Review Of Cost Management In Construction Project Accounting Essay

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Lean construction is a new way to manage construction. The objective, principles and techniques of lean construction taken together form the basis for a new project delivery process.

Unlike current approaches to managing construction (including design-build) and programmatic improvement efforts (partnering and TQM), lean construction provides the foundation for an operations based project delivery system. From roots in the Toyota Production System, this new way of designing and making capital facilities makes possible significant improvements on complex, uncertain and quick projects.

2.2 Definition of cost management

Cost management means knowledge of resources used by company, forecast amount of additional financial resources necessary, and the ability to ensure the maximum efficiency level of resources used. It is also the ability to save resources and at the same time maximize their efficiency. According to Stenzel and Stenzel (2003), cost management is the of cost accounting systems and methods to guide current and future operations towards specified objective; the analysis and interpretation of cost data is critical to the decision-making process. In other word, cost management is used to refer to the final cost of the construction to the client and contractor.

2.3 Purpose of cost management

The main purpose of cost management is to achieve better final cost of the construction in projects. Jaggar D et al., (2002), explains the purpose of cost management is essential and necessary if building clients are confident that a budget is reliable, and the ultimate solution achieves the best set of values possible for those clients. In turn, the design team must deliver a cost control process that achieves its aim, which is the final building within cost, on time and of the appropriate quality. The main goal of cost management should be the evaluation of techniques to give services and products with higher value for the client at a lower cost.

According to Lock (2007), contractor's project manager can have a specific cost management duty to the client, which is broadens the cost objective further. The project cost management function then extends to predicting and reporting costs to the client, working with the client to help schedule and control expenditure and marshal the necessary funds.

Hansem and Mowen (2006) outlines the purposed of a cost management through the following:

To allow the construction firm to reduce scrap and rework of the construction projects.

Helps to decrease the number of customer complaints.

Helps the contractor to reduce the resources used.

Allow the contractor to gain increased profitability.

2.4 Key to effective cost management in project

Effective cost management in project is an extremely complex process that begins very early during a project life cycle, and long before its actual start (Pinto and Venkataraman, 2008). Among the factors that influence success is a reasonable and accurate system for estimating costs. Table 2.1, drawn from Rodney Turner's work, (Turner and Simister, 2000), highlights some of the most important considerations when creating a cost estimation system.

Table 2.1 Keys to effective cost estimation

A clear, complete, and unambiguous definition of the project and the scope of work involved

A thorough assessment of the potential risks involved, with well-thought-out action plans to minimize their possible impact

A well-trained and competent project manager

A thorough understanding, by all stakeholders, of the various types of costs that are likely to be incurred throughout life of the project

A project organizational culture where there is a free flow of communication, so that all project participants clearly understand their responsibilities

A well-defined project work structure where work packages are broken down into manageable sizes

Meaningful budgets, where each work packages is allocated its appropriate share of the total budget, commensurate to the work involved

An accounting system and coding scheme that are well aligned with the work breakdown structure and are compatible with the organization's management information system

A cost accounting system that will accumulate costs and allocated them to their relevant cost accounts as and when they are incurred

A prioritized and detailed work schedule, drawn from the work breakdown structure, which assigns and tracks the progress of individual tasks

Effective management of well-motivated staff, to ensure that progress meets or beats the work schedule

A mechanism for comparing actual and planned expenditures for individual tasks, with the results extrapolated to cover the entire project

The ability to bring critical tasks that are late back on schedule, including providing for additional resources or taking other prompt remedial measures

Adequate and effective supervision to ensure that all activities are done right the first time

Supervision of staff time sheets so that only legitimate times are booked to various cost codes

Proper drafting of specifications and contracts

Discreet investigation to confirm that the customer is of sound financial standing, with sufficient funds to make all contracted payments

Similar investigation, though not necessarily as discreet, of all significant suppliers and subcontractors (especially those new to the contractor's experience)

Effective use of competitive tendering for all purchases and subcontractors to ensure the lowest cost commensurate with quality and to avoid committing to costs that exceed estimates and budgets

Proper consideration and control of modifications and contracts variations, including all justifiable claims for price increases to the customer

Avoidance of all nonessential changes, especially those for which the project customer will not pay

Proper control of payments to suppliers and subcontractors to ensure that all invoices and claims for progress payments are neither overpaid nor paid too soon

Recovery of all incidental expenses allowed for in the contract charging structure (for example, expensive telephone calls, special printing and stationery, travel, and accommodation)

Proper invoicing to the customer, ensuring that claims for progress payments or cost reimbursements are made at the appropriate times and at the correct levels, so that disputes that could delay payments do not arise

Effective credit control to prevent payments from the customer from becoming long overdue

Internal security audits to help prevent losses through theft or fraud

Regular cost and progress reports to senior management, highlighting potential schedule or budget overruns in time for corrective action to be taken

Cost-effective design, perhaps using value engineering

Prompt action to close off accounts at the end of the project, to prevent unauthorized time bookings and other items from being charged to the project

While this list is not all-inclusive, its elements do have a significant influence over the effectiveness of cost management for large and small projects Pinto and Venkataraman (2008). The more immediate interest is the complexity of an effective cost estimation, suggesting that organizations who intent on controlling their cost need to recognize that it is not simple and quick fix. Rather, project cost management depends heavily on the accuracy of detailed estimation in the early of the projects.

2.5 Cost management practices in Malaysia

2.6 Types of cost management in construction project

2.6.1 Activity-based coasting (ABC) Definition of activity-based costing

Activity-based coasting (ABC) is frequently used for project budgeting. According to (Pinto and Venkataraman, 2008) the basis of activity-based coasting is that projects consume activities, and activities consume resources. As such, costs are initially assigned to activities (the discrete tasks that need to be completed to deliver the project), and assigned to projects, based on each project's use of resources. Steps in activity-based costing

Maher (1997) explain that activity-based coasting consists of four steps:

It begins with the identification of activities that make use of resources, and assigns costs to them. This step involves using the work breakdown structure (WBS) into its work packages. Costs are then assigned to each work packages based on the resources required to complete each identified activity.

The cost drivers associated with the work packages are identified. These are element that cause, or "drive," an activity's costs. For examples. The principle cost driver for many project activities is human resources in the form of labour. Similarly, an important cost driver for construction project is the variety of raw and finished material needed.

Next, a cost rate per unit of the cost driver is calculated. For example, human resources values can be stated as cost of labour per hour.

To assign cost to a project that utilizes a cost driver, the cost driver rate per unit is multiplied by the total number of cost driver units consumed. For example, if the cost rate for a designer is $50/hour, and 100 hours of this designer's time is used on the project, the cost assigned to the project for this designer is

$50/hour x 100 hours = $5,000.00 Cost drivers in activity-based costing

2.6.2 Just-in-time (JIT) Defintion of just-in-time