Construction projects can be a tornado of documents: contracts, plans, invoices, notices, pay apps, waivers, change orders, and more. One of the documents that GCs (at least those on public, commercial, or relatively large residential jobs) will be intimately familiar with, but that other parties may not know as much about as a whole, is the Schedule of Values. This document can have significant influence over the project, so it’s worthwhile for every participant to have an understanding of why, and what it entails.
What is a Schedule of Values?
At it’s most simple, a schedule of values is a start-to-finish list of work items on a project (broken down into their component parts and with corresponding values) that, in total, represent the entire project from beginning to end and the entire contract price. According to the standard AIA documents, “The schedule of values shall allocate the entire contract sum among the various portions of the work.”
In practice, the granularity by which the schedule of values must be broken down can vary. On some jobs the requirement of the owner and architect might be that every item must be broken down into increments of less than $20,000 as separate line items. On other projects the value threshold may be more or less – there is no single, industry-wide accepted value threshold.
Why Is a Schedule of Values Important?
A schedule of values (SOV) is used as management tool in monthly pay app processing, and as a valuable tool in evaluating a project’s progress as a completion percentage related to plan. Since cash flow is determined by the SOV, as the timing of payment depends on how the SOV was constructed and allocates the funds, it can be of crucial importance to contractors in making sure the cash-flow keeps moving and their bills get paid.
Additional resources from zlien created especially to help with construction industry accounting challenges:
- The Accountant’s Guide to Lien Waivers | written by zlien CEO Scott Wolfe
- Construction Accounting: What Is a Work-In-Progress Schedule?
- Construction Accounting: What Is Percentage of Completion Accounting?
- Top 3 Hidden Losses for Contractors on Construction Projects
Common Temptations & Problems
Because the cash-flow on a project can be determined in part by the SOV (payments are made according to the values and timetables set forth by the schedule, upon completion) there can be a temptation for contractors to “front-load” the SOV so that the majority of the payments come in at the start of the project and they get the cash quick. Contractors may attempt to front load the SOV by artificially increasing the values of the early project activities and devaluing the work at the end. This is called “overbilling,” and we recently wrote an article about it: “Construction Accounting – What Is Overbilling?”
While this may be tempting – who wouldn’t want to get more of the money earlier? – it is a bad idea for many reasons. One practical reason is that the owner and architect must sign off on the SOV and will be looking to avoid this exact behavior. Being caught attempting to fudge the numbers for your own benefit is never a good look.
Beyond that, however, front-loading an SOV can create other significant problems down the line. If a payment issue arises, the justifications can be tricky when the value on the SOV do not mesh with the payments made down the chain, especially since most SOVs require that only a certain amount is allowable for contractor profit and overhead. Additionally, if there is a dispute regarding the a sub’s work (but the contractor has loaded too much into the value of that work in the SOV) it will be difficult to argue that the full amount should be able to be collected by the contractor when some is supposed to go to sub whose work is disputed.
Also See: Schedule of Values: More Valuable than Ever | Contractor Magazine
There are many other issues that can arise from not preparing the SOV correctly and accurately – but beyond that, doing it right is just the right thing to do.
Of the multitude of documents that are required throughout construction projects – the SOV is one intrinsically tied to cash flow, and as such, is a document which which all parties should be familiar.