Cost management principles in construction projects

¶ … management has to do with the knowledge of the resources a company uses in running their daily affairs. It also involves effective projection of additional resources that could be needed along the way, and the maximization of the available resources. Maximizing the efficiency of the available resources and the ability to put some of them in reserve are part of Cost Management. Some scholars define cost management as the of cost setting up systems of accounting and models for the provision of guidance in relation to current and future operations in order to achieve specified objectives. They also believe that analyzing and interpreting cost information is vital and aids the processes of decision making. Basically, between a client and a contractor, cost management refers to the final cost of a construction project (Dubois, 2003).

The major reason for the analysis of cost management is to find a more effective final cost in a construction project. Experts have explained that the analysis of cost management is greatly needed for there to be a reliable budget. Usually, the most critically analyzed set of values attracts the clients more. Apart from the overall cost, the team of designers need to present measures of controlling cost even as the overall aim is maintained, in terms of providing quality building when due. The major focus of cost management should centre on the evaluation of several techniques to deliver quality services and products at lower costs. Researchers believe that a construction project manager owes the client the duty of managing cost, and this broadens the scope of cost management. Cost management in a project encompasses the prediction and reporting of cost variables to the client, and helping him to analyze and control expenditure while maintaining quality in the project (Dubois, 2003).

Specialists in the field have outlined the essence and importance of cost management as follows:

To minimize cases of rework in construction projects

Minimizing customer complaints

Reduction in the use of resources

Increase in profit for the contractor (Dubois, 2003).

Principles of Cost Management

Cost Management involves the planning, making estimates, budgeting, and taking measures to control the cost of completing a project within a specified budget. This aspect of management has three main principles:

Estimation of Cost: this has to do with the projection of the approximate cost of the resources that would be needed to successfully complete a project.

Budgeting of the Cost: gathering the cost estimations of the individual deliverables within the project in order to have the total cost.

Cost Control: this involves exertion of expert influence on the factors which affect cost differences, and also controlling the changes that could appear in the budget of a project (Dubois, 2003).

These principles are intertwined and they interact also with all the other area of project management. Each project management process may involve the efforts of one or more members or a group of persons in the project depending on what the needs of the projects are. If the project has different phases, each process of project management occurs not less than once in every phases. Though the processes appear here as distinct elements having defined boundaries, they are, in reality, intertwined, overlapping in ways that details may not be able to capture (Cokins, 2001).

Types of Estimates and Methods for Their Preparation

The estimation of the cost of managing a project has to do with the development of the approximate costs of the resources that will go into the completion of every scheduled activity within the project. The estimator needs to consider the factors responsible for cost variations, without ignoring risks (Cokins, 2001).

The process of estimating cost looks at the budget in relation to offsetting additional costs that may arise. Cost estimations are always expressed in currency units (euro, dollars, pounds, and so on) so as to be able to draw comparisons within and across multiple projects. However, other measurement units, like staff hours and work days, can be used in the analysis of cost in order to ensure effective managerial control (Cokins, 2001).

The accuracy of an estimate in a project increases with the progression of activities. The costs for deliverables are estimated also to account for all the resources that will go into the project. And this includes, among other things, materials, facilities, services, labor, and equipment, without sidelining important categories like inflation allowance and contingency cost. The cost estimate of a deliverable quantitatively assesses the presumable cost of the resources needed to successfully complete that scheduled activity (Cokins, 2001).

Techniques and Tools

Top-Down Model of Estimation (Analogous Estimating)

Analogous Estimating is a Top-down model of estimation. With this technique, the project duration is determined. It considers and compares previous and current projects to determine the length of time it will take to complete the current one. The project duration is not manifest at the early stages of the project when this estimation is usually made (Daft, 2001).

Bottom-Up Estimation Model

This technique is capable of producing a more effective estimate for each phase of the project. Here, each phase is broken up into deliverables. Estimations are made based on these. There are initial estimations of smaller portions of the work which are then gathered to provide the estimate for the entire project. In this case, estimates of single work units are considered rather than giving an estimation of the cost of an entire project. Accuracy is higher when the scope of the estimation is smaller (Daft, 2001).

Parametric Estimating

The parametric technique considers the relationship between variables and the data provided. It is also accurate since it focuses on the resources needed for a single unit of activity. It takes into account the nature of the project, in terms of whether it is simple or complex (Daft, 2001).

Reserve Analysis

Reserve analysis is used to analyze concurrent projects. It looks at the entire features of the project, and also determines the relationship between them. Reserve analysis allows for the establishment of scheduled duration, cost estimation and the final budget (Daft, 2001).

Activity Cost Estimates

Activity cost estimate is used to stipulate the cost of all the resources that are required to complete units of scheduled activities. This method takes into account the costs for materials, labor, facilities, services, and equipments, in addition to information technology and contingency reserve costs.

There should be a synergy between the variables and the cost estimate documentations. The documented activity cost estimate needs to include:

1. The scope of work for the project

2. Explanation of the basis on which estimates were drawn, and possible constraints (Daft, 2001).

Project Management Software

There is cost estimation software for project management. The software with the tools therein facilitates cost estimating techniques. Let's consider the different alternatives to cost estimate (Daft, 2001).

Cost Budgeting

Cost budgeting gathers the total estimations of all the activities scheduled in the project deliverables. It is used to establish the baseline of the cost in order to measure the performance of the project (Daft, 2001).

Time-Phased Budget

Once the WBS and a schedule are available, the time-phased budget can be developed. And this contains details of when a budget should be spent and what is to be accomplished at every level of expenditure. This kind of budget is also referred to as the earned value plan (Daft, 2001).

Having done all these, the data needed to create the initial budget would be available. Every WBS item is assigned a cost. From the staffing plan, affix human resources to each of the tasks. With a spreadsheet or a project management tool, you would be able to calculate the cost for labor. With the available labor rates for each category of job, you could multiply the number of hours each of the human resources is expected to work. You may need to add the cost for miscellaneous items (Daft, 2001).

When you get to compare the actual money spent and the actual WBS items completed against the planned budget and work schedule, you would have an idea of the progress of your project. If the planned budget for a particular WBS item has been exhausted while work still remains, that is a clear indication of a problem on the budget. With the time-phased budget, various variables can be used to determine the health of a budget. And these variables should be monitored monthly (Daft, 2001).

Processes Involved in the Cost Budget of an Information Technology Project

The benefits of developing an effective cost budgeting and cost estimate plan are threefold. First, the budget presents a concise documentation of the project. Through adequate planning, issues that would have been overlooked or neglected are taken into consideration without which problems may erupt in the process of project execution. The final benefit is that good planning instills confidence and paves way for success. Experts maintain that project planning is never a waste of time since the time allocated to a project during the planning stage and the actual completion time are usually not so far apart (Desai et al., 2001).

Scholars have said that getting stakeholders involved in all stages of the project management is important and necessary for the successful completion of IT projects. If this is the case, decisions will be taken together and there will be no complaints of any kind. And so scholars have recommended that every important party be involved in the project. There should be a routine report of project completion status. However, experts choose accuracy of project reports over regular frequency (Desai et al., 2001).

A detailed assessment of possible risks needs to be carried out in IT projects in order to ensure success of completion. Expert analysis has divided risk assessment into two levels: assessment of risks that are obvious, and unknown risks that emerge in the course of solving the more usual ones. It is a business attitude to consider and address risk in-depth, putting internal customers and senior management in the limelight. Researchers have posited that, if the risk assessment suggests a withdrawal from the project site, the decision to stop work is better taken sooner than later (Desai et al., 2001).

Experts have advised that it is wise to forecast possible failures in a project that may necessitate making contingent plans to overcome problematic situations. Thus, it is necessary to consider items that might easily be overlooked, including changes in the business that need to be incorporated in the project. This may cause delays of some sort. Over all, an effective cost management involves the development of contingent plans to overcome unforeseen circumstances (Cooper and Slagmulder, 2004).

While developing a project in Information Technology many issues and difficult situations may be encountered. All of these, including the need to stick to deadlines, may lead to tensions and pressures. With an effective cost management, these irregularities will be surmounted. Seeking for and getting support from top management staff continually will help to bring the project to a successful completion (Cooper and Slagmulder, 2004).

Cost budgeting and making estimates effectively in the course of project planning has multiple phases, especially in IT related projects. Though difficulties abound in terms of trying to identify and manage every potential difficulty, efficient appropriation of budgets and strict implementation of plans bring success to the project. However, it depends on the project size because larger projects possess greater unforeseen risks. For example, large IT projects may look overwhelming and too gigantic to coordinate. Issues here may not have touched on every aspect of the project planning and cost management prospects because, in reality, issues are a lot more complicated. It is to be noted that the draft of a project plan does not mean to be perfect. However, a project manager will be better placed on the path to success if he takes into consideration all the issues raised therein (Cooper and Slagmulder, 2004).

The Assistance of Project Management Software in Project Cost Management

Experts have asserted that the process of effectively forecasting the cost management of a project is a very complex one. And it starts at the very onset of the project, and even a long time before the project actually begins. One of the factors that bring about success is the existence of highly accurate and effective system used for cost estimations (Baker, 2002). The software for project management may be of great assistance in estimating cost management if the following conditions are met:

1.

The existence of a concise and simple definition of the extent of work the project involves

2.

A detailed investigation and analysis of possible risks, together with comprehensive presentation of the action plan to reduce the effects to the barest minimum

3.

A competent and expert manager of projects

4.

The awareness of all the stakeholders of the different kinds of costs, those which are operative at the various stages of the project

5.

An efficient organizational structure which encourages a free and effective flow of communication, so that there will be a thorough understanding of responsibilities by all involved.

6.

A detailed structure for the work where the entire project is broken into manageable deliverables

7.

Realistic budget that allocates to each unit of work package their appropriate share of the entire budget which tallies with the work needed to be done

8.

A system of accounting and well-written coding scheme that properly synchronize with the structure of work already broken down; and these should be made compatible with the system of information management in the organization

9.

A system of cost accounting that can accumulate and allocate costs to their appropriate accounts whenever the need arises

10.

A comprehensive schedule of work which is drawn from the deliverables, and has the ability to assign and track the advancement of units of work packages

11.

Efficiency in the management and proper motivation of the staff in order to ensure successful and timely completion of projects

12.

A method to compare the planned and the actual expenditures for units of work packages

13.

A way to recall foregone tasks and bring them back to the work plan, and also providing measures to remedy problematic situations

14.

Provision of effective and thorough supervision to make sure quality is maintained throughout the different stages of the project

15.

Proper supervision of time sheets submitted by the staff in order to ensure that only the actual hours worked will be booked

16.

Correct drafting of contracts documents and specifications

17.

Thorough investigations to ascertain the financial standing of the customer

18.

Adequate monitoring of all suppliers, including the subcontractors, especially the inexperienced ones

19.

Effective use of highly competitive tendencies to purchase at lowest cost while sticking to good quality in all purchases and subcontractor deals

20.

Control and thorough consideration of modifications that necessitate variations in the contracts, including ways to justify increases in the price

21.

Avoiding every change that is not essential especially those that will not attract payment from the customers

22.

Proper monitoring and control of payments made to subcontractors and suppliers in order to make sure that all invoices are processed only when due

23.

Tracking down and recovering all miscellaneous expenditures that are provided for within the charging structure of the contract

24.

Timely and proper invoicing of payments to the customer to ensure that progress payment claims are processed on time to avoid disputes

25.

Controlling credit effectively to avoid customers indulging in long overdue payments

26.

Maintaining an internal security audits culture to prevent fraud and theft

27.

Regular presentation of progress and cost reports to top management, dwelling on the most sensitive aspects that need immediate intervention

28.

Going for designs that are cost-effective by patronizing Value Management

29.

Acting promptly to close accounts at the completion of the project to avoid the staff booking unauthorized hours, or the charging of other items on the project (Baker, 2002).

Though this list does not pretend to be all encompassing, it contains relevant information concerning the effectiveness of cost management for both small and large projects. It has shown that the process of making an effective cost estimate can be complex and organizations should not look down on the rigors because they are, indeed, not easy and simple. Project cost management rather relies heavily on the series of detailed estimations made earlier on in the course of project execution (Baker, 2002).