Understanding Cost Control in Construction Industry
Construction Cost Control
Cost control methods in construction projects is a process through which project and program managers maintain project expenses from crossing the limits. It can be done in various ways, such as controlling labor expenses and material and overhead cost monitoring. The managers ensure that in no way do project expenses go over the budget limitations.
The primary thing about cost control in construction management is that it heavily relies on sound estimates and constant monitoring throughout the project to see how efficiently it is done. Understanding the purpose and importance of cost management of construction projects is crucial because the project quickly overruns its budget without a solid cost control mechanism. Worst case scenario, it can make the construction firms involved with the project go bankrupt.
How To Control Construction Costs?
Before kicking off the planning phase of construction projects, it is advisable to devise cost estimates. Many high-level project managers sometimes feel a need for another designation to help them out with these estimates. It is also worthwhile to invest in a construction manager because they can have a good track record of cost estimation techniques and expertise in the field, one which is often lacking by other management stakeholders. Hiring a cost manager can be the first step towards construction cost control, and a wise one at that.
Another smart move a construction project manager can make is to use software technology for their use. Software usage in construction management has started to grow rapidly in Ireland, and it can prove to be very helpful if the managers know their basics well.
Another way to control costs is to update the cost plan constantly. Analyze and reevaluate cost plans to determine if costs are higher than expected in some parts of the project. Balance it out by cost reduction in other parts of the projects. Similarly, when it comes to procurement, a manager can try and bargain with the constant vendors or sellers to bring down the prices a notch without compromising the quality of the goods.
Types of Cost Control
1. Budget making
The project budget is a financial plan for all the costs. Success in project budget management depends primarily on the creation of a comprehensive and reliable project budget.
Managers need to remind themselves that, by definition, the project budget cannot be accurate as it is only an estimate. Normal ranges of project budget variability depend on the project, the construction firm’s company culture, the type of construction, and many other factors, but usually falls within +/- 10% (estimate).
According to the Project Management Body of Knowledge (PMBOK), construction budget-making comprises Cost Estimation and Determining the Budget. Even though both these processes sound the same and are often erroneously used interchangeably, they are vastly different.
The Cost Estimation process estimates the cost for each element and records the basis of that cost, whereas Determine Budget is a process that helps cost estimation upwards. Moreover, it applies cost aggregation, project contingency and makes a cash flow estimate for the project to finally have a detailed budget for various WBS levels and overall.
2. Cost Tracking
The best way to track costs is using a time-based budgeting technique. This helps in keeping track of the budget of a construction project in each of its phases. The actual costs will have to be tracked against the periodic targets that have been set out in the budget and approved by the stakeholders.
This is much easier to work with rather than having one complete budget for the entire period of the project. If any new work is required to be carried out, construction managers only need to make the estimations for that new part and not the whole of the project just to accommodate the new change.
3. Earned Value Method and Variance Analysis
One other very powerful tool that helps analyze project budget performance is the Earned Value Method (EVM). EVM evaluates project budget performance and calculates a Cost Performance Index (CPI), which represents the effectiveness of project spending. EVM can calculate a Cost Variance (CV), which is the difference between the value of the work completed and the number of funds expended to accomplish that work. These values tell a construction manager if they are over or under the budget.
Variance analysis is another tool to help managers understand why construction elements are over or under budget. Understanding why project phases are overrunning requires managers to come up with action plans to bring the project back within budget.
Simply coming up with a project budget is not adequate during your project planning sessions. Project managers and team members would have to keep a watchful eye on whether the costs remain close to the figures in the initial budget. Not just that, but they should pay attention to the approved costs, forecasted vs. actual cost, and committed costs.