Manage your construction budget well with a reliable construction project management software to avoid zero profit. Today, we will look into ways on how you can control your construction costs and make the highest profit possible from your client’s given budget.
Identifying Cost Issues in Construction
During the construction process, systems for project management and documentation have become indispensable tools to managers and other stakeholders involved in the project. But these tools can act more than just a project management system. They can also serve as record holders of financial transactions so managers can monitor where the budget is going.
We always defined construction problems as factors that lead the project to become over budget and delayed. Now, project management systems can give you a fair indication of when the problem exists and to what extent has it affected the project.
You don’t need to have a sophisticated system for controlling your budget. A simple project management software can help you do the job. With a given budget, a competent project manager will know when an activity will result in more costs. By monitoring activities via construction project management software, he’d easily pinpoint these activities that are costly.
Like in avoiding delays, chances to see the project go over the budget can be diminished during the planning phase. We mentioned before to set realistic estimates by consulting your suppliers, subcontractors, and previous projects. During the drafting of the contract, also let your client know that costs may change during the process, most especially when it comes to materials procurement.
The plan, schedule, and budget are intimately linked with each other. However, in project management, this information is kept separate from each other, making it quite difficult for project managers to track issues. But with proper communication and the integration of these data, with the help of project management software, for instance, can help project managers who aren’t really accounting experts to guide the project to the right route so it won’t go over the budget.
Setting Construction Project Budgets
As we mentioned, budget is set during the planning phase along with the schedule of activities. As soon as the objective is set, steps to achieve it are planned and the corresponding costs for each step and resource set are estimated.
For cost control responsibilities, the construction plan and cash flow estimates provide the baseline reference for project control and monitoring. As for project progress monitoring, completions can be compared with the set schedule and milestones to know whether the team is being productive or not. This can also indicate whether the project will soon be delayed and over budget.
Like the project plan which is broken down into steps and sub-steps, cost estimate should also be made very detailed so that the construction firm wouldn’t have to shell out for the deficit when the client turns out unprepared for unexpected additional costs. Of course, an allowance should be set and we mentioned before that a common practice is to set 20% of the total budget as an emergency fund. This emergency fund should go to overruns when they happen.
For cost control and monitoring purposes, the original cost estimate is used as a basis for the final project budget and this budget serves as a guide for managing expenses during the operation. Expenses incurred are then recorded in specific job cost accounts and compared with the original cost estimates in each category. These job cost accounts are what project managers usually use in cost control.
In addition to cost accounts, expenses incurred on materials and labor are also typically retained in the project budget. This information lets the project manager identify the actual quantity of materials used and the labor hours consumed. Comparing them with the set budget for each, project managers will then be able to identify whether they can will have cost overruns or savings.
Cost Planning in Construction
Cost plan and budget are often regarded as synonymous but they are not. Cost planning is part of budget planning. Here, project managers allocate the budget to particular elements of the project and will serve as a reference for cost control. In short, the budget is the limit of the expenditures for a project while the cost plan is the definition of where the money will be spent.
Again, to avoid going over budget, the cost plan should include the best estimate and that doesn’t mean declaring the cheapest possible unit prices. It should be flexible so you can adjust comfortably when prices in the market suddenly change. The cost plan should cover all stages of the project and will be an essential reference against which the project costs are managed.
Like the project planning, setting the budget can be a complicated task which needs much attention, research, and consultation. The method in setting the budget may differ for each stage of the project. But the degree of certainty should increase as elements of the project like materials and resources become better defined. But see to it that the budget you set is based on the client’s capability and objective. We said that changes are likely to happen but they should only happen when the client decides to change his objective.
Finally, the objective of cost control is to manage the delivery of the project so that expenses stay within the approved budget. Thus, your aim as a project manager in this cost control task is to come up with the best possible building that’s within the budget. Regular cost reporting will facilitate the best possible estimate of:
- Anticipated final project cost.
- Project cost to date.
- Future project cash flow.
In addition, a more efficient regular cost reporting should include assessments of:
- Costs incurred in the use of a completed facility
- Ongoing risks to costs.
- Potential savings on each element used in each phase.
Monitoring expenses on any particular date doesn’t pose control over future expenses and the final cost of the project. For cost control to be really effective, the whole project team should adopt the correct attitude to cost.
Effective Cost Control and Planning Tips
Reiterating it again, cost control is more effective when the whole team understands the budget and cost plan and takes necessary actions to stay within the budget. Hence, effective cost control will require the following actions to be taken:
- Establishing that all decisions made during the design stage and construction proper are based on the cost plan and alternatives considered. No decisions should be implemented whose implications are likely to cost exceeding the total budget.
- Encouraging the designers to design within the cost plan at all stages. They are also encouraged to follow design development control procedures for the whole project. Experts claim that 80% of the cost plan should be determined by the design while 20% of it is defined by construction. It is then recommended that all crew members become aware that no one among them is authorized to change estimated costs on any item and that if any change becomes necessary, then the increase must always be balanced by savings on another item.
- Regularly update and reissue the cost plan as well as the variation orders so that all members become aware of the alterations to the brief.
- Adjust the cash flow plan, master schedule, and forecast of inflation to reflect alterations in the target cost. This is important so that misunderstanding with the client will be avoided and so that the team stays on track when it comes to the budget.
- Develop the cost plan in close liaison with the project team as the design stage and construction phase advance. The plan should always include the best possible cost estimates and future cash flow. Whenever better information on cost is available, be sure to update the cost plan, replacing the initial forecast with a more accurate estimate or the actual cost of possible. with the project team as design and construction progress.
- Risks can cause altered costs most especially when rework is required. Review contingency allowances at intervals or when risks become actual problems. Contingency plans should not involve, as much as possible, increasing the total cost.
- The agreed change in management process should be followed strictly at all project phases. Alternative procedures should only be carried out when proven that otherwise, delay, danger, or cost increase would be incurred.
- Anticipated change in costs should be reported immediately to the client to prevent unrecognized claims. The contractor should then be given the correct information at all times through the cost reports. This is made easy with the help of construction project management software like Pro Crew Schedule.
- Contingency provisions are given after a thorough evaluation and determination of the risks that can greatly affect the schedule and budget and execution of plans. When consultants decide that there is no other way around the risk but to exceed the budget, a written request must be submitted to the client. This request must include the following details:
- Risks and variations leading to the request.
- Confirmation by a consultant that the variations are essential.
- Confirmation by a consultant that savings is not possible without having an unacceptable effect on the quality of the completed project.
- Submit accurate and up-to-date cost reports regularly to keep the client well-informed of the cost situation and where the budget is actually going.
- Ensure that all parties involved in the cost planning and plan execution are clear about the meaning of each entry in the cost plan and report. Data in these documents should never be incorrectly entered. Likewise, incorrect deductions from the budget report should never be done.
- Ensure that the project costs incurred in every milestone are always reported back and compared with the original approved budget to see whether adjustments should be done in the next phases. Any subsequent variations to the cost plan must be clearly indicated in the cost reports.
- Always plot the actual expense against the predicted cost to give an indication of the project’s progress.
Keeping your project within the budget shouldn’t be difficult when the cost plan is done properly from the start and when all members comply with the plan. Monitor expenses regularly and put them into reports so you can keep better track of the actual costs. The project progress can be a basis for your tracking so make sure that you employ a reliable project management software in your projects. Start a demo today with Pro Crew Schedule and be more efficient in your cost planning and monitoring.