Cost Control in Construction Works

The construction industry is unlike other sectors, since construction is mostly concerned with once-off projects. Whilst many construction companies are guided by industry norms or their own experience when pricing construction works, difficulties arise when considering the specifics of each scope of work, the site and the working conditions under which it will be executed.  The price of works is also influenced by negotiations with clients to reduce the price. All of these contribute to uncertainty regarding contract prices. Contractors have to take cognisance of these variables when managing costs and cash flow.

The objective of this article is to highlight some measures a contractor can put into place to effectively manage their costs. In their book “Modern Construction Management”, Frank Harris and Ronald McCaffer liken cost control to a domestic thermostat. The domestic thermostat measures the temperature and adjusts it to be within a pre-specified range. Similarly, a cost control system should enable a manager to observe the current cost levels, compare them with a standard or norm and adjust the cost levels accordingly.

However, unlike thermostats, most cost control systems have a long response time, relying on data gathered in previous weeks or months. Furthermore, the relevance of the data is limited to the work being analysed. Thus, the success of any system depends on the assessment of the data by the person responsible for cost control and how they react to it. Cost control is not an exact science, and the acumen of the responder is imperative.

A Bill of Quantities (BoQ) cannot effectively be used to manage costs, since the BoQ is reflective of the completed works rather than the operations. It would serve contractors well to develop or adopt an effective cost control mechanism. Some examples of the systems currently in use include the following:

• By overall profit or loss: A contractor waits until the project is completed and compares the amount of money that they have been paid against all expenses under the project. This hardly qualifies as a cost control mechanism and may only be useful on small projects for a short duration and provides key input for the next project.
• Profit or loss on each payment certificate: The value of a certificate inclusive of retention is compared to the expenses of the project, including materials on site not yet installed. If the value of the claim for the payment certificate does not reflect the work done and expenses incurred, adjustments are made to the claim. This system does not provide a breakdown of the profit figures between the different categories of work.
• Unit costing: The costs of the various types of work are recorded separately and compared to the costing in the BoQ or tender. Care should be taken to include all costs, including miscellaneous costs.
• Systems based on the Principles of Standard Costing: Standard costings are successfully used in manufacturing industries and can be suitably adapted to the unique attributes of a construction project. Comparisons on cost versus profit are drawn on specific subcategories such as material price, material usage, labour rates, labour efficiency, fixed and variable overhead expenditure and sales. Due to the variety of the product in construction works, the contractor could utilise this method to compare the budget of a specific project to the amount that they expect to be paid.
• PERT/Cost: In the Performance Evaluation and Review Technique (PERT), each contract is networked. Work packages, which are a group of activities, are assessed in advance. When updates are made to the system, the value of work done is provided as a byproduct of the calculation. When divided by cost codes, with the work packages similarly divided, the costs can be recorded against the same codes and variances will be provided by the system.

Selecting and adopting an effective cost control system is crucial to project and organisational success. Cost control directly affects cash flow, and as the old adage goes, “Cashflow is the lifeblood of a construction project.”

Please contact the Association if you require any further information.

Bilaal Dawood

Head: Membership Services