May 6, 2022
What is a Schedule of Values, and Why is it Necessary?
When starting a new construction project, success can be determined by your understanding of the loans, fees, and costs involved. Here is your crash course in construction loans and contingency. We will go over different types of loans, how to get them, and the contingent costs associated.
- A Schedule of Values lists every billable cost involved in a construction project and establishes cash flow between all parties.
- The breakdown of a Schedule of Values is entirely up to the contractor and will be tailored to the specific project and client.
- In order to avoid a cash flow disruption, contractors should use a Schedule of Values so that their on-hand cash will match the value of the work being done in that particular pay cycle.
Schedule of Values Definition
A Schedule of Values in construction is a detailed document created by a contractor that outlines the values for all billable costs associated with a construction project. It essentially shows the entire project on paper, step-by-step. According to the American Institute of Architects, a Schedule of Values "shall be used as a basis for reviewing the Contractor's Applications for Payment". It is used as a tool for submitting and reviewing progress payments, which allows the contractor to keep track of the project's progression. The Schedule of Values will be drafted long before the start of construction; it organizes the entirety of a project's moving parts into one consolidated document. Without a Schedule of Values, payment management is close to impossible. So, a contractor should discuss the Schedule of Values breakdown during the earliest stages of a project and should be updated as the project moves along.
What Does a Schedule of Values Look Like? (With an Example)
The ultimate purpose of a Schedule of Values is the same in every project, however, there is no industry standard for its format. The breakdown of a Schedule of Values is entirely up to the contractor and will be tailored to the specific project and client. Generally, though, the Schedule of Values is a spreadsheet with each line being a work item (i.e. window installation, waterproofing, etc) that corresponds to a dollar amount. The dollar amount represents how much that particular work is worth. The contract's grand total is the sum of values. Now let's take a look at an example of a Schedule of Values…
This spreadsheet may seem daunting at first, but if you break it down you'll see how a schedule of values is vital to your project.
Let's start at the top…
Each schedule of values should include a project name and number so as to identify and organize these documents. In the application number section, you should fill in which specific application this is (perhaps the 3rd, 4th, or 5th application?). The last line should indicate what payment cycle this specific version pertains to.
Clients will pay contractors via progress payments as the project continues (often on a monthly basis). Meaning that a contractor must keep track of the cash they have on hand, have used, or need for the current pay cycle. So, each updated version of the schedule of values needs to specify the version number and pay cycle it pertains to.
In each numbered line, you will list a description of a work item. For instance, if you are building a home, you might have something like "window installation" in a ‘Description of Work Item' cell. In the column labeled ‘Scheduled Value', you will enter the estimated value for each described work item. The estimated value should reflect the entire total value of all labor and material costs involved with that work item
Column 2 is the value of work completed since the last payment. At the start of a project, this value will be zero. The 3rd column is the value of the work completed within the current pay cycle. In column 4 you will add columns 2 and 3 to find the total value of the work already completed. The 5th column shows the percent of work completed on a particular work item. This column is especially helpful; contractors will be able to monitor the progression of their projects. Column 6 refers to retainage, which is decided by the owner and typically ranges from 5-10% of the budget.
According to the AIA A201- 2017 General Conditions of the Contract for Construction, "the contractor is required to submit a schedule of values where the construction contract is based on a stipulated sum or Guaranteed Maximum Price". So, the sum of all costs involved will constitute the GMP. To learn more about contract types contract types and other costs visit this blog post.
Why is a Schedule of Values Important?
As stipulated by the American Institute of Architects, a schedule of values is used as the basis for payment. When it comes to a construction project, cash flow is everything. If you are unable to pay subcontractors or fund material purchases, then your project will come to a screeching halt. In order to avoid a cash flow disruption, contractors should use a schedule of values so that their on-hand cash will match the value of the work being done in that particular pay cycle. Most commonly, the payments to the contractor will be made on a monthly basis, taking into account the needs of the project at the time.
Why Should a Contractor Avoid Frontloading?
An upfront cost used to mobilize the start of a project is often included in a schedule of values. This includes temporary facilities/utilities, cost of permits, the cost to transport materials, security fencing, etc. It might be tempting for a contractor to frontload costs (meaning that they inflate the cost associated with the start of a project so they can have a larger sum of money on hand at the start of the project). This strategy, however, can be detrimental to the project. Frontloading can skew the values of future progress payments, which can disrupt cash flow and stall the project. Plus, clients might become suspicious of the large upfront cost, making a contractor seem untrustworthy. By creating a schedule of values with proper values, a contractor can avoid issues such as these.