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Timely Topics - Frontend Loading / Overbilling

Front-end-loading is a practice adopted by most construction contractors and accepted by most sophisticated construction project owners. Front-end-loading occurs when a contractor develops a “schedule of values” as a device for quantifying the value of its periodic draws on the project. The contractor and the owner agree on the value of specifically identified activities of work to be installed by the contractor. Front-endloading has occurred when the contractor places a value on a work activity that is in excess of its cost with reasonable overhead and profit.

For example, if the work activity is in the contractor’s estimate at $100 including overhead and profit but $125 is the value recognized in the schedule of values, the contractor has created a $25 positive cash flow. The contractor employs front-end-loading in an effort to avoid the necessity of financing some portion of the project with its own or borrowed money. Typically, the contractors include NO dollars in the estimate for “cost of money”. The positive cash flow attained by the contractor via its front-end-loading should not exceed the total fee included in the contractor’s estimate or bid.

There should always remain in the unbilled portion of the contract sufficient currency to complete the work at its estimated raw(1) cost. The cost of money savings generated by this practice benefits the owner’s pocketbook as well with lower overall cost of construction, at least in theory. There are contractors and contractor personnel who were taught that more is always better. This is the witch’s brew that often destroys project cost and schedule.

For the purposes of this discussion, I have differentiated between front-end-loading and overbilling as follows: (a) front-end-loading is as described above, limited by estimated overhead and profit percentages; and, (b) “overbilling” is billing grossly in excess of the limited front-end-loading. Whereas front-end-loading is (1) generally limited to a few planned early completion activities, (2) confined to activities where the values are agreed, and (3) constrained by estimated overhead and profit, overbilling may know no limits. Overbilling is generally the product of the contractor billing for more work than it has really performed.

Clever contractors can accomplish this deception by installing a lot of pieces of work in many places to manifest the illusion of much work being accomplished. The reality is that many bits and pieces of work have been performed but the time consuming and labor intensive process of connecting the loose ends created in the process costs the contractor considerably more than if the work had been properly and systematically completed in the first instance. The downfalls of this overbilling process are innumerable. I will list a few.

• Billing for work not performed might be considered in some circles as theft;
• Performance bonds could be forfeited since insufficient funds remain in the unpaid portion of the contract to complete the incomplete activities;
• The contractor begins to believe that it is really as complete with the work as it has billed and thus fails to adequately man and prosecute for completion;
• Work performed early on appears to have been completed at a labor productivity index far better than what the contractor can really achieve;
• The contractor spends all funds from the positive cash flow which overbilling creates, only to later find that it does not have sufficient funds remaining to complete the work. This sometime leads to contractor defaults on the work;
• Owner expends funds to hire operations personnel and equipment for facility start up only to find that the completion date projected by the contractor is much too optimistic, thereby wasting significant dollars;
• Contractor may be concealing serious financial losses on other work such that it is living on cash flow and not on earned profits.