Various cost control methods used by contractors

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Problem Statement

During the execution of a project, procedures for project control and record keeping become indispensable tools to managers and other participants in the construction process. These tools serve the dual purpose of recording the financial transactions that occur as well as giving managers an indication of the progress and problems associated with a project. (Chris Hendrikson, 2008)

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Aim

This study will introduce various cost control method used by Contractors during the construction process and indentifies the problem that arises in implementing and practicing those methods.

Objectives

To study the cost control method used Contractors in the construction process.

To identify the cost control method frequently used by contractors.

To identify problems faced by Contractors in implementing and practicing the cost control method.

Scope of Study

This study will be limited to the cost control method used by Contractors based within the geographical boundaries Kuala Lumpur and Selangor during the construction period of the project.

Research Methodology

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literature review

Introduction

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Defining Cost Control

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Cost Reporting Systems

Weekly Cost Report

One of the basic reports for the control of cost on site is the weekly cost record (Pilcher, 1992). However, only major operations involving large quantities and significant cost would be prepared, because it involves a great deal of time and cost. In normal events, checking cost in weekly intervals would be prove to be very difficult to be carried out and also too expensive of an operation, unless the costs and quantities can be measured accurately. Usually, the cost of materials used in a week would not be recorded (Pilcher, 1992).

Nevertheless, should this operation is required to be carried out, it should give a complete record of the quantities of work which have been carried out in the week previous to the date of the report, together with the lump sum total costs of the labour and plant that have been incurred in respect of those operations (Pilcher, 1992). Sample of the report are shown in Table 2.3 - 1.

Table 2.3- Weekly Cost Report

Each of the quantity, cost, and unit cost are prepared on the basis of the work carried out during the week. There are two total area that need to be recorded, that is, the amount of work carried out on the week previously to the date of report and the amount of work carried out reported by the previous report. The availability of these information should assist in determining the cost difference in cost per unit between this and the previous week.

In preparing the weekly record, it should be as simple, brief and accurate as possible. The staff would only ignore the record if there is too much impertinent information. The record should make a quick and lasting impression that would take consideration to the significant features of the condition (Pilcher, 1992).

Monthly Cost Report

At monthly intervals, it is desirable to prepare a cost statement in somewhat more detail than the weekly control statements (Pilcher, 1992). It shall consist of the actual cost incurred to date, In addition to information regarding the cost to date and the value of the work carried out, it is highly desirable that an estimate be prepared of the cost of the work yet to be completed. Since it may well vary from the original estimate, it should be prepared in the light of information that has been gained on the work so far.

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Standard Costs and Variances

In order to make a meaningful interpretation of the information collected, it is necessary to have some form of norm or standard against which the actual performance can be measured (Pilcher, 1985). Estimating possible outcome from historic performance and experience usually sets standards in construction or in special cases from the use of work measurement technique (Pilcher, 1992).

Any departure from the set of standard practice is known as variance. An unfavorable variance is one which the planned or budgeted cost has been exceeded by the actual cost of work. Whereas, a favorable variance indicates that less cost or resources has been incurred in order to complete the work than what was budgeted (Pilcher, 1985). According to (Pilcher, 1992), variance can occur because of two reasons:

The actual price paid for the resources is greater or lesser than the amount estimated in the standard.

The actual quantity of resources used is greater or lesser than the amount estimated in the standard.

The two factors deserve consideration if the work is to be carried out as its budgeted cost. Inefficiencies are important in terms of cost, and attention can be paid on limited areas where these inefficiencies exists when using the variance analysis.

Actual Cost (AC)

=

Actual Quantity (AQ) - Actual Price (AP)

Standard Cost (SC)

=

Standard Quantity (SQ) - Standard Price (SP)

Total Cost Variance

=

Standard Cost (SC) - Actual Cost (AC)

Where,

Actual Quantity (AQ) is the actual amount of resource used up to complete the work.

Actual Price (AP) is the actual price paid for the acquisition of the resource used to complete the work.

Standard Quantity (SQ) is the estimated amount of resources that will be used to complete the work.

Standard Price (SP) is the estimated price to acquire the resource to complete the work.

A variance between Actual Quantity and Standard Quantity indicates that the production is more/ less efficient than what was estimated.

A variance between Actual Price and Standard Price indicates that the price to acquire the resources to complete the work was higher/ lower than the estimated price.

Material Variances

Usually, there is a variance between the price and usage of the material used to complete the work. The material price variance will amount to the difference between the standard and actual prices for the quantity of material used whereas the material usage variance will be the difference between the standard and actual quantities of materials used (Pilcher, 1985).

Material Price Variance

=

AQ (SP - AP)

Material Usage Variance

=

SP (SQ - AQ)

Material Cost Variance

=

SC - AC

=

(SQ - SP) - (AQ - AP)

The cost variance for material can also be calculated as the sum of variance between the material usage and variance between material prices.

Material Cost Variance

=

Material Price Variance + Material Usage Variance

In both cases, the result obtained will be the same.

Labour Variance

There are two important variances to be considered at the first stage of the analysis of labour performance and cost. These are 'labour rate' and 'labour efficiency' variances (Pilcher, 1985). The labour rate variance occurs from the difference between the standard wage rate and the actual wage rate paid.

Labour Rate Variance

=

Actual Time Worked (Standard Rate - Actual Rate)

=

AH (SR - AR)

The labour efficiency variance occurs from the difference between the actual time and t he standard time to do a job, which is measured at the standard rate.

Labour Efficiency Variance

=

Standard Rate (Standard Time - Actual Time)

=

SR (SH - AH)

Therefore,

Labour Cost Variance

=

SC - AC

=

(SQ - SP) - (AQ - AP)

Or,

Labour Cost Variance

=

Labour Rate Variance + Labour Efficiency Variance

It should be noted that the calculation of the labour rate variance takes account of the variance as between the different rates of pay, and therefore actual hours are priced at the standard rate when calculating the efficiency variances (Pilcher, 1985).

Overhead Variances

The overhead cost variance is the variance that acquired from calculating the difference between the actual overhead costs acquire on an operation and standard overhead cost set for that operation related to the production funds to be accomplish. The units can vary from based to establish standards. They can be units of production or of time. Units of time can b in hours, days, weeks, months or even years.

Units that are selected should be suitable to the nature of works that is carried out. The units chosen are usually for convenience and economy of calculation and data collection. The intention of the analysis and the accuracy and the form in which the ultimate information required are also important factors that influenced the choice chosen.

There are fixed and variable costs need to be recognize when stating the overheads. Fixes costs do not alter with changing levels of production but they might alter after a certain level of production has been achieved. For example, in overheads for site supervision, one foreman can be used for many levels of production and number of operatives. However, if the levels of production have reached, or the numbers of operatives exceeds a maximum level, then, the second foreman is needed.

The occurrence in the difference in the recovery of the related overhead is called the 'overhead volume variances'. This happens because of the estimated production or time taken to produce the budgeted quantity is greater or lesser than the actual production time. An unfavorable volume variance happens when a fixed overhead is not fully utilized whereas a favorable volume variance happened when the production time bearing a fixed overhead is in excess of the budgeted.

An overhead budget variance is the difference between the actual cost of overhead incurred and the overhead cost budgeted for that level of production. An overhead efficiency variance is the difference between the hours actually worked to achieve a specific production target and the standard hours budgeted to be used to achieve that production target.

Control of Material

Controls of material are not highly considered in creating cost control systems. This is because that labour and plant are the areas variations exist more, and most probably, area where profit is acquired or losses over the estimated costs. Controls for materials should be in terms of unit measurement and not in terms of cost (Pilcher, 1992).

In cases of deficit, one cannot be sure, if that the cost is on the bases of whether the materials bought at prices lower than estimate have a higher wastage, or whether the material are used economically, with little wastage but bought in price higher than the estimates. The cost comparison alone made for materials would not indicate the true quantity of the rate of usage for the materials.

One easy way in controlling materials is to draw a graph of the quantities of various materials that should have been used, which is calculated from present measurement of the quantities of work carried out. Such graph would be drawn for major items only. Against this graph, each individual can be drawn of a second graph, indicating the quantity of the materials that have been delivered to the site.

Such information can be obtained from the invoices received and a running total can then be easily be maintained. The intercept on vertical ordinate between the two graphs should be equal in quantity. It is necessary to check the stock on the site to make the comparison effective.

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