What is Cost Management in construction?
Cost Management in construction is a project cost management. It is the process of estimating, budgeting and controlling costs throughout the project life cycle, with the objective of keeping expenditures within the approved budget.
For a project to be called successful, it’s necessary that
- it delivers on the requirements and scope
- its execution quality is of a high standard
- it’s completed within schedule and
- it’s completed within budget.
Cost management is one of the key concepts of project management. It helps to create a financial baseline against which project managers can benchmark the current status of their project costs and realign the direction if needed.
Parts of Cost Management in construction
CM helps to split the function into four steps: resource planning, estimation, budgeting and control. These steps are sequential, but it’s possible that some resource changes happen midway through the project.
1. Project Resource Planning
Resource planning is the process of identifying the resources required to execute a project. Examples of resources are people (such as employees and contractors) and equipment (such as infrastructure, large construction vehicles and other specialized equipment in limited supply).
Resource planning is done at the beginning of a project, before any actual work begins. A work-breakdown structure (WBS) ready is needed before beginning the resource planning process. WBS is created at the project design stage and can be loaded in Finoko (depending on data format).
2. Cost Estimation
Cost estimation is the process of quantifying the costs associated with all the resources required to execute the project. To perform cost calculations, we need the following information:
- Resource requirements (output from the previous step)
- Price of each resource (e.g., staffing cost per hour, vendor hiring costs, server procurement costs, material rates per unit, etc.)
- List of assumptions
- Potential risks
- Insight into the company’s financial health and reporting structures
Estimation is arguably the most difficult of the steps involved in cost management as accuracy is the key here. Also, project managers have to consider factors such as fixed and variable costs, overheads, inflation and the time value of money.
3. Cost Budgeting
Cost budgeting can be viewed as part of estimation or as its own separate process. Budgeting is the process of allocating costs to a certain chunk of the project, such as individual tasks or modules, for a specific time period. Budgets include contingency reserves allocated to manage unexpected costs.
Budgeting creates a cost baseline against which we can continue to measure and evaluate the project cost performance. If not for the budget, the total estimated cost would remain an abstract figure, and it would be difficult to measure midway. Evaluation of project performance gives an opportunity to assess how much budget needs to be released for future phases of the project.
4. Cost Control
Cost control is the process of measuring cost variances from the baseline and taking appropriate action, such as increasing the budget allocated or reducing the scope of work, to correct that gap. Cost control is a continuous process done throughout the project lifecycle. The emphasis here is as much on timely and clear reporting as measuring.
Along with the cost baseline, the cost management plan is an essential input for cost control. This plan contains details such as how project performance will be measured, what is the threshold for deviations, what actions will be done if the threshold is breached, and the list of people and roles who have the executive authority to make decisions.
Daily reports and continuous updates
It is most vital in the construction industry to have daily reports and continuously update data. Daily reports make it possible to spot costs that are starting to get out of control or potential disruptions in the construction schedule, giving you the opportunity to take action to mitigate the issue.
Through constant monitoring, you will reduce the chances of nasty surprises when it comes time to review your budget at the end of the project.