Construction Funding During Covid-19
The Schedule of Values, Why is it so Important?
By: Frank Skelly
Construction projects require a lot of documentation: contracts, plans, notices, pay applications, supplier waivers, certified payroll, change orders, and more. One of those documents is the Schedule of Values (SOV). This document is particularly important, so it’s worthwhile to spend a few minutes discussing it.
What is a Schedule of Values?
Simply put, a schedule of values is a comprehensive documented list of work items on a particular project with corresponding values that, in total, represent the entire project from beginning to end including the entire contract price along with all approved change orders. 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 level of detail on a schedule of values can vary dramatically. On some projects the owner or the bank might require that every item must be broken down in great detail, each on separate line items. On other projects the general categories might only be listed– there is no single, industry-wide accepted standard for the level of detail on an SOV. Generally speaking however on larger more complex projects the SOV will be more detailed then on smaller straight forward projects.
Why Is a Schedule of Values Important?
The SOV is essentially a project management instrument used in the monthly pay application process and is a valuable tool in evaluating a project’s progress as a completion percentage related to the scope of work. Since the SOV is used not only to determine the allocation of funds but also to determine the amount of money actually being released for any given month its accuracy is of crucial importance.
Another critical factor on any commercial construction project is cash flow and because it is in large part determined by the SOV, which in turn effects how the funds are allocated, its accuracy is critical. The percentage of a job that is deemed to be complete is of crucial importance to contractors to make sure the cash keeps flowing and their bills get paid.
Common Problems & Issues
Since the cash-flow on a project is in large part dictated by the SOV (as well as the length of time it takes the owner to release funds) there is a temptation for sub-contractors to “front-load” the SOV. Sub-contractors sometimes attempt to front load the SOV by artificially increasing the values of the early project activities which can leave shortages at the end of the job. This practice of “overbilling,” can put the general contractor, owner, surety or bank at tremendous risk.
Often cash flow can mean the difference between the success or failure of a sub-contractor on a given project. If the general contractor, owner, bank or surety doesn’t catch the overbilling it can put an entire project at risk. Unpaid subs, suppliers, vendors, union dues and payroll can further compound the problem. If a payment issue arises, there could also be a bunch of liens to deal with from unpaid subs, suppliers & vendors.
There are many other issues that can arise on a commercial construction project but since the SOV is one intrinsically tied to cash flow it is a document which all parties should be familiar.