s resources (e.g., time, material, tools) without visibility to the money can deplete the construction energy.

Linking Work to Money: It Starts With the WBS

Until the industry gets beyond the management of work (i.e., step 2 of the Industrialization of Construction⁵), the trades must still be relied on to manage labor and work. Skilled trades are the best source of data about work including the plan (or in some cases, not having a plan) and work progress.

The plan is made visible through a Work Breakdown Structure (WBS)⁶ created by skilled trades, which can be the first signal about how money will be spent on the job. However, the WBS alone may not be the final form of understanding the connectivity between work and money. For example:

• Does the foreperson understand the scope of work?
• Does the foreperson see the sequence of the job and how they will sequence the work?
• Does the foreperson have a plan to optimize the build with labor power, materials,
  and tools and decipher who should do what, when, and where?
• Does the PM understand and agree with the plan (relative to the budget for the job)?

After all, the estimate or thereafter negotiated contract is as relevant as the money in the bank, linked to what the customer will measure as progress and value via the schedule of values. However, it is only a guesstimate of money without taking the previous questions into account about how the work will unfold.