Construction Cost Management

Construction Cost Management

Figure 1: Construction Cost Management Processes.PNG‎

Introduction

Cost Management in construction industry and the measurement of the financial activities involved there are unique and completely different from financial management of other industries. The basic production unit of the construction industry is the project. Thus, in contrast to the other industries, the number of projects in construction, is relatively small compared to other industries. Considering also the expended time frame and the multiple stakeholders, which are involved in this one project, the differences in the cost management from other industries can be realized.

Construction Cost Management is presented as a subject group as in DS/ISO 21500:2013. It is analyzed in the processes groups, illustrating by the aforementioned standard. The definition of the process group according to the DS/ISO 21500:2013 is the following:

• Initiating The initiating process is used to start a project phase or project, to define the project phase or projects objectives and to authorize the project manager to proceed with the project work.
• Planning The planning process is used to develop planning detail. This detail should be sufficient to establish baselines against which project implementation can be managed and project performance can be measured and controlled.
• Implementing The implementing process is used to perform the project management activities and to support the provision of the project's deliverables in accordance with the project plans.
• Controlling The controlling processes are used to monitor, measure and control project performance against the project plan. Consequently, preventive and corrective actions may be taken and change requests made, when necessary, in order to achieve project objectives.
• Closing The closing processes are used to formally establish that the project phase or project is finished, and to provide lessons learned to be considered and implemented as necessary.

Planning

Cost Estimation

The capital cost for a construction project consists of the following expenses:

• Land acquisition
• Planning and feasibility studies
• Architectural design and engineering consultancy
• Construction of the project, including labour and equipment
• Field supervision of construction works
• Insurance and taxation during the construction of the project
• Owner general office overhead
• Equipement and furnishings after completion of construction
• Inspection and testing

Cost Estimating Techniques

• Basic approaches on cost estimation

• Unit Cost Method of Estimation

• Methods for Allocation of Joint Costs

Historical Cost Data

Application

Th use of historical data for cost estimation is a common procedure in the construction industry. Historical data is useful when it is collected and properly structured for for future applications. Consulant engineering and construction companies continuously keep record of their construction cost estimating economic activities. The available data is structured according to the needs of the specific organization.

Limitations and Challenges

• Changes in relative prices result on serious changes in construction costs

• Prediction over long period of time is quite difficult

• Possibility of errors in analysis, due to uncertainties

Computer Aided Cost Estimation

Cost Estimation of construction projects in the preliminary design stage is a rather challenging task, due to the lack of available project information. Therefore, cost estimation models using parametric computational methods have been developed. Such cost estimating model techniques in the preliminary design phase are :

• Multi regression models
• Neural network models
• Case-based reasoning models

Implementing

Pricing is determined by a large number of factors. The bid, which is submitted by a contractor, depends on

• cost estimation
• contractor's profit

Contracting

Construction contracts is the mean for pricing a construction project and stands out as an official agreement between the client, the contractor and the possible other stakeholders, who are involved in the contract. Contracts are a structure for the allocation of risks between the involved parties in the project. The type of contract, which will be used for the construction of a project, is decided solely by the client, who also sets the term on the contractual agreement. Different type of contracts pose also different risks for the contractor. Some types of contractual agreement, which are used in construction industry, are listed below:

• Lump Sum Contract

• Unit Price Contract

• Cost Plus Fixed Percentage Contract

• Cost Plus Fixed Fee Contract

• Cost Plus Variable Percentage Contract

• Target Estimate Contract

• Guaranteed Maximum Cost COntract

Controlling

The primary objective of Construction Cost Control is the delivery of the project within the approved budget.

Closing

Operation Costs and Maintenance Costs

The Operation and Maintenance Cost of a construction project include the life-cycle costs of this project over the subsequent years. It is of utmost importance for the client and the consultants to realize that, although construction cost is the the most significant as it stands as the largest amount of the overall project cost, the other cost components are also major expenditure, which in some cases their value can be equal to construction costs. Therefore, it should be carefully considered and thoroughly calculated. The expenses related to this type of cost are the following

• Land rent
• Labor and material for maintenance services and repair
• Periodic renovations
• Insurance and taxation
• Financing costs
• Utilities
• Owner's other expenses regarding the facility

Notable Mentions

Technology trends in Construction Cost Management

5D Estimating Building Information Systems

Software, many, platforms, getting the data for estimation to the interest parties, inhouse software for pricing in companies, due to fierce competition

Annotated bibliography

1. Winch, G. M. (2010), "Managing Construction projects". Second edition

Summary: The book presents a holistic approach of construction management. The basic principles of construction project management are presented along with different tools and techniques that aims to enhance construction performance and provide innovative techniques. The use of information and communication technologies is also a point of interest in the book.

2. Kerzner, H., Ph.D., (2006), "Project Management: A systems approach to planning, scheduling and controlling". Ninth edition

Summary: The book illustrates the basic principles of project management. The book is targeting for enhancing the project skills of not only students, but also executives, pointing out that project management can be related to every profession apart from engineeering, including information systems and business.

3. Maylor, H. (2010), "Project Management". Fourth Edition

Summary: This book cover all the topics of project management, focusing in the theory, as well as in the application and usage of the ideas discussed in it. The book points great emphasis into the 4D-model of the project.

4. Flyvbjerg, B. (2008) "Curbing Optimism Bias and Strategic Misrepresentation in Planning": Reference Class Forecasting in Practice, European Planning Studies Vol. 16, No. 1

Summary: This paper presents the method and illustrates the first instance of reference class forecasting. The paper targets in the inaccuracy of the financial appraisal in planning in construction, explains them in terms of optimism bias and strategic representation and present a method of eliminating this inaccuracy.