Construction management is the process of ensuring that your project is completed within a given budget. Contractors should apply cost management practices during all construction stages, including preconstruction, construction, and handover.
Cost management is crucial because it enables contractors to identify costs and create an accurate financial projection. Also, good construction management ensures that expenses are approved before materials are bought.
Steps for construction cost management
Construction cost management involves these main steps.
Resource planning
The first step of cost management is resource planning. The contractor will devise a work breakdown structure in this step. All project deliverables must be identified, and related work activities added to each deliverable.
Once each activity is identified, the contractor must calculate how many resources (labor and material) will be required to complete each identified milestone. For example, you need to know how many men and what kinds of equipment will be required to dig a foundation.
Cost estimation
After identifying the required resources, you will have to put a cost to them. If 50 men and two tractors are required to dig a foundation, you need to know how much that will cost. When estimating the cost, ensure it is done within the scope of work. Each time the scope of work changes, the cost estimates must also change.
To get accurate construction costs, use modern technological solutions like construction optioneering platforms. These can be used with other technologies, such as BIM, to create estimates. The platform can also be used during resource planning to identify over or underutilized resources.
Using technology, contractors can realize significant labor cost-saving benefits. When you get estimates exceeding your budget, you can also use technology to identify alternatives that will fit your budget.
Cost budget
Once you have cost estimates that you can work with, you will have to prepare a suitable budget. The budget will act as a guide and ensure that your profit margins are intact preconstruction. When creating a cost budget, summarize all individual cost estimates calculated throughout the scope of work. The budget should include all costs, such as equipment, material, labor, and administrative costs.
Cost control
Once a budget has been completed, you must devise cost control measures to prevent scope creep. One cost control measure you can use is ensuring that no expenditure is made until key decision-makers approve it. Also, the spending should be based on what was agreed on in the original budget.
Another strategy you can use is creating forecasts at least once a week to identify if you are within budget quickly.
6 construction cost management mistakes to avoid
1. Using an Excel spreadsheet
The problem with using Excel is that it is prone to error and manipulation. After all, there is no way to know who edited data and what exactly was edited.
In contrast, using more modern costing platforms, one can easily share costs because they can be accessed via the cloud. Also, modern platforms keep logs of who edited data and what was changed. You can also create projections with the click of a button, unlike Excel, which requires manual entry.
2. Creating inaccurate estimates
Accurate estimates are crucial because they enable you to complete a project without hitches. If your estimates are inaccurate, the project can stall, exposing the contractor to litigation. Inaccurate estimates can be caused by factors like having multiple suppliers and using the wrong cost strategy.
To avoid this, have an independent cost estimator review your estimates. This way, they can identify errors and advise accordingly.
3. Operating without a work breakdown structure
A work breakdown structure is a hierarchical visual of a project’s objectives and the scope of work. A work breakdown structure is important because it will break down big goals into smaller objectives that can be quantified.
This strategy makes it easier to devise an effective cost management strategy. The only problem with this strategy is that it is tiresome. However, this can be solved using modern platforms that do the work for you.
4. Failure to regularly update cost plans
One mistake frequently made by contractors is assuming that the cost plan is perfect. Cost plans can be subject to errors and alterations, caused by unexpected external factors like inflation and taxes. To avoid these shortfalls, your plans should be updated regularly.
5. Underestimating the time required to complete a project
A common mistake project managers make is the failure to use historical data to know how long a project can take to complete. Without accurate data, the project manager tends to underestimate completion time, which means there will be a budget shortfall.
Another strategy project owners can use to know how long a task will be completed is asking subcontractors. This is because they have enough experience to estimate how long a project will last.
6. Failure to manage people
Cost management is not all about numbers. You need to have people management skills to ensure they work within the stipulated time frame and deliver on agreed quality. Delays caused by laborers can create a ripple effect affecting total estimates.
Utilize systems that both promote productivity and allow workers to be paid on time. Another way to manage people is to reward productive employees and compensate them better than competitors.
Finally, project managers should be more active than reactive. If you are reactive, you’ll be waiting for disasters to happen before you solve them, which can increase costs as project managers spend unbudgeted money to solve these problems. Active approaches create simulations to identify risks and develop mitigation measures in advance.
