CHAPTER 9

COST CONTROL
 CONTENT OUTLINE

• Understanding the need to cost control

• Advantages of cost control
• Necessity and strategies
ELEMENTS OF CONSTRUCTION
SCHEDULE

QUALITY

SCOPE BUDGET
 PROJECT COST MANAGEMENT

• PCM includes the processes required to ensure that the project is

completed within an approved budget.

• PCM may be defined as management of the processes involved in planning,

estimating and controlling costs so that the project can be completed within
the approved budget.
 PROJECT COST MANAGEMENT

It includes three factors:

• COST ESTIMATING

• COST BUDGETING

• COST CONTROL
 COST ESTIMATING

• Developing an approximation or estimate of the costs of the resources

needed to complete a project.

• Includes identifying and considering various costing alternatives.

 COST BUDGETING

• Allocation of overall cost estimates to individual works items in order to

establish a cost baseline for measuring project performance.
 COST CONTROL
• During the execution of a project, procedures for project control and
record keeping become crucial tools to managers and other participants in
the construction process.
• These tools serve the dual purpose of recording the financial transactions
that occur as well as giving managers an indication of the progress and
problems associated with a project.
• The process of controlling in expenditure on a construction project at all
stages from its inception through its development and design and till the
execution and final payment.
• It can be achieved by appropriate decision-making process and financial
control system.
 COST CONTROL

• Controlling changes to the project budget.

• Influencing the factors which create changes to the cost baseline to ensure
that changes are beneficial.

• Determining that the cost baseline has changed with in acceptable units.

• Managing the actual changes when and as they occur.

 OBJECTIVE OF COST CONTROL
• To have a knowledge of the profit and loss of the project throughout the
duration of the project
• To have a comparison between the actual project performance and that
conceived in the original project plan.
• To locate areas of inefficient functioning and provide guide for reducing
cost.
• To serve as a basis for estimating
• Determine that the cost baseline has changed.
• Managing the actual changes as and when they occur.
• Provides feedback data on actual project performance to future project
planning.
 COMPONENTS OF COST CONTROLS

A.Your Costs
• Identify your major cost centers.
• Identify the major types of cost within each cost center.
• Choose the costs to focus on first
COMPONENTS OF COST CONTROLS

B Systematic cost control

• Start from your business objectives
• Establish your ‘standard costs’ for achieving your objectives.
• Establish realistic ‘budgeted costs’ based on your actual experience.
• Record your actual costs and compare them with the standard and
budgeted costs.
• Periodically review what you are doing and how you are doing it.
 COMPONENTS OF COST CONTROLS

C Who is involved?
• Each cost centre is usually the responsibility of a manager.
• Involve employees in cost control.
• Include your customers and suppliers
• External consultants can be a useful resource
COMPONENTS OF COST CONTROLS

D Easy savings
• Checking supplier invoices may reveal overcharging
• Eliminate unnecessary costs
• Crack down on excessive costs.
• Root out inefficiency
 COMPONENTS OF COST CONTROLS

E Opportunities
• Reduce your payroll costs
• Improve your purchasing
• Find ways to make production more efficient..
• Review your finances
• Get the most out of your premises
• Cut the cost of communications
 COMPONENTS OF COST CONTROLS

F Pitfalls
• Reduces flexibility and process improvement in a company.
• Restriction on innovation.
• Requirement of skillful personnel to set standards.
• Reducing costs which directly impact on employees is fraught with
difficulty.
• Almost every cost saving has a potential downside
 COMPONENTS OF COST CONTROLS

G. Consultants
• External consultants can offer an advantage over purely internal cost
control..
• Select a consultant carefully
• Negotiate a clear, written contract.
COMPONENTS OF COST CONTROLS

H . Stages
• Preliminary stage
• Planning phase
• Negotiation phase
• Contractual phase
• Design phase
• Construction phase
• Post Construction phase
 ADVANTAGES OF COST CONTROL

• Achieving the expected return on capital employed by maximizing or

optimizing profit.
• Increase in productivity of the available resources.
• Reasonable price for the customers.
• Continued employment and job opportunities for the workers.
• Economic use of limited resources of production.
• Increased credit-worthiness.
 ADVANTAGES OF COST CONTROL

• Prosperity and economic stability of the industry.

• Cutting costs is the simplest way to improve your bottom line.
• Introducing a cost control system can bring immediate savings and ensure
that you remain competitive in the longer term.
• But cost control needs to be carefully managed.
• While eliminating wasteful activities is clearly beneficial, indiscriminate
cost cutting can lead to falling quality and poor morale.
 TYPES OF PROJECT COST

Direct cost (normal cost)

• These are the cost that can be identified directly with the activities of the
project. labor, material, equipment costs.
• It increases with shortening of project duration.

Indirect cost
• Insurance ,storage cost, charge, administration charges etc. it increases
with the increase in project duration.
COST OPTIMIZATION
 STEPS IN COST CONTROL

• Preparation of cost estimate

• Preparation of procurement plan
• Selection of procurement method
• Price adjustment
• Arrangement of budget and construction site
• Cost checking mechanism
• Expenditure monitoring system
 STEPS IN COST CONTROL

• Budget estimating based on a client’s brief

• Cost advice on different tendering and contractual arrangements
• Pre-tender price estimating
• Comparative costs of alternative design solutions
• Elemental target costs for cost planning
• Whole-life cost planning
 STEPS IN COST CONTROL

• Tender analysis, reconciliation and recommendation

• Interim payments and financial statements
• Final accounting
• Cost analysis of accepted tenders
• Costs-in-use
• Taxation and insurance considerations
TOOLS/TECHNIQUE OF COST CONTROL

• Earned Value Management

• Estimate to complete
• Forecasting
• Cost Variance
• Cost performance Index
 EARNED VALUE MANAGEMENT

• The earned value technique uses the cost control contained in the
project management plan to assess project progress and the magnitude of
any variations that occur. The earned value technique involves developing
these key value for each schedule activity, work package or control
account.
• It compares the amount of work that was planned with what was actually
earned with what was actually spent to determine if cost and schedule
performance are as planned.
 PLANNED VALUE:
PV is the budgeted cost for the work scheduled to be completed on an
activity or WBS component up to a given point in time.

EARNED VALUE:
EV is the budgeted amount for the work actually completed on the schedule
activity or WBS component during a given time period.
ACTUAL COST:

AC is the actual cost incurred in accomplishing work on the schedule activity

or WBS component during a given time period. This AC must correspond in
definition and coverage to whatever was budgeted for the PV and the EV(e.g.
direct hours only, direct cost only or all costs including indirect costs.
 ESTIMATE TO COMPLETE

• The PV, EV and AC values are used in combination to provide performance

measures of whether or not work is being accomplished as planned at any
given point in time.
• The most commonly used measures are cost variance (CV) and schedule
variance (SV). The amount of variance of the CV and SV values tend to
decrease as the project reaches completion due to compensating effect of
more work being accomplished. Predetermined acceptable completion can
be established in the cost management plan.
 FORECASTING

• Forecasting includes making estimates or predictions of conditions in the

project’s future based on the information and knowledgeable available at
the time of the forecast. As the project progresses, the forecasts are
adjusted.
• Forecasting technique parameters to assess the cost or the amount of
work to complete schedule activities is called the EVA.
 COST VARIANCE

• CV equals earned value (EV) minus actual cost (AC). The cost variance at
the end of the project will be the difference between the budget at the
completion (BAC) and the actual amount spent.
• These two values, the CV and SV, can be converted to efficiency indicators
to reflect the cost and schedule performance of any project.
 COST PERFORMANCE INDEX

• A CPI value less then 1 indicate cost overrun of the estimates. A CPI value
greater than 1 indicates a cost under-run of the estimates. CPI equal the
ratio of the EV to the AC. The CPI is the most commonly used cost-
efficiency indicator.
• CPI is widely used to forecast project costs at the completion.
COST CONTROL AND TIME
 ELEMENTS OF COST CONTROL

• Observation
Regular observation should be made on material consumed, manpower,
equipment
• Comparison
The observed data must be compared with design standard by calculating
variances
• Identify reasons for variance
If the variance is large, it is important to know reasons for the variance 1
• Corrective action
If the variance cannot be justified, then the higher-level management takes the
necessary action for controlling cost.
COST INFORMATION
 IMPORTANCE OF COST CONTROL

There has been a trend towards modern designs and new techniques,
materials and methods of construction. The designer can choose from a
far wider range of products and this has produced variety in
construction. The traditional methods of estimating are unable to cope in
these circumstances to achieve value for money and more balanced
designs.
There is a general trend towards greater cost effectiveness, and thus a
need to examine construction costs not solely in the context of initial
costs but in terms of whole-life costs, or total-cost appraisal.
IMPORTANCE OF COST CONTROL

The increased pace in society in general has resulted in clients being less
likely to tolerate delays caused by redesigning buildings when tenders are
too high.
The client’s requirements today are more complex than those of their
counterparts. A more effective system of control is therefore desirable
from inception up to the completion of the final account, and thereafter
during costs-in use.
 END
OF
CHAPTER NINE