Effective construction cost management involves establishing and using systems to control costs. This includes preparing accurate estimates, tracking expenses, and proactively identifying budget overruns.
The resulting construction costs are tracked by comparing them with the original detailed estimate, which becomes the project budget. Expenses incurred are recorded in expense accounts that relate to particular scheduled activities and the specific items in the budget.
Budgeting
In construction, budgeting is a vital aspect of a project’s success. It enables project stakeholders to set realistic budgets and ensure that financial resources are allocated appropriately throughout the project lifecycle. This prevents costly project overruns and keeps projects financially viable.
Budgeting requires a strategic approach that includes careful analysis, stakeholder consultation, and documentation of changes. In addition, a clear budget reduces the risk of cost overruns by providing transparency into project expenses and performance. It also allows for timely and effective corrective action to minimize expenditures.
Effective strategies for enhancing budgeting include utilizing historical cost data, collaborating with project managers and engineers to understand project specifications and technical requirements, seeking expert input on value engineering opportunities, and accounting for contingencies. These techniques allow construction organizations to reduce costs without sacrificing quality and deliver projects on time and within budget.
Construction budgeting can be complicated, as it requires a deep understanding of the project requirements and a thorough knowledge of the local labor and materials market. It can also be affected by unforeseen project scope changes, design revisions, and unanticipated site conditions.
For these reasons, it is important to involve all project stakeholders in the budgeting process and to regularly communicate with them about expenses and performance. It is also useful to use productivity software that consolidates and automates reporting based on the data you’ve gathered.
Variance Analysis
Cost variance analysis allows companies to evaluate their performance and make adjustments to improve their budgeting and forecasting processes. It compares actual costs with estimated costs and identifies the reasons for discrepancies to determine which expenses are within or over the expected range. It’s essential that accurate, timely documentation of expenses is in place to have reliable data for comparisons and variance analyses.
Companies can use variance analysis to identify trends and take steps to prevent future problems. For example, a company that is spending more on raw materials than expected can investigate the reason for this variance and reduce material expenses in the future by purchasing less expensive material or by increasing production volumes to lower per-unit raw material costs.
Companies can also analyze revenue variances to find ways to increase revenues or reduce costs and improve cash forecasting. For example, if a company’s sales are $200,000 below their projections, they can investigate the reason why and try to implement new strategies to boost revenue in the future.
Change Orders
Change orders are common in construction, but they should be handled carefully. They can have a huge impact on project completion and contract terms. They must be negotiated, detailed and authorized by all parties involved. They should also be made in a timely manner. Delaying changes can result in backlogs of rework, blown schedules and cost overruns.
Changes can come from a variety of sources. Some are based on design decisions that the client makes throughout the project, such as moving a door or changing the size of a window. Others are based on the conditions that you encounter on site, such as soil that is not as stable as expected or unforeseen weather events.
It is important to calculate the full cost of the change order. This includes the direct cost, the impact on the schedule and the consequential costs. Be prepared to explain your calculations and provide references for all costs.
It is also important to keep in mind that your profit margin percentage that you apply to the original bid should also be applied to the change order pricing. This will help you set realistic expectations for your clients and protect yourself from disputes that could arise. It is a good idea to bake change orders into the initial contracts, detailing how they will be initiated and carried out.
Contingency Funds
A Contingency Fund acts as a buffer for unexpected circumstances that impact the original budget. These events can include design changes, material price fluctuations, labor shortages, regulatory changes, weather disruptions and unforeseen site conditions. By including a construction contingency, project participants can avoid using credit to meet these unanticipated money requirements.
The inclusion of a contingency in the cost estimate can minimize the impact of an overly optimistic estimate and create safeguards for project completion on time and within budget. A project’s overall cost estimate may be made up of a contractor contingency, a design contingency and/or a management contingency. These funds are typically outlined in the contract and tracked carefully. A project contingency can also be used to manage change orders, a common issue in construction projects.
Managing a construction contingency budget can involve analyzing individual contract contingencies, monitoring the use of unused funds and evaluating the reoccurrence of costly issues. This can be done through a continuous comprehensive risk analysis that quantifies and refines contract contingencies, as well as a system for tracking cost overruns and impacts.
It is important to understand the difference between a retainage and a contingency plan. While the concept is similar, there are significant differences in terms of how they are structured and the benefits of each. Unlike retainage, which is paid for by the contractor, a contingency plan provides the Owner with safeguards that will help to ensure that the project is completed on schedule and within budget.