by Jeffrey C Kadlowec, Architect
Abstract
Cost management is a key factor if project success and profitability for construction companies. Market fluctuations on material and labor costs must be considered in accurate cost estimating. Integration of big data and internet applications improve decision making throughout the entire lifecycle of construction projects. Understanding of earned value and actual costs is essential to avoiding budget overruns and financial losses. Many methods and strategies in cost control are available to reduce uncertainty and minimize risks. With recent trends in this market sector, integration of these concepts is key to long-term growth and high quality performance.
Keywords: cost control, financial risk, construction project management
Cost Control
Cost management directly affects the profitability of construction companies. Market economy adds uncertainty to an industry with a substantial amount of inherent risk [Zhou 2023]. Long project timelines in particular can be heavily impacted by market fluctuations that affect material and labor cost. Negligence in cost estimating and failure to address the importance of these hidden costs may result in considerable financial losses. Properly managing and optimizing estimating strategies will maximize profits for contractors, allowing them to perform quality work for property owners.
Big-data technology and the internet of things are being integrated into every aspect of the construction industry. This is impacting social and economic development, and changing traditional business models. Taking advantage of the benefits from new cost management tools should be a top priority of construction companies due to their single source of revenue [Chan 2021]. Databases with costs of production and operation activities should be utilized in estimating and control. The historic data will minimize financial risks from project cost to within a reasonable level. Cloud computing and related applications provide faster and easier utilization of this information in feasibility studies, job costing, and decision-making.
Project estimates are usually derived from construction documents before design alternatives and value engineering are considered. By utilizing building information modeling (BIM) throughout the design phases, associated costs can be evaluated simultaneously [Sepasgozar 2022]. The 5D element of BIM models allows for real-time cost estimating based on unit rates and quantity take-offs. Further analysis of these attributes provides comparison of earned value (EV) and actual cost (AC) against break-even point (BEP) and return on investment (ROI). Adjustments can then be made to avoid budget overruns and financial losses.
Cost control includes strategies, methods and practices intended to minimize risk of budget overruns in construction while focusing on optimization of project performance. Proactive measures must be taken to address the dynamic and volatile nature of the industry. Success is measured by the financial stability and timely delivery of quality results that meet (or exceed) the expectations of stakeholders [Chan 2023]. Cost overruns will have negative repercussions, causing project delays and strain relationships, creating conflicts and disputes that may result in legal consequences. Many effective strategies have been developed to mitigate these risks including: budget adherence, value engineering, change order procedures, and earned value management (EVM). Efforts should be made to account for inaccurate estimates, insufficient data, and uncertain conditions, while also avoiding major changes and scope increases.
Reduction in scope, though often not desirable, is an effective method to limit overruns that is rarely explored. With limits to project financing and needs to meet schedule constraints, scope management, much like value engineering (EV), should be considered throughout each phase of design and throughout the construction stages. With quality assurance being a significant criterion for contractor selection, scope management becomes an important area of discussion and exploration [Olsson 2015]. Implementing these constraints will ultimately lead to greater satisfaction by stakeholders.
Many construction projects fail to meet cost and time objective despite various control strategies and techniques. Gantt charts, critical path method (CPM), and program evaluation and review technique (PERT) were developed over the past decades to address these issues. Software packages and online applications are now readily available and are widely used throughout the industry. Variables including inaccurate estimates, design changes, inadequate planning, material shortages, and labor productivity have been identified as reasons for schedule delays, while lack of experience, inaccurate take-offs, and inflationary increases are the cause of budget shortfalls [Olawale 2010]. Risks created by these uncertainties have adverse effects on project success and is well known in the construction business. Key performance indicators should be used to track output, document progress, and optimize performance in efforts to mitigate risks and increase profitability.
Population growth and rapid urbanization is fueling major developments throughout the construction industry. This has created a highly competitive environment that requires companies to focus on control of costs through innovation and integration of technology to remain successful. Analysis of the market reveals that management must 1) guarantee smooth development, 2) assist in planning and budgeting, and 3) improve quality and efficiency [Junlv 2020]. Design decisions made early in the project lifecycle will have the greatest impact on cost, while those in later stages will have less influence towards overall performance (See Fig 1). Integrated project delivery (IPD) seeks to optimize the entire process by involving all participants throughout all phases of design and construction.
Figure 1. Construction Cost Management and Control Analysis [Junlv 2020]
References
Chan, Lee & Khan, Konal. (2023). Cost Control Measures for Successful Construction Project Management. Department of Civil Engineering. University of Hong Kong.
Chen, Liang & Dai, Heping. (2021). Application of Big Data in Cost Management and Control in Construction Project. Journal of Physics Conference Series. 1881. 10.1088/1742-6596/1881/2/022036.
Junlv, Zhang. (2020). Dynamic Control and Management of Construction Engineering Cost. IOP Conference Series: Earth and Environmental Science. 638. 10.108/1755-1315/638/1/012090.
Olawale, Yakubu Adisa & Sun, Ming. (2010). Cost and Time Control of Construction Projects: Inhibiting Factors and Mitigating Measures in Practice. Construction Management and Economics. 28: 509-526. 10.1080/0144191003674519.
Olsson, Nils O E. (2015). Scope Reductions as Tool for Cost Control in Construction Project: An Ex-Post Analysis of Scope Reduction Options. International Journal of Risk and Contingency Management. 4(4): 1-16. 10.4018/IJRCM.2015100101.
Sepasgozar, Samad M E; Costin Aaron M; Marimi, Reyhaneh; Shirowzhan, Sara; Abbasian, Ezatolla & Li, Jinyun. (2022). BIM and Digital Tools for State-of-the-Art Construction Cost Management. Buildings. 12, 396. 10.3390/buildings12040396.
Zhou, Ziqi. (2023). Cost Management and Risk Control of Construction Projects under the Market Economy. 7th International Conference on Economic Management and Green Development. 10.54254/2754-1169/41/20232041.
