Cost Management in Construction

Client expect from the project manager to manage costs in a precise and responsive approach. It is essential, during the design progress, the project manager to have the ability to supervise a project’s scope and costs. Budget control is a requirement for a successful project. For a successful budget control variances must be identified and informed actions must be taken at main design milestones. In order to ensure the client that the project will be on budget and on time, meeting the owner’s objectives, an efficient cost management and budget control program must be established from the conceptual phase to the bid phase. Cost management and control budget, during the design phase, is not a difficult goal but is a worthwhile goal. It is important because changes because it is easier, during the design phase, to accommodate changes and the cost of such modifications is lower compared to later phases. In order to achieve an effective cost management and budget control an organized methodology and approach must be established. Furthermore, team members must understand their roles and responsibilities, and good estimating techniques must be used (Sundaram, 2008).

The first typical objective of design phase cost management is to estimate a sufficient and accurate budget. The second objective is to ensure that bids are in budget. Then make sure alignment of budget, scope and owner’s requirements. The last typical objective is to reduce risks because of cost overruns. During the design phase, all the design team members must show a cost conscious approach. All members of the design team must use cost control, as a design tool, to reduce the risks of cost overruns (Sundaram, 2008).

In order to approach an effective cost management design, team members must demonstrate a strong commitment to the project budget and target costs. A cost model must be established for the cost estimate in aid of managing the cost effectively and tracked easily variances to support decision-making (Sundaram, 2008). Requirements must be manage in order to balance requirements with owner’s affordability. Scope creeps must be monitored and controlled (Macaluso J., et al, 2004).Cost drivers must be considered in aid of establishing product specifications. Cost must be considered, during development, as an essential design parameter (Crow, 2000). Exploration of design alternatives to develop lower cost design approaches. Value engineering and value analysis must be used in order to improve product value at minimised cost (Crow, 2000). Use of constructability review in order to ensure, that the project will be finished in realistic, programmed cost parameters. Finally, documentation of review meetings discussions and confirmations of design decisions must be done (Sundaram, 2008).

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The above mentioned objectives and approaches of cost management in design phase will result the following benefits. More precise estimates would be achieved and they have as a result to improve business decisions. Budget cost control would be improved. Change control would be improved and there will be less likelihood of unplanned scope creep. Finally it will improve the timely identification of problem areas (Sundaram, 2008).

Methodology of budget control

In a phased plan development with design milestones, the estimated cost is organized at each milestone. Furthermore, the cost is reconciled with budget at each milestone (Figure 1). The budget for the project is refined all the way through the different design phases. All elements of the budget must be plainly defined, captured and developed during each phase (Sundaram, 2008).

According to Sundaram (2008) the recommended steps for a successful budget control are the following. First, the project scope and the project baselines details must be understand. ‘At every design stage, schematic, design development and construction document phase’ must be prepared an updated estimate and track the updated estimate against the previous stage budget for any variations. In order ‘to get the project back on track budget/scope alignment’ must be checked. The variances or scope creep must be identified and make right trade-offs between scope, quality and scope to contain the project on budget. A confirmation must be done that the differences among previous and current design costs are reconciled, in order to ensure that needless changes and costs have not take place, before proceeding to the next stage until the final stage. (Sundaram, 2008).

Roles/Responsibilities of the architect, the estimator, owners and stakeholders for effective cost management and budget control

‘Furthermore, for effective cost management and budget control, it is necessary that the estimator and the architect understand their roles and responsibilities’ (Sundaram, 2008).

‘The role of the contractor’s estimator is vital to the success of the organization. The estimator is responsible for predicting the most economic costs for construction in a way that is both clear and consistent. Although an estimator will have a feel for the prices in the marketplace, it is the responsibility of management to add an amount for general overheads, assess the risks and turn the estimate into a tender’ (Brook, 2004).

Estimator must understand that he plays an important role in the whole process of budget control. During the design phase the estimator must coordinate with the design team. The role of the estimator does not end in producing an estimate. It is essential the estimator to be involved from the early stages in the design process because things can be changed without great difficulty. The estimator must observe design decisions that influence cost and inform the design team, at the earliest achievable time, of the impact of design decisions. The estimator must make effort to understand the design aim in aim to predict cost implications. He must be able to offer the best potential construction information to the design team (Sundaram, 2008). Sundaram 2008 also state that ‘estimator should convey to the design team, that in addition to the design factors, final cost is governed by other variables such escalation, union and non-union wages, and the nature of construction’ (Sundaram, 2008).

‘A simplistic view of the role of the architects is that they create architectures, and their responsibilities encompass all that is involved in doing so. This would include articulating the architectural vision, conceptualizing and experimenting with alternative architectural approaches, creating models and component and interface specification documents, and validating the architecture against requirements and assumptions. However, any experienced architect knows that the role involves not just these technical activities, but others that are more political and strategic in nature on the one hand, and more like those of a consultant, on the other’ (Bredemeyer & Malan, 2006).

The architect, during the schematic stage, is bound by three constraints quality, cost and size requirements (Figure 2). The architect is responsible to assist the owner in choosing the priorities and also making the correct trade-offs. For example, if cost is the primary concern for the owner must try to contain costs and make the owner to realize the amount of size requirements and quality he will obtain to suit the budget. Furthermore, architect must also assist the owner to determine his second and third priorities (Sundaram, 2008).

During the design stage architect can make adjustments to the materials, the quality or architectural effect and size requirements. Value engineering sessions, including a multidiscipline team, will make sure that owner’s functions are offered in the most cost-effective approach without reducing quality. At this stage, before going on to the construction stage, the architect and the owner must be sure of the cost. Architect must realize that except reflecting the design also determines the cost (Sherwin, D. 2009). A review of the design, specifications and contract documents before the bidding stage will have as a result competitive bids and fewer changes later on (Sundaram, 2008).

The owner is a component of the design team and his decisions can influence the final bid value. The owner, before confirming the bid package, must think about the following considerations. According to Sundaram (2008) is better the bid package to be simple without confusing documents. Unreasonable requirements must be avoided and is wise to follow proven type of contracts. In order not to limit competition, the unnecessary use bidding limitations and the persistence on nominated suppliers and subcontractors, must be avoided. ‘The risk considerations and the adequacy of contingency’ must be checked. For example, unit price items should be better for items of work which are difficult to quantify. The risk to contractor is removed and the owner has to pay for the work actually executed (Sundaram, 2008).

An essential aspect of a successful project is the relationship with stakeholders. ‘Freeman defined stakeholders as all those who can influence the objectives of the firm, or are influenced by the fir, in attaining their own objectives. The set of actors identified is extensive, and includes consumers and suppliers, employees, shareholders, environmentalist groups, trade unions, local communities and governmental bodies’ (Keijzers, 2005). Therefore, dealing with stakeholders is an issue of choosing the stakeholders that really matter. Mitchell et al. state that for this selection process there are three criteria. The first criterion is the power a stakeholder has over the company (Mitchell et al, 1997). Power focuses on the question of how much the company needs the resources provided by that stakeholder only (Keijzers, 2005). The second criterion is legitimacy. This criterion concerns legitimate claims of a stakeholder on the firm. (Mitchell et al, 1997). For example, governmental bodies are essential in this respect, because they have the legitimacy to build up rules for companies (Keijzers, 2005). The last criterion is urgency. ‘The claims of stakeholders can differ with respect to the urgency of a response of the firm’. (Keijzers, 2005). Rowley states that stakeholders might have connections, and that company works in a network of stakeholders (Rowley, 1997). ‘This implies that a stakeholder may not be crucial given the variables of legitimacy, power or urgency, but it still should be selected because it influences other stakeholders that are important to the firm. An example of this would be the local community of a crucial supplier of the firm.’ (Keijzers, 2005).