CONSTRUCTION MANAGEMENT INSTITUTE

Training
on
Training Title: Construction Cost management
for
Name of organization: Ministry of Irrigation and
Lowlands
Presenter: (Paulos Alemu)

(September, 2022)
 OUTLINE OF THE PRESENTATION
1. Introduction
1.1. OVER VIEW OF COST MANAGEMENT
Conception ----Design -----Construction -----Commission and Closeout
1.2. CONSTRUCTION PROJECT COST MANAGEMENT ( DEF.)
1.3. PROJECT COST MANAGEMENT PROCESS PROCEDURE
1.4. TECHNICAL COMPETENCE
1.5.PLAN COST MANAGEMENT
INPUT---------------- Tools and Techniques--------------------Out Put
(source, ( Feasibility Study, (Project Financial
contract, cash Flow Analysis, plan, Expenditure)
PMP etc.) Contingency Plan etc.)
 OUTLINE …. Cont`d
1. Introduction
1.6 COST MONITORING [CONTROL PROJECT APPLICATION]
INPUTS---------------------- Tools and Techniques---------------Output
(Financial Plan, (Expert Judgments, (Corrective
Change request, Progress Tracking, Action Plan)
Etc.) PM and Accounting soft)
1.7 COST ADMINISTRATION AND RECORDS
INPUTS---------------------- Tools and Techniques---------------Output
(Financial Status, (Progress report, (Traceability of
Plan Reviews, data recording, Financial System)
Etc.) Cost Progress)
OUTLINE …. Cont`d
1. Introduction
1.8 RISK ANALYSIS (SOFTWARE)
1.9 OVERHEAD ESTIMATION
1.10 COST BREAKDOWN
 1.1. OVER VIEW OF COST MANAGEMENT
 Depending on the contract if it s DB or DBB cost management flow might vary.
Conception ----Design -----Construction -----Commission and Closeout
1.1.1 Conception
 Client :-
 Reviews need of Project
 Establish Cost and Benefit of Project
 Carryout Preliminary Design and Feasibility
 Secure finance for Design and construction
 Consultant :-
 Participate in bid
 1.1. OVERVIEW …. Cont`d
1.1.2 Design
 Client :-
 Manage Design Service
 Consultant :-
 Detail Deign
 ENG. Cost and Time Estimate
 Prepare bid Document
 Evaluate and Identify Bid-Winners
 Contractor :-
 Participate in tender
 Cost assessment and Evaluation
 Sign Contract
 1.1. OVERVIEW …. Cont`d
1.1.3 Client
 Client :-
 Manage Works Contract,
 Prepare Cash Flow Plan
 Effect Payment
 Consultant :-
 Manage Works Contract
 Certify Payments
 Contractor :-
 Determine plan and Implement
 Plan Cash Flow
 Control Finance
 1.1. OVERVIEW …. Cont`d
1.1.4 Commission and Closeout
 Client :-
 Manage Works Contract,
 Prepare Cash Flow Plan
 Effect Payment
 Consultant :-
 Manage Works Contract
 Certify Payments
 Contractor :-
 Determine plan and Implement
 Plan Cash Flow
 Control Finance
 1.2. CONSTRUCTION PROJECT COST MANAGEMENT
 DEALS WITH REVENUE SOURCE AND ANALYZING/UPDATING NET CASH FLOWS FOR
THE CONSTRUCTION PROJECT AND MANAGING DAY TO DAY COST OF PROJECT
LABOUR , MATERIALS AND EQUPIMENT.
 COST MANAGEMENT DETERMINS,
 Project financing Methods (loan, Advance Payment , IPC)
 Common activities are :-
 client pays for the cost of the project by means of periodic or interim
progress payments to both the consultant and contractor.
 Consultant has to finance the initial costs of hiring employees and the
monthly expenses of employees using advance payment from owner or
project sponsor, or loan from banks.
 the contractor has to also finance initial costs of set up and the first few
months of work using advance payments or by themselves or can obtain a
short term loan to cover this initial period
 1.2. CONSTRUCTION…. Cont`d
 What are the reasonability's of the PM
 financial resources of the project
 managing costs and profits
 managing cash flows, and
 making financial decisions or providing the necessary verified
information to the project sponsor for making such decisions.
 1.3. Project Cost Management Process
 processes to acquire and manage the financial resources for the project.
 Three primary process
 Cost Planning
 Identify key Cost
 Assess the Project role, responsibility and reporting relations
 Cost Monitoring
 Monitor Key influencers
 Take Measures if negative trend are recognized
 Administration and Recording
 Designing and maintaining financial storage to have smooth financial
control
 Each Process is defined by their input, tools and techniques, and output
 1.3. Project …. Cont`d
 These processes interact with each other and with the processes in the other
project management knowledge areas such as risk and time management
knowledge areas.
 Each process may involve effort from one or more individuals, such as project
managers, or groups of individuals drawn from project and accounting
departments, based on the needs of the project.
 Additionally, Construction Financial Management should consider interaction
with stakeholders such as,
 accountants and financial analysts
 charter holders
 insurance firms and banks
 project investors
 Management consultant
 1.4. TECHNICAL COMPETENCE
 project management professionals shall have appropriate competence which
encompasses,
 technical competence (financial management fundamentals in order to
better understand and navigate the financial decisions) and
 behavioral competence (attributed to individuals such as motives, traits,
attitudes and values).
 Competence required for entire financial management process are:
 financial analytics, cost estimates, Financial Accounting,
 Breakeven analysis, Financial Alternative Analysis
 Decision Making, Leadership, Teamwork, Consultation,
 Ethics, Self-Control, Reliability,
 Commitment, Adaptability, Trust Building,
 Interpersonal and Presentation skills
 1.5. PLAN COST MANAGEMENT

 Planning is the phase where all project requirements of a financial nature

are identified and provided for. Cost planning is no different than standard
project planning and tasks must be identified, the requirements placed on
a timescale and quantified, resources are also required to ensure that the
Cost related tasks are completed timely.
 This are brief process planning Cost Management
 Inputs
 Tools and Techniques
 Out Put
 1.5. PLAN …. Cont`d

 Inputs
 Source of Funds: is identify the funds source for financing
 the conceptual design
 the detail design,
 bidding for construction contracts,
 Contract Requirement : defines requirements for the financing needs in
construction projects from conception to project closeout.
 The client responsibility to the timing and amount (maximum
payment) for contractor based on his performance
 The contractor financial outflow based on agreed work progress.
 The maximum delay to effect client to the contractor without interest
as delay damage
 Bonds, Interest on loan and Cost for Dispute Managment
 1.5. PLAN …. Cont`d
 Inputs
 Estimate Project Cost (PMP) :- is the total cost encompassing conceptual to
construction and project closeout where client or contractor sets its target financial
plan and Schedule, Risk Factors)
 At Design Stage Total cost and cash flow is estimated by designer
 After bid submit detail implantation of task (work program) along with cash flow
based on contractual requirements and the client will develop his plan considering
other costs
 Enterprise Environmental Factors : Economical , Environmental , Tax Benefits on
Bonuses
 Political , Regulatory , Social and Economical Factors
 Project Duration [Schedule]: the timing of material, equipment, human resource flow
of the project involving all stakeholders: client, supplier, contractor, consultant, etc.
 Tax Benefits on Bonuses: any tax benefits or bonuses associated with the facility
under construction.
 1.5. PLAN …. Cont`d

 Inputs
 Risk Factors: As planning involves decision under uncertainty, there is a
risk of variation in financial estimate. Thus, risk and their impact will be
identified and quantified so that either contingency would be secured
and or responsible parties will be assigned.
 Organization process asset: Organization policies, document review
process, organization culture and structure,
 Enterprise Environmental factors: Published industry document for
financial planning, economic condition of the project area: availability
of material and human resource, infrastructure conditions, society
working culture
 1.5. PLAN …. Cont`d
 Tools and Techniques
 Feasibility Study: For construction projects that are financed by the Client or their
associated financers, a feasibility study is performed to determine if the project can
be profitable with the given parameters; or, when proposing, whether the ultimate
payments proposed will cover all of the costs and still provide a reasonable profit.
 Financial cash flow: The financial cash flows consist of costs and revenues that
would arise with the development of the project. Cost of contractor (expense) vs
revenue of contractor (payment outflow from client). When project operation is
considered, project revenue could be benefit of project cost would be capital cost
(contractor, consultant payments, admin cost), operation and maintenance costs.
 Working capital analysis: Working capital for construction projects represents the
excess between the current assets assigned to the project over current liabilities of
the project. The maximum working capital needed by the contractor can be then
found from measuring the vertical differences between the two graphs at several
points, and then these vertical differences are compared such that the largest
difference is identified.
 1.5. PLAN …. Cont`d
 Tools and Techniques
 Sensitivity Analysis: A sensitivity analysis should be performed varying
several parameters to determine the effect upon the project's cash
flow and the preliminary financing plan.
 Provision for Added Financing (Treatment of risks): added financing
needs to cover for unexpected delays, scope revisions and other risks.
 Increased cost (geological/construction risk)
 Reduced long term energy output (hydrological risk)
 Test the Financial Plan: test the financial plan by contacting
prospective lenders to assure the acceptability of unique features (e.g.
short term loans, overdrafts, valuation of existing assets) in the
financing plan.
 1.5. PLAN …. Cont`d
 Tools and Techniques
 Expert Judgment: & financial advisor
 Expert judgment: expert judgement guided by historical
information, provides valuable insight about the environment and
information from prior similar projects.
 Financial advisor: responsibility of developing a comprehensive
financing strategy which will implement the financing plan in an
optimum manner. Lending institutions and other fund sources
have to be reviewed and contacted in providing part of the
financing required.
 Meetings: Project management teams may hold planning meetings to
develop the financial management plan
 1.5. PLAN …. Cont`d
 Output
 Project Financial Plan: identify all financial requirements of a
construction project and means to finance them. All parties must
understand by whom, and when, all of the necessary equity, debt,
and insurance, in appropriate types and amounts are to be supplied
during the construction period.
 Expenditure Authority: Authority (client administration cost or
contractor managerial cost) for expenditure, is usually determined by
company internal policy.
 1.6 COST MONITORING [CONTROL PROJECT APPLICATION]

 Cost monitoring ensures that the allocated funds are managed properly
and calls for additional funds from projects are made as needed, and all
expenses are paid at the appropriate times. Financial control and cost
controls are executed in the most effective way to ensure all items are
within budget and the financial cash forecast.
 Financial Controlling process
Input Tools and Techniques
• Financial Plan • Expert Judgment
• Contract Requirements • Meeting
• Cost and Revenue Baseline • Internal - External Audit
• Change request • Progress Tracking
• Enterprise Environmental factors • PM and Accounting Software tools
• Organizational Process Assets • Decision making

Output
• Corrective Action Plan
 1.6 COST MO…. Cont`d
 Inputs
 Contract Requirements: condition of contract in connection to financial
variation, tolerance, Payment schedules interest, payment delay days,
etc.
 Project Financial Plan:-
 Cost and Revenue Baselines: The budget and revenue forecasts
developed for the financial plan serve as the net cash flow
baselines for the project against which any adjustments are
measured.
 Change Requests: Any changes to the project that affect cost or
revenue streams must be analyzed and incorporated into the financial
plan for their effect on long or short term borrowing, performance
bond and insurance coverage and other features of the financial plan.
 1.6 COST MO…. Cont`d
 Inputs
 Organization process asset: Organization policies, organization culture
and structure, database system, Organization accounting systems
 Enterprise Environmental factors: legal policies and procedures.
 Tools and Techniques
 Internal and External Audits: ensure correct accounting methods and
financial practices are being maintained in construction project and
companies. External audits are often a statutory requirement of the
Ethiopian government can show result of Audit report.
 Cash Flow Analysis: Updating all the actual financial and cost data of a
project on regular basis gives an up to date financial information.
Utilizing cost and schedule updated information, an analysis can be
made of cash flow trends and forecasts can be made to determine what
adjustments may be required to the financial plan.
 1.6 COST MO…. Cont`d
 Tools and Techniques
 Financial Reports: periodic financial reports shall be a requisite for
management and for any lenders who may be involved.
 Project Accounting Systems: The project accounting system whose cost
structure similar to project WBS. Financial control is exercised by
closely monitoring actual spending and revenue against budget and
cash flow forecasts, adjusting either the work methods or problem
areas where this mechanism shows deviations.
 On small to medium size projects, the breakdowns can be kept on
simple Excel generated S curves,
 large project accounting systems would normally be a bit more
sophisticated.
 1.6 COST MO…. Cont`d
 Tools and Techniques
 Project Management Software: Project management software, such as Primavera
P6, shall be used to assist with financial control processes.
 Financial analytics: may contain the followings:
 Financial statement analysis and projection: financial statement shows where
the money come from, where it went and where it is now. It contains balance
sheet, income statement and cash flow.
 Outputs
 Corrective action: Based on an analysis of financial status with relevant set criteria,
an action plan can be prepared to correct any deviations in the original forecasts
and plan.
 Budgets may need to be revisited and adjusted according to the current state of
the project, which may again require approval from the top management.
 There may be a need to increase revenue from financial sources to cover any
projected shortfalls.
 1.7 COST ADMINISTRATION AND RECORDS

 Financial management requires a proper administration and record keeping

of the project’s financial process. This ensures establishment of accountable
system. It facilitates fast data storing and information retrieval which
facilitates proper decision making.
 Financial administration and record process’ input, tools and techniques,
and outputs.
Input Tools and Techniques
• Project Financial Status Report • Progress Report Review
• Contract Requirements • Accounting –Financial Recording
• Project Cost Plan Software
• Enterprise Environmental factors: • Spread Sheet
benchmark study • Cost Progress Tracking
• Organizational Process Assets: • Earned Value Management
Lesson learned registry • Decision making
Output
• Traceability of Financial System
• Lesson Learned Regiter
 Alternative 1 Alternative 2 Alternative 3
Primary Criteria Secondary Criteria Multiple
Max Score characterScoreanalysisEvaluation
Evaluation Score Evaluation Score
Road Length (Km) 6 71.313 6 78.63 5.44 77.313 5.53
Rolling (%) 87% 2.15 77% 1.8 73% 1.68
Terrain Type 4 0.32 23% 0.54 27% 0.62
Mountainous (%) 13%
533.817 4 640.58 3.74 587.20 2.33
Total Earthwork Cost (million Birr) 4
414.862 3 474.436 2.62 456.349 2.73
Total Pavement Cost (million Birr) 3
Engineering
Total Culverts & Bridges Cost (million Birr) 4
360.49 4 440.5 3.27 443.277 3.25
Materials (See table 3-19) 3   3   2.80   2.70
Geo-hazards (See table 3-20) 6   6.00   5.00   5.00
Cost (million Birr) 5 2,019.19 5 2,332.7 4.33 2,298.05 4.39
Sub-total 35   33.47   29.54   28.23
Community Access 3 H 3 H 3 H 3
Development Potential 3 H 3 H 3 M 2
Public Transport uptake 4 H 4 M 3 L 1
Resettlement Impact 4 M 2 H 1 L 3
Community Severance 2 H 1 H 1 M 2
Social
M 3 M 3 L 4
Impact on Cultural Heritage 4
Road Safety 3 M 2 H 1 M 2
Pollution 2 M 1 M 1 M 1
Sub-total 25   19   17   18
See Chapter 5 20   15.50   13.75   14.5
Environmental
Sub-total 20   15.50   13.75   14.5

Viability (Maintenance Cost in Million Birr) 7 570.5 7.00 629.04 6.35 618.5 6.46

Economic
Road User Benefits (Travel time in Minutes) 3 66.12 3.00 73.92 2.68 72.72 2.73

Sub-total 10   10   9.03   9.19

Sustainability (geo hazard & Flooding) 5 High 5 Moderate 4 Moderate 4
Administrative
Strategic Impact 5 Moderate 4 Moderate 4 Moderate 4
Sub-total 10   9   8   8
 Thank You
Paulos Alemu (M.Sc.)
0913184575