Construction Cost

Control
What is Cost  Cost management is a process involved in the
Management ? planning , estimation, budgeting and controlling cost
so that budget can be completed in estimated budget.
It is also considered a form of management
accounting that helps to identify future expenditures
in a business to reduce budget overages.
 • Chart out team-based and task-based costs
Why do we • Monitor all costs and ensure that they remain aligned
Manage Cost? with the forecasted budget
• Set hourly and task-based rates as necessary, in order
to stay on budget
• Keep track of actual productivity to accurately
estimate billable hours
  Cash flow analysis determines the estimated annual costs and
benefits for a project and the resulting annual cash flow Too
many projects with high cash flow needs in the same year may
not be able to be supported which will impact profitability
 Tangible costs or benefits are those costs or benefits that an
organization can easily measure in rupees
Basic  A task that was allocated 150,000 but actually costs
Principles of 100,000 would have a tangible benefit of $50,000 if the
assets allocated are used for other projects
Cost  Intangible costs or benefits are costs or benefits that are
Managment difficult to measure in monetary terms
 Costs – resources used to research related areas of a
project but not billed to the project
 Benefits – goodwill, prestige, general statements of
improved productivity not easily translated in rupees
 Direct costs are costs that can be directly related to
production and services of the project
 Salaries, cost of hardware and software purchased
specifically for the project
 Indirect costs are costs that are not directly related to the
products or services of the project, but are indirectly related
to performing the project
 Cost of electricity, paper towels
 Sunk cost is money that has been spent in the past; when
deciding what projects to invest in or continue, you should
not include sunk costs
 To continue funding a failed project because a great
deal of money has already been spent on it is not a
valid way to decide on which projects to fund
 Sunk costs should be forgotten
 Learning curve theory states that when many items are produced
(or tasks are performed) repetitively, the unit cost of those items
decreases in a regular pattern as more units are produced (or more
tasks performed)
 Reserves are money included in a cost estimate to mitigate cost risk
by allowing for future situations that are difficult to predict
 Contingency reserves allow for future situations that may be
partially planned for (sometimes called known unknowns)
and are included in the project cost baseline
 Recruiting and training costs for expected personnel
turnover during a project
 Management reserves allow for future situations that are
unpredictable (sometimes called unknown unknowns)
 Extended absence of a manager; supplier goes out of
business
Processes To
Control Cost COST ESTIMATING
COST BUDGETING
COST CONTROL
 A rough order of magnitude (ROM) estimate provides an
estimate of what a project will cost.
Also referred to as a ballpark estimate, a guesstimate, a
swag, or a broad gauge.
Done very early in a project, often three or more years prior
to project completion, or even before a project is officially
started to help PMs make project selection decisions.
What is Cost
Estimation ? A cost estimate is the approximation of the cost of a
program, project, or operation. The cost estimate is the
product of the cost estimating process. The cost
estimate has a single total value and may have identifiable
component values.
 Expert Judgement Comparative or
analogous estimation
This is probably the most
common way people get an
estimate. Talk to the men
If your current project is
and women with the best
similar to past ones, take the
Types of hands-on experience and
understanding of the data from previous work and
extrapolate it to provide your
Estimation project requirements. Just
make sure that everyone estimates for the new job.
has the same Before proceeding, make
understanding of what sure to check whether those
needs to be delivered. And projects were successful!
try to find experts who will
actually be working on the
project.
 Bottom-up
This method uses a detailed
work breakdown structure, and is
best for projects you’re
committed to. Each task is
estimated individually, and then
those estimates are rolled up to
give the higher-level numbers.
This process makes you think
about what’s required in order to
take a step back to see if the big
picture still makes sense. You’ll
receive more accurate results
than the top-down method, but
it’s also a greater investment of
time.
Top-down
Using a high-level work
breakdown structure and data
from previous projects, you
can add estimates for each
project work item to determine
the overall effort and cost.
The top-down method lacks
detailed analysis, which
makes it best suited for a
quick first-pass at a
prospective project to assess
its viability.
This is a more scientific method that essentially auto-calculates estimates
using detailed data from previous activities. Let’s say you have data from
your last three office network installation projects. You can use this to get a
days-per-workstation value or something similar. You then plug in the
number of workstations for your new installation and out pop the
estimates.
This can be a quick method but needs robust data to feed it. And because
it’s all about the math, it’s hard to adjust for the environmental, political and
cultural differences between projects.

Parametric model estimating

Cost
Budgeting Cost budgeting is a tool to estimate the costs or necessary efforts
for projects, work packages or activities in project management. Cost
budgeting includes the estimation of costs, setting a fixed budget, and
managing and controlling the actual costs (compared to the estimated
ones). The costs then have to be allocated to the activities or work
packages in a project. A carefully implemented schedule and resource
plan enables a more precise cost budgeting.
 Master Budget or Summarized
Functional Budgets Budget or Finalized Profit plan

 It relates to any function of

the firm such as sales,
production, cash, etc.
Following budgets are

Types of
prepared in functional
budgets:

Budget  Sales Budget

 Production Budget
 This budget is very useful for
the top management of the
company because it covers all
 Material Budget the information in a
 Manufacturing Budget summarized manner.

 Administrative Cost Budget

 Plant Utilization Budget
 Capital Expenditure Budget
 Research and Development
Cost Budget
Cash Flow Budget
 A cash flow budget
examines the inflows and
outflows of cash in a
business on a day-to-day
basis. It predicts a
company's ability to take
in more money than it
pays out.
 Cash flow budgets also
suggest production
cycles and inventory
levels so that a
company's resources are
available for activity, not
sitting idle on warehouse
shelves.
Static Budget
 A static budget contains
elements where
expenditures remain
unchanged with variations
to sales levels. Overhead
costs represent one type
of static budget, but these
budgets aren't confined to
traditional overhead
expenses.
 This condition occurs
routinely in public and
nonprofit sectors, where
organizations or
departments are funded
largely by grants.
  Cost control is the practice of identifying and reducing
business expenses to increase profits, and it starts with the
budgeting process. A business owner compares actual
results to the budget expectations, and if actual costs are
higher than planned, management takes action.
Cost  Project cost control includes:
 Monitoring cost performance
Controlling  Ensuring that only appropriate project changes are
included in a revised cost baseline
 Informing project stakeholders of authorized changes
to the project that will affect costs
 Performance review meetings can be a powerful tool to help
control project costs
 Knowing you have to report on your progress is an
incentive for people to perform better
 Budgetary control, Standard costing, Inventory control,
Ratio analysis, Variance analysis
 Performance measurement is another important tool for cost
control
 There are many general accounting approaches for
measuring cost performance but earned value
management is a tool unique to project management
  EVM is a project performance measurement technique
that integrates scope, time, and cost data
 Given a baseline (original plan plus approved
changes), you can determine how well the project is
Earned meeting its goals
Value  You must enter actual information periodically to use
EVM
Managment  Was a WBS item completed or approximately
how much of the work was completed
 Actual start and end dates
 Actual cost
Planned value (PV), formerly called the budgeted cost
of work scheduled (BCWS), also called the budget, is
that portion of the approved total cost estimate planned
to be spent on an activity during a given period

Actual cost (AC), formerly called actual cost of work

performed (ACWP), is the total of direct and indirect
costs incurred in accomplishing work on an activity
during a given period

Earned value (EV), formerly called the budgeted cost

of work performed (BCWP), is an estimate of the value
of the physical work actually completed
EV is based on the original planned costs for the
project or activity and the rate at which the team
is completing work on the project or activity to
date
  Budgetary control is a system of controlling costs
which includes the preparation of budgets,
coordinating the departments and establishing
responsibilities, comparing actual performance
with the budgeted and acting upon results to
achieve maximum profitability.
 Process Of Budgetary Control
Ways of Cost 1. The objects are set by preparing budgets.

Management 2. The business is divided into various responsibility centres for

preparing various budgets.
(Budgetary Control)
3. The actual figures are recorded.
4. The budgeted and actual figures are compared for studying the
performance of different cost centres.
5. If actual performance is less than the budgeted norms, a remedial
action is taken immediately.
  To ensure planning for future by setting up various
budgets, the requirements and expected
performance of the enterprise are anticipated.
 To operate various cost centres and departments
with efficiency and economy.
 Elimination of wastes and increase in profitability.
 To anticipate capital expenditure for future.
Objectives  To centralise the control system.
 Correction of deviations from the established
standards.
 Fixation of responsibility of various individuals in
the organization.
  Standard Costing discloses the cost of deviations
from standards and clarifies these as to their
causes, so that management is immediately
informed of the sphere of operations in which
remedial action is necessary.
 Process Of Standard Costing :
 Ascertainment and use of Standard Costs;
Standard  Recording the actual costs;
Costing  Comparison of actual costs with standard costs in order to
find out the variance
 Analysis of variance
 After analysing the variance, appropriate action may be
taken where necessary.
  After analysing the variance, appropriate action may be
taken where necessary.
 It helps to ascertain performance evaluation.
 It supplies the ways to utilise properly material, labour
and also overhead which will be economic in character.
 It also helps to motivate the employees of a firm to
improve their performance by setting up a ‘standard’.
 It also helps the management to supply necessary data
Objectives relating to cost element to submit quotations or to fix up
the selling price of a firm.
 It also helps the management to make proper valuations
of inventory (viz., Work-in- progress, and finished
products).
 It acts as a control device to the management.
 It also helps the management to take various corrective
decisions viz., fixation of price, make-or-buy decisions
etc. which will be more beneficial to the firm.
  Ratio analysis is the process of determining and
interpreting numerical relationships based on
financial statements. A ratio is a statistical yardstick
that provides a measure of the relationship
between two variables or figures.
 Process of Ratio Analysis
 An analyst should decide the objectives of ratio analysis.
Ratio  Select th0 appropriate ratios on the basis of objectives of ratio
analysis.
Analysis  Calculation of the selected such ratios.
 Comparison of the calculated ratios with the ratios of the same
business concern in the past.
 Comparison of the calculated ratios with the same type of ratios of
other similar business concern.
 Comparison of the calculated ratios with the same type of ratios of
the industry to which the business concern belongs.
 Interpretation of the ratios.
  Spreadsheets are a common tool for resource planning,
cost estimating, cost budgeting, and cost control
Using  Many companies use more sophisticated and centralized
Software To financial applications software for cost information

Assist in  Project management software has many cost-related

features, especially enterprise PM software
Cosst  Several companies have developed methods to link data
between their project management software and their
Managment main accounting systems
  It helps the firm to improve its profitability and
competitiveness.

Advantages  It helps the firm in reducing its costs and thus

reduce its prices.
of Cost  It is indispensable for achieving greater

Coontrolling
productivity.
 If the price of the product is stable and reasonable,
it can maintain higher sales and thusemployment
of work force
  Reduces the flexibility and process improvement in
Disadvantages a company.
Of Cost  Restriction on innovation.
Controlling  Requirement of skillful personnel to set standards.
  Cost reduction is not  Techniques of cost reduction
concerned with setting
targets and standards. Cost  Organization and methods
reduction is the finalresult in  Work study
the cost control process.
 Material handling
 Cost reduction aims at
improving the standards.  Automation
Features of  It is continuous, dynamic and  Value analysis
Cost innovative in nature, looking
always for measures and
Controlling alternativeto reduce costs.
 It is a corrective function.
 This is applicable to every
activity of the business.
 It adds thinking and analysis
to action at all levels of
management.
  The Architect to provide the Owner with a preliminary
estimate of construction costs at the end of the Schematic
Design Phase
 The Architect to provide the Owner with adjustments to its
preliminary estimate of construction costs at the end of the
Design Development and Construction Document Phases,
respectively.
 The Owner shall cooperate with the Architect in making
some adjustments.” The problems presented by this phrase
include the following:
Role Of an  There are no boundaries for the “adjustments” necessary to
Architect in bring the Architect’s estimate of cost into line with the
Owner’s budget. That is to say, this is a totally open-ended
obligation;
Cost Control  The amount of redesign work necessary to adjust the
Architect’s estimate is similarly open-ended notwithstanding
the potential mismatch of the Owner’s evolving program
with the Owner’s budgetary constraints; and
 The Architect is bound to provide redesign services for free
notwithstanding the fact that the estimate of the costs of
work may have increased due to factors that are totally
unrelated to the Architect’s services.
  Planning starts even before the starting of project. This
phase is very important. Successfully completion of a project
and success of a project manager mostly depend on this
phase. In this phase a CPM selects the source of materials,
source of necessary equipment, justify the sub-contractors,
choose the project team, prepare project's budget, calculate
project's risk, etc.
 Risk management is the most difficult part of project
management. Civil engineer calculates the project risks
before starting the project though, there are many critical
Role of Civil risks can arise during project's life cycle. To mitigate these
risks without hampering the project's progress is another key
Engineer responsibility of a construction project manager.
 Suppose building materials price now is lower in the market
than the time of preparing budget. That doesn't mean you
can waste materials as you wish. So, cost management is the
procedure of choosing best quality materials with lowest
possible price and using them with minimum possible
wastage.
THANK YOU