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By Missy England
June 26, 2016
*This is Part 3 of a three-part series. Check out Part 1: Planning, to dive into estimating and risk assessment, and check out Part 2: Scheduling, to learn about communicating the schedule and lessons in the critical path method (CPM).
Using cost controls during a project provides the necessary assurance that spending won’t exceed the budget. When cost controls are used at the activity or task level, they also help locate problem areas within the schedule and encourage new efficiencies. If costs for a particular activity rise too fast relative to the percent complete, then adjustments may be in order. These adjustments might include:
Once construction is underway, it’s very difficult to address cost problems arising from mistakes or oversights that should have been dealt with during the planning stages. If there’s an inadequate work breakdown structure, budgets that have been highly reduced in order to increase competitiveness, or an overall budget is unrealistic, then it’s time for a meeting with management, and quickly. If attention was put into planning a realistic project, with achievable deadlines and budget, utilizing the cost controls set in place will help mitigate budget problems once the project is underway.
According to the Construction Users Roundtable, or CURT, project costs should be reviewed every month with an effort to track all fixed-price contracts. Some projects, however, benefit from weekly or even daily tracking. When a project starts to get into trouble, increasing the frequency of budget reviews adds a margin of safety to both cost and timing.
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One of the more difficult aspects of cost control is managing reimbursable costs. These require tracking work progress and purchases already spent against the budget. If these aren’t reviewed or managed well, predicting the final cost of assembly, task or activity will be challenging. Review the tools you’re using and make sure you’re not overlooking features that will provide transparency. If needed, find new, more effective tools.
Changes in project scope due to the emergence of new information are inevitable in construction. It’s not a question of whether, but rather when the next change will take place. If you have a project management solution like Procore, change orders are quickly and easily tracked from cradle to payout and beyond. Construction software helps ensure cost changes continue to into the project budget and approved changes are transparent and tracked in real time with all parties involved.
Just as costs must be tracked, they should also be reported. It does no good to have growing cost reports sit buried in an inbox or budget report. Items on the verge of and those already running over cost should be called out for attention, whether in a clearly marked section of the budget report or in red type on a ledger. How close an activity is to going over budget depends on more than just the amount spent to date in relation to the total budget for the activity– the amount of remaining work is also a major consideration.
There is no shortage of construction solutions that handle accounting aspects of the project. The best options are able to record costs based on cost accounts that track, as closely as possible, the activity or task level. Getting to this level is essential if you want to track, in extreme detail, where money is being spent. You might have a project budget of $2,000,000 for carpentry, but if you don’t break costs down into wall versus roof carpentry, then it’s much harder to know exactly where the carpentry budget is causing you to dip into the red. Additionally, at project closeout, you will miss valuable data that could inform decisions on future projects.
According to Edward Opall, CPA, CCIFP, and director at EisnerAmper, Real Estate Construction Services Group, the best opportunity for reducing costs and increasing profitability on a construction project is to have effective procurement. This extends beyond consumables to subcontractors as well. Developing and using a strategic purchasing plan and packaging all the components of work products gives contractors the best opportunities for competitive pricing according to Opall. He also stresses the importance of incorporating unit prices, labor rates and alternates into purchasing decisions.
There are multiple reasons why project costs begin to escalate. A few of the common ones to watch out for include:
Activities out of sequence. Construction is a social business that requires interaction between many participants, in which unofficial negotiations are always taking place. Sometimes these negotiations take place because the planners were incorrect, but more likely, on a well-planned job, they take place because it’s in the best interest of those negotiating the change. These negotiations often end up rearranging the order of activities. For example, drywall installers might try to get ahead of schedule by requesting to work alongside electricians, installing the drywall while the electrical wire is being pulled. Besides potentially getting into each other’s way, there is an increased likelihood of making a mistake and installing drywall over a spot where the wire hasn’t been pulled yet. Perhaps material costs will come out of the subcontractors’ allowance, but time will be lost and the cost of electricians may increase for delays.
Scope creep. Scope creep is a phenomenon that occurs during project execution and is often so gradual it goes unnoticed. The likely culprits are new products or features being added and upgraded, or design changes that escalate time and costs without increasing the budget. Sometimes called “value for free,” this cost escalator can only be adequately handled in the very early stages. If a project has had many changes in scope before construction began, and there has been a lot of back and forth amongst participants on the design and critical project aspects, then it could be advantageous to institute daily or weekly budget monitoring in the early stages of the project so you can detect creep very early on.
Increases in material costs. Even when contracts include language to protect contractors from rapidly rising material costs, this can still become a cost problem. A 9% rise in rebar cost is not recoverable if the contract specifies the cost must rise 10% or more before it’s eligible for reimbursement. That 9% increase is a significant cost for the contractor to bear. The solution might include a thorough review of the quantities of the material used and determining if there are options for reducing that amount. Other options include changing suppliers or submitting alternative materials as a substitute. Beyond making sure the project stays within budget, cost controls are really the measure of how well the project is planned, and in the end, how well it is managed.
The quality control plan is created early in the project lifecycle and becomes the guide for assuring quality as the project is built. While quality begins and ends with those doing the work, conversely, few things are more detrimental to quality than a lack of time. When rushed, there is a natural tendency to focus on completion. This focus on the endpoint rather than the process compromises quality because details are often overlooked and shortcuts are taken. The cost of rushing becomes painfully clear when activities have to be duplicated to get the quality up to the level of specification. If you don’t have enough bandwidth to do the job correctly the first time, how will you have enough to do it correctly a second time?
Lack of proper training and subpar skill sets also contribute to poor quality. Whenever new and unfamiliar materials or processes are introduced, there will inevitably be a shortage of necessary skills and understanding to perform the task. Often times when a new process is introduced, training is abbreviated or skipped altogether to accelerate progress. This drastically decreases quality control as teams are never properly trained to execute the job to company standards and often work under their own personal assumptions of “quality.” When dealing with these factors affecting quality at the task level, the best answer is to have experienced leaders. Foremen, project managers, and superintendents who know how to lead, inspire, coach, counsel, and effectively discipline will be able to address problems most effectively.
Want more? Click here to download the entire free eBook, "Project Management Guide Part 3."
This is the final edition of a three part series. Be sure to check out Part 1: Planning and Part 2: Scheduling.
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