Journal of Financial Management of Property and Construction

Volume 11, Number 2, pp75 - 90, August 2006

Printed in Great Britain

A model for integrating cost management and production plan-

ning and control in construction
ANDREA P. KERN
Universidade do Vale do Rio des Sinos (UNISINOS) Av. Unisinos, 950 - Bairro Cristo
Rei, CEP 93.022-000, Sao Leopoldo-RS, Brazil
CARLOS T. FORMOSO
Federal University of Rio Grande do Sul, Building Innovation Research Unit
(MORIE), Av. Osvaldo Aranha 99, 3o andar, CEP 90035-190. Porto Alegre-RS, Brazil
Summary
• Traditional cost management systems adopted by construction firms have many problems,
which are widely discussed in the literature: the information provided by them is usually too
late, and tends to be too aggregated and too distorted to be relevant for production management.
• The main objective of this research work is to propose a project cost planning and control
model for construction firms. This model aims to support the development of production
management systems, in which cost management and production planning and control can be
gradually integrated, in order to overcome the existing limitations of cost accounting systems.
• The scope of the model was limited to building projects carried out by small and
medium sized companies, involved in both product development and production.
The development of the model was based on the literature review and also on the re-
sults of nine empirical studies conducted in four different Brazilian construction firms.
• The model suggests the integrated application of three fairly well known cost management
techniques: operational cost estimating, S-curves and target costing. By using this set of tools,
it is expected that cost management will become more proactive, and able to deal with the
dynamic, uncertain and complex construction environment that exists in most projects. The
model was partially tested in two case studies, in which it provided key information for sup-
porting decision making related to design, production planning and contracts with suppliers.

Keywords: cost management, planning production control, cash flow, S-curves, opera-
tional cost estimating, target costing.

Introduction systems have three important consequences. Firstly,

Despite the environmental, managerial and technologi-
cal changes that have occurred in the last few decades,
existing cost management systems tend to be very
similar to the ones that have been used since the mid
Twenties (Johnson and Kaplan, 1993). In the face of all
these changes, traditional cost account information has
become mostly irrelevant and even dangerous for man-
agerial purposes (Ploss, 1999; Kim, 2002). According
to Johnson and Kaplan (1993), such information tends
to be too late, too aggregated and too distorted to be
relevant for production management, since they are
generated mostly to satisfy fiscal and financial needs.
The drawbacks of the traditional cost management
these systems cannot provide accurate product cost:
costs are distributed to products in a simplistic and arbi-
trary way that usually does not represent the real demand
imposed by each product on the company’s resources
(Ostrenga et al., 1998). Secondly, such systems fail to
stimulate decisions that can affect the overall production
result. Managers are sometimes encouraged to accom-
plish short-term goals by reducing expenses with train-
ing and investments, or even by increasing the level of
inventory(Ostrenga et al., 1998). Although effective in
the short term, these decisions can seriously affect future
results (Goldratt and Cox, 1989). Finally, the cost man-
agement information provided by traditional systems is
of little help to managers in their effort to improve pro-
duction performance. Poor transparency allied with the

© Glasgow Caledonian University

76 A. P. Kern and C. T. Formoso
lack of timeliness makes cost information ineffective to
help in the identification and elimination of waste.
Particularly in the construction industry, the exist-
ing gap between the available cost information and the
goals set to the business is pointed as being one of the
main faults of traditional cost management systems
(Kim, 2002). Often construction cost control consists
basically of monitoring actual performance against cost
estimates and identifying variances. As a result, tradi-
tional cost control systems have been much more useful
to manage contracts than production (Howell and Bal-
lard, 1996).
This paper discusses traditional cost management
practices in the construction industry and proposes a
project cost planning and control model for construc-
tion companies. Cost planning and control is defined
in this study as a managerial process that must be per-
formed in all project phases, involving different sectors
and other processes of a construction. Its main objec-
tive is to generate cost information to support decision-
making related to production management in order to
reach the goals set for the business, including decisions
related to finance, profitability, timing, and quality.
This model aims to support the development of
production management systems in which cost man-
agement and production planning and control can be
gradually integrated, in order to overcome the existing
limitations of cost accounting systems. The scope of the
model was limited to building projects carried out by
small and medium sized companies, involved in both
product development and production processes. The
development of the model was based on the literature
review and also on the results of empirical studies con-
ducted in four different Brazilian construction firms.
Cost estimating practices in the construction in-
dustry
Differently from other industries, the product of the con-
struction industry product is one-of-a-kind and most of
the production takes place in a temporary environment,
which is vulnerable to weather conditions. Thus, substan-
tial changes often occur in the product and in construction
methods during the design and production phases. These
limit the usefulness of the early cost estimates on which
the business is based.
Due to the unique characteristics of the product involved,
specific information is necessary for each new project.
This means that cost management models developed for
industries in which processes are repetitive and relatively
stable cannot be easily adapted to construction projects.
© GCU Journal of Financial Management of Property and Construction, 11 (2)
Uncertainty, variability, interdependence and com-
plexity play a key role in the construction environment,
and a major challenge for production management sys-
tems is to eliminate or to reduce the impact of these
characteristics (Koskela, 2000). Moreover, the uncer-
tainty related to the financial environment must also be
considered, regarding the significant amount of capital
required by construction projects (Barbosa and Pimen-
tel, 2001).
According to Koskela (2000), management systems in
construction tend to be ineffective due to the fact that the
nature of the production processes involved is not prop-
erly taken into consideration. The same author suggests
that a major underlying cause of the ineffectiveness of
production management is the fact that production is
viewed as a transformation process, without explicitly
considering the non value-adding activities, which tend
to be neglected in production control despite their high
impact in terms of cost. In fact, both cost estimates and
production plans for construction projects are typically
segmented in items that represent only value-adding
activities (Koskela, 2000).
In the case of cost estimating, the information pro-
duced has the additional drawback that it is remotely
related to the way costs are incurred. Most cost meth-
ods adopted in the industry are strongly based on the
standard cost method, and tend to associate each cost
item to a finished element, e.g. walls (m2), reinforced
concrete components (m3), windows (units), obtained
from design drawings (Koskela, 2000). This makes
it difficult to examine accurately the effect of design
changes in production costs.
Moreover, although time is a factor of major impor-
tance in construction costs, traditional cost estimating
methods do not offer any reliable guidance for assess-
ing the impact of production duration on project costs
(Kaka and Price, 1991; Turner, 1993; Navon, 1995).
Horngreen et al. (1990) argue that cost management
must not be isolated from other managerial functions,
and should play a key role in the implementation of
the company strategies. Kim (2002) suggests that cost
management systems should involve a set of processes
required to ensure that a construction project is com-
pleted within the approved budget, including cost esti-
mating, cost control and cost projection. Navon (1995)
points out that the proper consideration of the interac-
tion between cost and time in construction projects de-
pends on the integration of cost management systems to
production management.
Therefore, cost management systems in construction
must be dynamic, proactive and able to support differ-
 A model for integrating cost management and production planning and control
-ent decision-making processes, in order to protect the
business from the harmful effects of uncertainty. Their
main objective should be to generate information to
support decision- making, mainly concerned with cost
reduction, value improvement and financial manage-
ment.
Considering this context, this study proposes a cost
planning and control model that integrates the use of
three cost management techniques, which have been
identified in the literature as potentially helpful for im-
proving cost management in construction: operational
cost estimating, S-curves, and target costing. These are
described bellow.
OPERATIONAL COST ESTIMATING
The idea of using an operational approach for cost es-
timating is not new. In the Sixties, Skoyles (1965) dis-
cussed a radical change in traditional cost estimating
methods that had been proposed in the U.K., in which
a very detailed estimate of the project was produced
based on the early definition of construction methods.
This approach was not successful because it was con-
sidered to be too time consuming and also due the lack
of knowledge on production methods by cost estimat-
ing professionals. It seems that the main difficulty for
implementing such an approach was that the high level
of uncertainty and variability that exist in construc-
tion at the early project stages was neglected. Barnes
(1977) proposed a less radical approach to operational
cost estimating for construction projects, suggesting
the use of different cost drivers for estimating the cost
of resources, which were classified into fixed, quantity
based, time-based, and price-based.
Activity-Based Costing (ABC) is a cost method that
has been recently adopted in many industrial and serv-
ice firms as a method to improve cost management in
complex production systems. It is basically a two-stage
approach for allocating indirect costs to products based
on cost drivers of various levels (Kaplan and Cooper,
1998). In the first stage, resource costs (labour, equip-
ment and power) are assigned to those activities per-
formed in the organisation. During the second stage,
activities costs are assigned to the cost objects based
on selected cost drivers (e.g., machine set-up, quality
inspection and material handling activities), which ex-
press a causal relation between the activity demand and
the cost object considered (Ostrenga et al 1998). Besides
the fact that ABC allows to directly trace manufactur-
ing costs to products, it is also possible to determine the
costs related to product families, services and clients.
© GCU Journal of Financial Management of Property and Construction, 11 (2)
77
The information produced by ABC cost systems can po-
tentially increase process transparency, providing guid-
ance to identify non-value-adding activities (Marche-
san and Formoso, 2001).
Notwithstanding the benefits of its application, ABC
presents some drawbacks when compared to traditional
cost systems. Perhaps, the most important one is the
large amount of data usually needed in ABC systems.
Indeed, according to some authors (Krieger, 1997), the
excessive level of detail is a major cause of unsuccess-
ful ABC implementations. This problem can be even
worse in unstable and complex production systems,
such as those observed in the construction industry
(Marchesan and Formoso, 2001).
The idea of using operational cost estimating in this
research is to keep production into perspective during
the estimating process. Thus, costs of non-value ac-
tivities can be identified and estimated to some extent.
Moreover, the changes (i.e., design, production plan-
ning) that might occur after the initial cost estimate, due
to the uncertainty of the construction environment may
be taken into consideration.
CASHFLOW S-CURVES
The S-curve is a fairly simple technique that presents
graphically the project cash-flow. It can be used to
forecast and control the use of resources throughout a
project (Kim and Ballard, 2001). S-curves can be used
for simulating different scenarios, considering time and
cost deviations, and also for summarising key informa-
tion for supporting decision making in different sectors
of a firm (Neale and Neale, 1989). Due to its simplicity,
they can be used a visual device for displaying informa-
tion that is quickly understood in the working environ-
ment.
Although S-curves do not solve problems concerning
limitations in cost estimating (Bazarra et al. 2000), this tool
is very useful for supporting production management since
it can be used for integrating information from production
plans and cost estimates (Kim and Ballard, 2001).
S-curves are often used as both a cost and time con-
trol tool, by applying the earned value method (EVM).
Kim and Ballard (2000) define EVM as a project control
technique that provides a quantitative measure of work
performance: project progress is measured against an
earnings plan. The entire project is divided into the vari-
ous types of work required, each with their own budget
unit rates, with 100% corresponding to their aggregated
budgets. It involves a crediting of budget dollars or labour
hours as scheduled work is performed.
78 A. P. Kern and C. T. Formoso

However, this technique has been criticized by Kim process of product design (Cooper and Slagmulder,
and Ballard (2000): EVM is an effective tool only un- 1997).
der the limiting assumption that every activity or cost While target costing is focused in cost reduction dur-
account is independent. According to them, activities ing the design process, a similar technique, named kai-
should be considered as being dependent. Also, the au- zen costing, has been used during the production phase,
thors point out the work sequence can be manipulated with the main objective of reducing costs in order to
by managers, releasing work assignment to the field, achieve a pre-established target cost (Monden, 1999).
that are not shielded from uncertainty. A further prob- However, as in most construction projects, there is an
lem cited by Kim and Ballard (2000) is that with the overlap between the design and the production phases,
objective of making cost variance positive, managers this study proposes the use of target costing in the pro-
may try to decrease the actual cost of work performed duction phase, in construction companies that also get
as much as possible. The overload resulting from re- involved in the product development process.
duced capacity can make work flow less reliable, which
in turn can impact the performance of downstream pro- Research method
duction units.
This research project started in November 2001 and
TARGET COSTING ended in February 2005. Multiple case studies were the
research strategy adopted in this investigation. Com-
Target costing has been widely used by some leading pared to a single case study this creates a richer learning
industrial companies with the main objective of re- opportunity since the weaknesses of one study may be
ducing the final cost of the product in order to obtain compensated by the strengths of others. Moreover, de-
the expected profitability while ensuring satisfactory veloping an investigation in different organisational en-
quality levels (Maskell and Baggaley, 2003). It can be vironments creates favourable conditions for reflecting
described as a structured way of establishing the cost on the processes being investigated at a higher level of
and quality that must be achieved in the development abstraction.
of a product in order to reach the desired profitability Table 1 presents a brief description of the four compa-
(Cooper, 1995). nies involved in this study. They are all small and medi-
Target costing can be divided into two main steps. um sized companies, located in the Metropolitan Region
Firstly, a cost target should be established for the prod- of Porto Alegre, in the South of Brazil, and their main
uct, by subtracting the product’s desired profit margin business is to develop and construct building projects.
from its expected selling price. Secondly, the target cost The main criteria for choosing the companies were: (a)
of the product is distributed to its components, materi- their willingness to participate in this study; (b) they all
als or systems (Cooper, 1995). Differently from tradi- had fairly effective production planning and control sys-
tional cost estimating processes, cost is regarded as an tems; and (c) they were representative of different mar-
input and not as an outcome of the design process. By ket segments in Brazil. Three of the companies (A, B and
setting target costs based on market-driven selling prices, C) had been using for several years production planning
target costing transmits the cost pressure that is placed on and control systems strongly based in the Last Planner
the firm by the marketplace to everyone involved in the System for Production Control (Ballard, 2000).
Table 1: Brief description of the companies involved in this study
Company Number of direct Main market segment Turn-over
employees (US$/year)
A 14 Development and construction of 4,000,000.00
housing building projects for lower
middle class
B 136 Construction and refurbishment of 20,000,000.00
industrial buildings and hospitals,
including both the management of
the design and production processes
C 89 Development and construction of 4,600,000.00
social housing projects, and construction
and refurbishment of industrial buildings.
D 73 Development and construction of house 10,000,000.00
building projects for higher middle class

© GCU Journal of Financial Management of Property and Construction, 11 (2)

 A model for integrating cost management and production planning and control 79

Figure 1: Overview of the research design

Figure 2: Brief description of the case studies carried out in the second and fourth tesearch stages

Figure 1 presents an overview of the research design,
including the main research questions, as well as the
case studies and companies involved in each one of the
four research stages.
The first set of studies was focused on the cost man-
agement systems of each one of the four companies.
The aim was to understand the existing problems in the
cost management systems adopted by those firms. The
processes and sectors involved in cost management
were investigated, as well as the main decisions made
by managers that were supported by cost information.
In the second stage, exploratory case studies were
undertaken in three different construction projects, with
the objective of defining the scope of the cost planning
and control model and the role of the three cost man-
agement tools (cash flow S-curves, operational cost es-
timating and target costing). Based on stages 1 and 2
and also in the literature review, a project cost planning
and control model for construction companies was pro-
posed in the third research stage. Finally, the proposed
model was tested in two different projects in the fourth
research stage, in which the model was partially imple

© GCU Journal of Financial Management of Property and Construction, 11 (2)

80 A. P. Kern and C. T. Formoso
mented in two different projects.
The main characteristics of the projects investigated
in the second and fourth research stages are presented
in Figure 2.
It is important to point out that the research strategy
imposed some limitations in the scope of the model,
since its development was based on a set of case studies
in which changes in the cost management of construc-
tion projects were implemented. The degree of innova-
tion introduced by the model was to some extent lim-
ited by the success of the implementation process.
The main sources of evidence used in the case studies
were: (a) interviews with contract managers, produc-
tion managers and cost estimators; (b) participant ob-
servation in cost management and production planning
meetings; (c) analysis of documents (e.g. production
plans, cost estimates, etc.).
Results
FIRST RESEARCH STAGE: CONTEXT UN-
DERSTANDING
The case studies conducted in the first research stage
indicated that the four companies had faced problems
that are relatively similar to those pointed out in the
literature. Although the companies had fairly organized
project financial controls, their managers stated that
there was a lack of cost information to support decision
making related to design, production and contracts.
All four companies had some kind of cost database,
but they faced difficulties in keeping it updated. Some
of the people interviewed pointed out that this is dif-
ficult because it requires information from different
processes and sectors. Firm directors were particularly
dissatisfied with cost control due to the fact that the
information produced was usually late and too aggre-
gated.
Another important drawback was that in none of the
companies was production planning and control and
cost management integrated. In Companies A and C
production managers were not involved in the project
cost management system at all. In Company B and
D, although the production managers were in charge
of both cost control and production management, they
dealt with them separately, since the information was
available in two different information systems.
© GCU Journal of Financial Management of Property and Construction, 11 (2)
SECOND RESEARCH STAGE: CONTEXT
EXPLORATION
All three empirical studies carried out in the second stage
involved the combined implementation of cash flow S-
curve and operational cost estimating as a mechanism
for integrating cost control into the production planning
and control process. The S-curve was mainly used to
make cost projections, as well as to assess whether the
project cash flow was adequate. In Case Study 6, a tar-
get costing exercise was also carried out.
• Case Study 5
Case study 5 involved an investigation on the cost man-
agement system of a low-income house-building project
in which the houses were to be delivered in stages. Each
stage consisted of ten terraced house blocks.
The S-curve was gradually introduced in the com-
pany with the aim of producing a reliable cost plan, in-
volving the following tasks:
(a) The cost estimate structure was changed so that
each item of the bill of quantities had a correspond-
ing activity in the long-term production plan, i.e. an
operational cost estimate for each production activity
was produced. This task was jointly performed by the
project production manager and the person responsible
for cost estimating;
(b) The project resources were divided into two cat-
egories in order to simplify cost control. For the most
expensive items, detailed information on labour and
material costs, resource consumption and payment
dates were considered, while for the other items only
a lump sum was estimated for each month. The pro-
duction manager and the person responsible of material
supply were in charge of this task;
(c) Information on the expected monthly income pay-
ments were provided by the financial sector of the com-
pany;
(d) The cost plan was then produced combining in-
formation from production plans, cost estimates, sched-
ule of material and labour payments, and income pay-
ments. This information was organised in a spreadsheet
and also displayed as project cash flow S-Curves (see
example in Table 2); and
(e) The cost plan was updated every month, when a
new three-month look-ahead plan was produced.
The introduction of cost plans and S-curves demanded
changes in the information flow of the company. Differ-
ent sectors (production, cost estimating, material supply
and finance) started to be in charge of providing the infor-
mation that was necessary to keep the S-curve updated.
 A model for integrating cost management and production planning and control 81

Table 2: Example of a cost plan from Case Study 5

Production planning activities Activity cost estimates January February March
Labour Material Labour Material Labour Material Labour Material
cost (R$) cost (R$) cost cost cost cost cost cost
Pile location 30,000,000 9,360,000 3,000,000 9,360,000 3,000,000 3,000,000
Formwork foundation beam 500,000 500,000
production
Formwork foundation beam 500,000 500,000
assembly
Steel reinforcement 600,000 3,633,320 600,000 3,633,320
preparation
Steel reinforcement assembly 600,000 600,000
Foundation beam concrete 600,000 3,164,000 600,000 2,000,000 1,164,000
Beam formwork removal 200,000 200,000
Plumbing kit assembly 600,000 3,055,000 600,000 3,055,000
Internal landfill 300,000 300,000
Concrete slab 1,500,000 1,500,000
Ground floor brick wall 3,600,000 4,116,280 3,600,000 4,116,280
Precast slab assembly 1,800,000 1,168,900 1,168,900
Electrical pipes 1,200,000 247,000 247,000
Slab reinforcement 300,000 998,850 998,850
Note: The financial figures have all been changed due to the need for confidientiality

Figure 3: Cost plans of project phases 1 and 3 in Case Study 5

Updated cost plans and S-curves were used for sup-
porting decisions that improved the cash flow from the
project phase 1 to 3, as shown in Figure 3. Those de-
cisions were mostly related to changes in production
plans and also in resource payment schedules, due to
new agreements that were established with key suppli-
ers.
• Case Study 6
Case study 6 involved an investigation on a much larger
project than in Case 5. The project consisted of the con-
struction of two hospital buildings, and there was much
overlapping between the design and production phases.
Due to the size and complexity of the project, the imple-
mentation of S-curves for producing cost plans, based
on the existing cost estimates and the long-term
production plan, was very time consuming. As in case
5, a more detailed operational cost estimate was pro-
duced for the most expensive items in order to make it
easier to implement that tool.
One of the problems faced by the construction firm
was the relatively low profit margin that was expected
after the initial production phases due to a cost overrun
in the foundation activities. For that reason the company
established some cost targets for the following stages,
with the aim of reducing the total project cost. Based on
those cost targets, new design solutions and alternative
production methods were investigated, which resulted
in the renegotiation of contracts with some of the main
suppliers. Also, a spreadsheet for estimating overhead
costs was developed by the firm, so that the impact of
project duration on costs could be properly assessed.
Figure 4 presents the project cash flow after those

© GCU Journal of Financial Management of Property and Construction, 11 (2)

82 A. P. Kern and C. T. Formoso

Figure 4: Cost and revenue planning of hospital project studied in Case Study 6

Figure 5: Improvement in project cash flow in Case Study 7

changes were introduced, indicating the unfavourable
cash flow balance at the beginning of the project.
Although target costing was not fully implemented
in this project, in this case study it was possible to link
cost targets to S-curves, making it easier to assess the
impact of changes in design and construction methods
in the project cash flow, especially at the early project
phases, based on a fairly operational cost estimate.
• Case Study 7
Case study 7 involved the use of cash flow S-curves
during the conception phase of a low-income hous-
ing project. Based on data from two similar previous
projects, different cash flow scenarios were simulated
considering changes in the long-term production plans.
This also required the translation of cost information
into an operational cost estimate so that it could be
used to produce cost plans. The application of S-curves
enabled managers to make some important decisions
related to changes in the sequence of production activi-
ties in order to improve the cash flow of the project.
Figure 5 compares the initial cash flow for one of
the projects (cash flow 1), and the one that was pro-
duced based on the cost plan (cash flow 2), after some
changes were introduced in the long-term production
plan. It indicates that the project cash flow was sub-
stantially improved.
In all three case studies the implementation of S-
curves provided some short term benefits for the compa-
nies in terms of supporting managers in their decisions,
such as assessing economic and financial feasibility,
changing long-term production plans, and identif-

© GCU Journal of Financial Management of Property and Construction, 11 (2)

 A model for integrating cost management and production planning and control
-ying the need of renegotiating contracts. Although
the initial translation of cost information into a proc-
ess based model was time consuming, those studies
indicated that it is feasible to gradually introduce an
operational approach to cost estimating. This approach
includes gathering information from different sectors,
focussing on high cost items, and making explicit some
non-value adding activities, instead of adopting a high-
ly centralised cost control approach mostly based on
the standard cost method.
THIRD RESEARCH STAGE: MODEL PROPOSAL
• Scope of the model
In this study, the cost planning and control process was
divided into two subprocesses: cost estimating and cost
planning and control.
The information generated in the cost estimating sub-
process at the early design stages should be used mostly
for supporting decisions related both to the initial ne-
gotiations with the client and suppliers and to the de-
sign process. This cost estimate must be seen as a target
that may change over time, due to the dynamic nature
of most construction projects. It needs to be updated
whenever changes in design, production and contracts
are made. For example, in Case Study 5 it was neces-
Figure 6: Cost estimating and planning and control stages.
-sary to search for new design solutions and alternative
production methods due to the need of reducing the re-
maining project costs. It was a kind of partial applica-
tion of target costing in which the cost targets for some
building elements had to be reduced after the produc-
tion phase had started.
© GCU Journal of Financial Management of Property and Construction, 11 (2)
83
• Cost planning and control systems
After costs have been estimated, they should be planned
and controlled, according to pre-established cycles. Cost
plans ought to be updated and changed whenever neces-
sary and situations that need special attention should be
highlighted. The cost plan must have an operational form,
i.e. be easily related to production activities and resources
– this was achieved to some extent in Case Studies 5, 6
and 7. This is an important difference between this model
and the traditional cost planning techniques (see, for in-
stance, Ferry and Brandon, 1984).
Figure 6 presents an overview of the proposed model. The
cost planning and control process is divided into five activi-
ties, similarly to the production planning and control model
proposed by Laufer and Tucker (1987): process preparation,
information collection, plan preparation, information diffu-
sion, and process evaluation.
“Process preparation” consists of defining how cost plan-
ning and control will be performed in each project, involving
several decisions such as the role of each person or sector
involved, tools to be used, and frequency of control cycles.
“Information collection” typically involves gathering infor-
mation from different sources, such as design, contracts, pro-
duction control, resource schedules, and cost database. Once
the cost plan is prepared, the information produced must be
disseminated to different users in order to guide the nec-
essary actions to be carried out.
Further information needs to be collected and used for
updating the cost plans. Some information collected dur-
ing the project can also be used for updating the cost data-
base of the company. At the end of the project, the cost
plan ning and control process must be evaluated so
that this process can be improved in future projects.
84 A. P. Kern and C. T. Formoso
• Cost planning and control tools
Figure 7 illustrates how cash flow S-curves, operational
cost estimating, and target costing are integrated in the
model. Target costing should be used to support early
project decisions related to design, supply chain, and
production system design. Such decisions must take into
consideration the target cost established for the project
at the cost estimating sub-process. An operational cost
estimating approach must be used, based on informa-
tion from design, production plan and contracts with
suppliers, so that the impact of decisions concerned
with design and construction methods on project costs
and duration can be properly assessed.
S-curves play a central role in the cost planning and
control sub-process, from the early stages of the project
throughout the design and production stages. It demands
information from different sectors, such as cost esti-
mating, production management, and material supply.
Target costing can also be used during this sub-process,
if there is an overlap between design and production
phases, as it was undertaken in Case Study 6.
FOURTH RESEARCH STAGE: MODEL EVALUATION
• Case study 8
Before this study was conducted, cost management
in Company C, was mostly carried out by the firm
direct-ors, who also supervised cost estimating ac-
tivities.
Figure 7: The integration of target costing, operational cost estimating and cash flow S-curves
© GCU Journal of Financial Management of Property and Construction, 11 (2)
They were also in charge of an overall financial control
of the project, the only kind of cost control that existed
in the company.
The cost-estimating department was in charge of
estimating direct costs, including the updating of the
existing cost database, while overhead costs were es-
timated by the company directors. The focus of the
production managers was to keep production on time
and the material supply department was responsible for
purchasing materials demanded by production manag-
ers. Therefore, the production, material supply and cost
estimating sectors were not well integrated, and did not
get involved in major project decisions, such as choos-
ing suppliers and defining long-term production mile-
stones.
According to one of the directors, there was a general
dissatisfaction in the company with cost management
since there was very little cost information available
that could support timely production management deci-
sions. Cost control had a reactive character, meaning
that cost deviations were detected too late and it was
difficult to spot the main causes of deviations. In fact,
the company had faced financial losses in one previous
low-income house-building project.
In this case study, the cost planning and control mod-
el was partially implemented in three different projects
that had just started. For each of those projects, an ini-
tial cost estimative had been produced and the contract
 A model for integrating cost management and production planning and control 85

had already been signed with the National Savings
Bank based on that document. It was not possible to
implement target costing because the design was com-
pleted and there was not much flexibility for introduc-
ing changes.
At the beginning of the study several meetings were
held, involving one of the firm directors, the research
team and representatives of the cost estimating depart-
ment, material supply department and production man-
agers. In these meetings, the necessary information flow
for carrying out the cost planning and control process
was defined.
The production manager assumed the role of collect-
ing the required information and preparing the cost plan
using S-curves. The project cost plans were presented
and discussed every two weeks in a meeting by every-
one involved in the process, forming the cost planning
and control cycle.
Table 3: Organizational change due to the model implementation.
Activities
Before the implementation
Several production management decisions were based
on this new control cycle, mostly related to changes in
resource schedules and production plans. According to
the firm director, such decisions were based mostly on
the S-curve shape rather then on detailed information
on activity durations or cost estimates.
This integration of cost management and production
planning and control was made possible due to the fact
that some important changes that were made in the cost
estimates, in which a more operational approach was
incrementally introduced, based on previous projects.
This was made easier because a separate cost data-
base was created specifically for low-income housing
projects.
The implementation of the model resulted in a much
broader involvement of different sectors in cost man-
agement, as shown in Table 3.
People from different sectors became engaged in dif
Directors Production Cost estimating Material supply
managers department department

Cost estimating Estimating Estimating Estimating

overhead direct cost direct costs
of the model

Cost database Database updating

Cost control Overall financial
control
Decision-making Major cost related
decisions

Cost estimating Estimating Estimating Estimating Analysis of database

After the implementation of the

overhead direct cost direct costs regarding market

Database updating Analysis of the Database updating prices of resources
database regarding
production aspects
model

Cost planning Overall financial Cost planning Provide information Provide

control for cost estimating information of
payment dates
Cost control Proactive control Proactive control Proactive control
in real time in real time in real time
Main decisions Major cost Production Decisions related Decision related
involved related decisions management cost to estimating process to material supply

Such control cycle was strongly linked to the look-
ahead (medium-term) production planning level, in
which constraints should be identified and removed.
The main focus of this discussion was the results
achieved so far, in terms of time and cost deviations,
and the resources to be purchased within the medium-
term plan horizon.
Based on a suggestion of the material supply manag-
er, direct costs were divided into two categories: com-
mitted and not-committed. This enabled the amount of
resources to be purchased to be visualised in the S-cur-
-ves, as shown in Figure 8, pointing out the items for
which it was still possible to negotiate price and pay-
ments with suppliers. ferent activities, such as data
collection, and database updating, and started to get
involved in the decision-making process. Moreover,
systematic cost planning and control cycles were in-
troduced, allowing managers to make timely decisions,
rather than simply obtaining late information on cost
deviations. According to one of the company directors,
these changes in cost management has decisively con-
tributed for the success of the three projects that were

© GCU Journal of Financial Management of Property and Construction, 11 (2)

86 A. P. Kern and C. T. Formoso
investigated in this case study – all of them had a much
better financial performance (profit margin around 8%)
than the previous one (profit margin around –7%).
• Case Study 9
Since 2002, Company B has been seeking to improve
its cost management system because the firm directors
realized that some important projects were not so suc-
cessful in terms of profitability as expected. They also
realized that the company had not been very successful
in terms of winning contracts. According to some direc-
tors and production managers, a major cause for those
problems was that prices were not adequately formulated
in the cost estimating process.
Due to those problems the company changed its bid-
ding strategy. Instead of bidding for several price requests
from potential clients, the company decided to focus its
efforts only on projects that had the potential of becomi-
Figure 8: S-curves developed by Company C in Case Study 8
-ing very profitable. It means that when the company
decided to make a proposal for a project, a thorough
analysis of design, and client requirements was un-
dertaken, in order to develop new solutions in col-
laboration with some key suppliers. The aim was to
make a proposal in which the cost was reduced and
the value for the client increased. Before that change
in the bidding strategy, the firm used to make an ef-
fort for developing new solutions, but only after the
contract was signed.
Case study 9 was carried out on the refurbish-
ment of an industrial building for a steel mill. The
complexity of this project is much related to the fact
that this building was inside an industrial site that re-
mained in operation. Moreover, the project duration
was relatively short (six months) for the size of the
© GCU Journal of Financial Management of Property and Construction, 11 (2)
project, and the design had not been fully conclud-
ed.
The client commissioned the architectural and struc-
tural designs, which were developed to the sketch design
level. The project consisted of a reinforced concrete struc-
ture, steel roof, and brick walls.
Company B took part in a competitive bidding, in which
several other construction firms had participated. Both tar-
get costing and operational cost estimating techniques were
used as a basis for the formulation of the proposal.
The target cost was initially based on a previous
similar project and also on the available design. Based
on this information the final price of the project was es-
tablished, and the target cost resulted from the subtrac-
tion of the profit margin expected by the firm directors.
After establishing the project target cost, directors and
the contract manager (who had experience in similar
projects) established the target-costs for the main sub-
systems involved and estimated the overhead costs with
support from the cost estimating sector.
For the negotiation with subsystem suppliers, an opera-
tional approach to cost estimating was adopted, in which
a unit price was initially established for each of them, e.g.
foundation (m3), reinforced concrete pre-cast structure
(m3), steel roof structure (m2).
Once the project started and the main suppliers were con-
tracted, some collaborative design meetings were carried
out for developing the detail design. Those meetings in-
volved not only designers but also a client´s representative
and suppliers, and were chaired by production managers
from Company B. They jointly develop design solutions
and production methods, aiming to meet requirements
from both the client and the production system. The use of
target costing by Company B is illustrated in Figure 9.
 A model for integrating cost management and production planning and control 87

Figure 9: The implementation of target-costing in Case Study 9.

Table 4: Total cost reduction from new engineering solution in Case Study 9
Description Client New design Cost reduction Solution
design
Overhead costs R$ 61.11
Preliminary services R$ 53.54
Foundation R$ 56.98 R$ 48.00 18.71% Beams elimination
Concrete structure R$ 205.96 R$ 174.49 17.96% New modularisation: elimination of column
Walls R$ 87.74
Concrete floor R$ 67.37
Windows/doors R$ 58.42
Roof R$ 475.32 R$ 417.20 13.92% New structure conception
Painting R$ 22.27
Sanitary installation R$ 9.85
Total R$ 1,098.47 R$ 1,000.00 9.85%
Note: The financial figures have all been changed due to the need for confidentiality

The most important changes introduced in the project Discussion

consisted of a new conception of the foundations, re-
inforced concrete structure and roof steel structure, re-
sulting in a reduction of 9.85% of the total estimated
costs, as shown in Table 4.
The new conception of the roof structure resulted in
a reduction of 37% of the steel weight. The subsystem
supplier, which was hired by the construction firm,
played a key role in developing this new solution. Also,
some major changes were made in the concrete struc-
ture. The pre-cast concrete supplier proposed a different
column modularisation, increasing the beam span from
5 to 10 metres. This was possible because fibre-cement
roof tiles were used for cladding and gypsum plaster-
board for the internal walls, instead of ceramic brick-
walls, reducing the total load. Moreover, due to those
changes, the foundation structure was also reduced.
The cost planning and control model that was proposed
in this investigation is based on the simultaneous use
of different cost modelling principles, according to the
type of resource that is considered. For instance, the
standard cost method approach may be effective for es-
timating the cost of some materials. By contrast, the
overhead costs were classified in three different catego-
ries as suggested by Barnes (1977): fixed, time-based
and price-based. Labour costs in most companies are
mostly related to the market price of subcontracted
work, rather than on standard cost based productivity
rates. If a construction component is purchased as a
subsystem, then there is usually an existing cost model
for estimating its purchasing cost (that often includes
design, materials, prefabrication and installation work).
This allows making explicit the cost of some non-val-

© GCU Journal of Financial Management of Property and Construction, 11 (2)

88 A. P. Kern and C. T. Formoso
-ue-added activities, especially those related to over-
head. Therefore, by keeping production into perspec-
tive during the estimating process it is possible to take
into consideration to some extent the nature of the pro-
duction process and its impacts on the final cost of the
project.
Of course, an operational approach for cost estimat-
ing would demand a substantial change in the project
cost structure, and tends be more time consuming, due
to the wider range of data that need to be dealt with.
However, the case studies carried out in the second and
fourth stages of this research indicated that this prob-
lem can be minimized when all relevant sectors of the
company are involved in this task, and also if the initial
cost estimate is based on a production plan.
The cost planning and control cycle must be short
enough so that it generates timely information that sup-
ports decision-making in real time. Due to the complex
and dynamic environment of most construction projects,
cost information needs to be updated frequently. This
will also demand the participation of different sectors
of the company. It is also necessary to focus cost con-
trol on the high cost items, in order to reduce the effort
needed. A Pareto diagram is useful for selecting them.
S-curves should be also used for forcasting the project
cash flow by updating payments and revenue dates, as
it was undertaken in case studies 5 and 7. Such simula-
tions can be useful to support negotiations with suppli-
ers in terms of payment dates and prices, as well as to
decide about changes in production plans, in order to
improve the project cash flow.
The integration of cost management and production
control, which was based in the Last Planner System,
minimized some of the drawbacks of the Earned Value
Method. The way S-curves is suggested to be used is
strongly based on the integration of production plan
with cost estimatiing. It must take into consideration
activities packages from production long-term plan,
to minimise the problems related to EVM technique
discussed in Cash flow S-curves item. For example, by
using work packages from production long-term plan, it
should be consider the dependence of activities.
Moreover, due to the strong link between production
management and cost planning and control, this study
suggests that production managers should be in charge of
both processes, as it happened in the case studies carried
out in the second and fourth research stages.
Target costing may be used as a reference for introduc-
ing changes in the project, such as proposing new design
solutions, devising alternative production methods, and
renegotiating contracts, in order to reduce costs or incr-
© GCU Journal of Financial Management of Property and Construction, 11 (2)
-ease value for the client. This technique can be used
in different phases of the project, from the early stages
through to design and production stages.
Conclusion
Existing literature suggests that one of the main factors
that contribute to the poor performance of traditional
cost management systems is the fact that they do not
take into consideration the nature of the product and the
production processes involved, due to the conceptual
basis on which these are founded.
This assumption was confirmed by the case studies
carried out in this study. All companies were dissatisfied
with their cost control systems, which did not provide
timely information that could be used for improving
the performance of their production systems. The main
causes of the ineffectiveness of such systems were the
separation between cost management and production
planning and control.
This paper has proposed a cost planning and control
model, which was developed and tested in several em-
pirical studies conducted in different small and medium
sized construction companies from the South of Brazil.
The proposed model is strongly based on the integration
of production planning and control and cost estimating.
It proposes that costs should be planned and control-
led in fairly short cycles, from the early project stages,
throughout the design and production phases, involving
information from different sectors of the company.
The model suggests the integrated application of three
fairly well known cost management techniques: opera-
tional cost estimating, S-curves and target costing. By
using this set of tools, it is expected that cost manage-
ment will become more proactive, and able to deal with
the dynamic, uncertain and complex construction envi-
ronment that exists in most projects. However, due to
the unique character of each project, the way in which
this set of tools is used may vary considerably.
The partial implementation of the model in two case
studies had positive impacts in the performance of tho-
-se projects. It provided key information to support de-
cision making related to design, production plans and
contracts with suppliers.
The implementation of the model made also a con-
tribution in terms of increasing process transparency,
making visible some important problems to the people
in charge of decisions earlier than before. A major ob-
stacle for its implementation was the inadequacy of the
existing cost database and the ineffective flow of infor-
mation among different sectors of the companies.
 A model for integrating cost management and production planning and control
Finally, some additional studies are suggested for fur-
ther developing the proposed cost planning and control
model:
(a) Investigating the full implementation of target-cost
ing and value analysis in construction projects, espe-
cially in low costing house-building projects, in which
the available resources for generating value are scarce;
(b) Investigating the use of the model to support pro-
duction management considering a multi-project envi-
ronment;
(c) Devising computer systems for cost management
that allow the use of the proposed tools and also the de-
centralization in data collection and processing, as well
as in decision-making.
Acknowledgements
The authors would like to thank FINEP – Financiadora
de Estudos e Projetos and UNISINOS – Universidade
do Vale do Rio dos Sinos for sponsoring this research
study, and also the construction companies that took
part in this project.
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© GCU Journal of Financial Management of Property and Construction, 11 (2)