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The importance of cost management in construction 

Cost management is important in construction projects to eliminate losses and avoid overbudgeting.

July 17, 2023
By Faith Ezeugoh
4 min read

The business of construction and commercial management are inseparable. Commercial management is the application of skills to maximise business potential by ensuring the successful management of the projects’ finances, procurement and all processes that can impact upon profit, timelines and quality output.  

Here in Construction Kaiser Limited, the department responsible for commercial management is the commercial operations department. The commercial operations unit is an integral part of the project operations team. Our commercial operations team is made up of young, seasoned and vibrant professionals with basic training in Quantity Surveying. Our role is centred on the cost management of our construction projects.  

Cost management is the process of estimating, allocating and controlling project costs. The cost management process allows us as an organisation to predict the future expenses of our projects and reduce the chances of budget overrun. Cost management is a continuous process throughout the lifespan of our projects. Planning, communication, reviews, value engineering, and decision-making are regular features of our cost management procedures.  

Cost management, though quite complex in nature, can be broken down into four processes:  
1. Resource planning
2. Cost estimation  
3. Cost budgeting
4. Cost control

Resource Planning  
Resource planning is all about identifying the resources required to carry out a project. In the commercial operations department, we identify the resources such as materials, plants/equipment, time, human resources, hardware, even the software needs of a project. Beyond identifying them, we determine what quantity of each should be required at what time of the project.

For effective resource planning, we sometimes rely on previous information from similar works carried out on past projects. We also update ourselves with the available resources in the organisation that could be deployed to the project. Resource planning is teamwork that requires value engineering and sometimes brainstorming sessions. Hence, we often call for input from other team members with specialised knowledge like human resources, execution, procurement and logistics, project management office and so on.

Proper resource planning in project cost management ensures that:  
• Our people are not overloaded with work.  
• Our equipment is efficiently maintained and available as planned. 
• The materials specified would be readily available when needed.  
• The time allotted for the project is optimised in the best interest of all stakeholders.  
• The project budgets do not get out of control. 
• The project does not suffer any timeline delays.  

Cost Estimation  
Cost estimation helps us predict the quantity, cost, and price of the resources required to complete a job within the project scope. Hence, we are able to determine how much money will be required to deploy and manage the resources mentioned above. By estimating cost, we are approximating the monetary resources to complete project a set of project activities.

The goal is to provide accurate information to the relevant project stakeholders about the planned projects possible costs. Top management is able to make good decisions when they have accurate cost estimates.

Our cost estimating procedure includes offtake quantities, building up of labour rates, equipment output/costing, estimating materials costs, etc. Nowadays, it is more complicated to get accurate cost estimates due to fluctuations in market prices. It is also important to determine the portions of  the project that would be executed by specialty trades or subcontractors. The estimate of subcontractor works scope also requires careful considerations for materials, labour and equipment costs and so on. Cost estimation would not be complete without factoring indirect costs on the project such as land acquisition, permits, design fees, office support, temporary on-site utilities, and mobilisation, etc.  

We deploy various cost estimating methods. Some include Expert Judgement, Analogous Estimating, Parametric Estimating, Bottom-up Estimating, Three-point Estimates and Vendor Bid Analysis. The method we choose depends on the scenario and the available data. 

Cost Budgeting
The basic function of construction cost management is to keep your project on budget and avoid the project cost eating into your bottom line. When budgeting cost, we allocate monetary values to different elements of work scope in the project. The planned time for such work scope or items is also essential. Hence, the programme of works is a very important input in cost budgeting.

Without proper budgeting, a project may not be completed on time. With cost budgeting, our project stakeholders would know how much we plan to spend on any given aspect of the project. The budget helps us plan and execute our projects while keeping the profit-cost ratio safe. The project budget includes all the funds authorised to be executed on the project. A good budget helps to mitigate risk and uncertainties. Depending on the level of risk, we may make provisions for contingency reserves and management reserves.  

Cost Control  
Cost control is the process by which we keep our project expenditure under control by managing labour, material and overhead costs, to ensure that the project finishes on budget. Cost control helps our project managers and team avoid cost overruns by providing guidelines for estimates and forecasts of labour, material, and overhead costs.  

The purpose of a cost control plan is to help ensure the project is delivered on time, within scope, and on budget. Cost control requires sound estimates and constant monitoring over the course of our projects. As part of cost control measures, we monitor to ensure there are no negative variances between the actual expenditure and the cost baseline. When variance occurs, we examine the root cause of such variance, the degree and impact. In addition, we take necessary steps to bring the project back to the planned budget. The cost behaviour is tracked weekly to ensure the minimal variance.  

Cost management is important in construction projects because it sets a baseline for project costs and helps in predicting the expenses and revenue of the project. This in turn would help eliminate losses and overbudgeting.  

Photo: Construction cost management (© Sly5800 | Dreamstime)