Cost Control Techniques in the Construction Industry

1.1 Objectives

Project cost control weaken the common problem. Strengthen cost control, change the efficiency of enterprises is fundamental the survival and development projects in a market economy. Many companies have recognize the importance cost control, some companies development of relevant cost control system, some enterprises in implementing cost control responsibility, and made valuable experience of cost control. However, from the overall perspective, Project cost control related to the success or failure of business cost control. From the perspective of cost control mode, the majority of companies still use traditional cost control methods, develop construction budget, cost control based on this budget, as long as it does not exceed the cost of the budget is the effective control of costs, rough, simple control costs, no so that the project cost to achieve optimum control. Therefore, the need to further improve the method of cost control, improve the economic efficiency companies.

Definition of the project cost:

Project costs are occurring the project of resources around the money reflects the cost, including the resource-consuming stage of the project life cycle. Project costs are usually measured in monetary units. Project costs are divided into direct costs, indirect costs in two ways. Direct costs from labor costs, materials, mechanical royalties and other direct costs component

1.2 Different types of project in Hong Kong

The project type was deemed appropriate for categorizing .The categories consisting of bridge, road construction, resurfacing, maintenance, traffic and traffic maintenance are characterized by notable differences in management practices due to the nature of the categories. Managing costs on a wide variety of new building projects and structures, such as residential developments, sports stadiums, roads and bridges, schools, hospitals, offices and factories.

To quote “For the Major Infrastructure Projects the progress in the past year. In time, many of these have entered the construction phase they including:

• Hong Kong-Zhuhai-Macao Bridge
• Hong Kong section of the Guangzhou-Shenzhen-Hong Kong Express Rail Link,
• South Island Line (East)
• Sha Tin to Central Linkadvance works of the Tuen Mun-Chek Lap Kok Link
• Xiqu Centre of the West Kowloon Cultural District, etc.

Apart from the major infrastructure projects, the DEVB will continue planning other public works to improve people’s quality of life. The projects including slope safety, fresh water supply, prevention flood, green and heritage conservation work.”

Development Bureau, Press Releases/Wednesday, April 2, 2014 http://www.devb.gov.hk/en/sdev/press/index_id_8215.html

Chapter 2 – Common Project Sources of Founds

2.1 Government, Developer, Contractor

To quote ”Sources and forms of finance a business plan is fundamental to satisfactory financial planning and ultimately the plan will need to be formulated in financial terms. When approved and adopted, the business plan forms a basis for control and comparison. When it is set up, after approval and adoption, consideration of its financing must take place. This may be short term, such as a bank overdraft or long term as debt finance. A business plan must be designed so that it provides the answers to all the question likely to be raised by prospective lenders.

The main sources of finance for a business are the following:

a) Banks

b) Share issues

c) Internal company finance

d) Hire purchase and leasing

e) Factoring

The most common forms of organization

• The role trader: from of business which one person owns and operates for his /she sole benefit
• The partnership: must consist of at least two and not more than twenty partners
• Limited liability companies: can be either private or public
• Public sector ownership organization: by the government and accountable
• Unincorporated association: usually social organization who may or may not have objective of making a profit.”

¹Roy Plicher (1985, 1994) Project Cost control in Construction P.15, 17, 18, Blackwell scientific Publication

The Hong Kong Government basic on the construction self-financing sources, including the financial and extra budgetary places mobility special fund such as fiscal taxes the Fund.

To quote ”(Baumal 3), for example ,argues that managers of firms operating in markets with very few rivals will seek to maximize revenue rather than profit. Nevertheless they are constrained by the need to maintain a minimum level of profit as demanded by shareholders. Other writers such as (Marris 4) and (Williamson 5) take different approach to growth. Nevertheless, what they have in common is that mangers are seen to pursue their own self-interest at the expense of the shareholder. This is in complete contrast with the neoclassical theory”.

3. BAUMAL W.J (1967) BUSINESS BEHAVIOUR, VALUE AND GROWTH. Harcourt Brace Jovanovich.

4. MARRIS R.L.(1964) The economic theory of “managerial” capitalism. Macmillan.

5. WILLLIAMSON J .(1996) Profit, growth anf sales maximisation. Econcmica, Februart

To quote ”Harris and McCaffer 12, Fine and other agree with this view by placing accuracy in estimating as the key variable in determining the successful outcome of bids “

Construction ecomomics: is there such a thinf? by D.K Rutter MBA MSc MCIOB MBIM CDipAF”; HARRIS F and McCAFFER( R.1997) Modern construction management. Granada Publishing

To quote ”A project cannot proceed without adequate financing, and the cost of providing adequate financing can be quite large.“

by Chris Hendrickson, Department of Civil and Environmental Engineering, Carnegie Mellon University, Pittsburgh, PA l52l3 Copyright C. Hendrickson 1998

First Edition originally printed by Prentice Hall, ISBN 0-13-731266-0, 1989 with co-author Tung Au.

Second Edition prepared for world wide web publication in 2000.

http://pmbook.ce.cmu.edu/07_Financing_of_Constructed_Facilities.html

Chapter 3 – Construction Cost Control Principles

The cost control is include the Time-Cost Relationship

To quote”Chitkara (2005) said the relationship between time and cost is a very important aspect in the control of costs on site as any variation in time has automatic implication on cost. It is important to report and record all the works involving materials, plant and labour on sites. This enables the contractor be able to know the costs and expenses of the resources used on site and compare with the initial cost budget. Various report techniques used include; daily or weekly and monthly recording, schedule control, site daily diary report and the project budget.”

Chitkara, K, K., 2005. Construction Project Management: Planning, Scheduling, and Controlling. Tata McGraw Hill Publishing Company Ltd.

Poor Project Management

According to User’s Guide, (2005), a poor project management structure will have an impact at all stages of the construction process leading to:

• Lack of planning and coordination;
• Poor communication between members of the project team and the project sponsor;
• Failure to identify problems and institute necessary and timely design and programming changes;
• Lack of control over time and cost inputs;
• Lack of end user involvement

A good project management manages costs by estimating, scheduling, accumulating and analyzing cost data, and finally implementing measures to correct problems related to cost.

BY FETENE NEGA (2008)CAUSES AND EFFECTS OF COST OVERRUN ON PUBLIC BUILDING CONSTRUCTION PROJECTS ,IN ETHIOPIA

A “S” line curve

Figure .1 To quote in :http://www.cpmtutor.com/c02/earnedvalue.html

Construction Poject Cost Control Method Construction cost control method of many, this highlights deviation analysis. Deviation refers to the actual value of the construction costs with the planned value of the difference. Deviation analysis may be used to a bar chart method, form method, curve method

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Curve is a total construction cost curve (S line curve) for the partial construction costs differential analysis methods. A figure which indicates the actual value of the construction cost curve, p. construction cost of the scheme said the value curve, the curve between two vertical distances between construction cost deviations. The method used is the same image analysis, and visual characteristics, but this is very difficult to direct for quantitative analysis of quantitative analysis can play a role.

During the execution phase of your project, you will need to monitor the status of the activities. Any deviation to schedule, quality, or scope for an activity will most likely have a cost impact. For this reason, project cost control requires you to check the overall status of each activity

3.1 Budget estimating based on a client’s, contractors

To quote ”The Government cost estimates should be prepared like the Government more cautious and full-equipped contractor estimating the project. Therefore, all costs, which a prudent, experienced contractor would expect to bear, should be included in the cost estimate. This philosophy widespread throughout the entire project cycle – from programming through completion of construction. Each estimate should be developed as accurately as possible, as detail as possible be assumed, and be based upon the best information available. This objective is to be maintained so that, at all stages of the project programming, design, and during construction, the cost estimate in each aspects representation the “fair and reasonable” cost to the Government.”

UNIFIED FACILITIES CRITERIA (UFC) HANDBOOK: CONSTRUCTION COST ESTIMATING; http://www.wbdg.org/ccb/DOD/UFC/ufc_3_740_05.pdf

To quote “Clients will usually identify their needs in terms of commercial or social pressure

1. Space requirements: the need to improve production levels, add to production capacity, accommodate new processes or provide domestic or social accommodation;
2. Investment: to exploit opportunities to invest in buildings;
3. Identity: to enhance the individual ’ s or organization ’ s standing in its market or society;
4. Location: could lead to a better use of resources, capture a new market or improve amenity;
5. Politics: mainly in the public sector.”

Fourth edition (2008) Martin Brook BEng (Tech) FCIOB, ESTIMATING AND TENDERING FOR CONSTRUCTION WORK

3.2 Analysis Special construct method

Construction Enterprise Project Cost Control Analysis

• Labour – Workers can be to the production and operation, but the monthly wages, allowances, and bonuses can spend less. Artificially expand the expenditure of funds.
• Material management – Some kind of engineering materials and book a difference to thousands of dollars, tens of thousands or even hundreds
• Construction machinery -efficiency is not high for example, Monthly leasing machinery and equipment.

To quote ”The aim of such a control system for use by contractor or subcontractor on site are to:

• Provide a clear definition of the products to be produced
• Determine the method and activity to product;
• Work package activities;
• Assign responsibilities for work ;
• Plan and schedule the work;
• Prepare resource budgets to agree with the programme;
• Measure the work completed;
• Collect cost and resource expenditure date ;
• Analyses data and take remedial action if necessary;
• Provide an historical input to a date base”

By A T Baxendale (1992), Integrations of time and cost control,BSc (Hons), MPhil, MCIOB

Judge the economic worth of independent projects

If a budget holder has proposals for several independent projects, then whole-life costing analysis can help decide the order in which projects should be given the go-ahead to guarantee the maximum level of savings in operation, maintenance and repair costs.

3.3 A life cycle costing

To quote “A life cycle costing approach ,that is an approach that takes explicit account of the life cycle cost of assets, is essential to effective decision making in the following ways a whole or total .(Flanagan et al.,1983)

• Life cycle costing is a whole or total cost approach undertaken in the acquisition of any capital -cost project or asset, rather than merely concentrating on the initial capital costs alone.
• Life cycle costing allows for an effective choice to be made between competing proposals of a stated objective the method will take into account the capital, repair running and replacement cost and express these in consistent and comparable terms. It can allow for different solutions of the different variables involved and setup hypotheses to test the confidence of the results achieved.

• Life cycle costing is an asset management tool that will allow the operating cost of premises to evaluated at frequent intervals.
• Life cycle costing will enable those areas of building to be identified as a result of changes in working practices, such as hours of operation, introduction of new plant or machinery ,use of maintenance analysis etc.”

John W.Bull (1993) Life cycle costing for construction, BLACKIE ACADEMIC & PROFESSIONAL

Chapter 4 – Relationship of Building Contract and Costing

Contract and information management

The contract are clear rights the agreement of both parties obligations, the two sides is liquidation the fundamental basis on the project personnel cost control baseline. After the signing of the contract should be organized project management staff contract analysis, contract report, contract implementation. Especially clear claims and counter-claims conditions in a timely manner to change the file. The contract information management into cost control.

The Construction projects Lump Sum Contract has become widely used in the world of the pricing method, the Construction project are recommended or required in the form of Bill of quantities Characteristics of Lump Sum Contract with quantity :

Lump Sum Contract with quantity list valuation to truly realize the “quantity”, “price” principle of separation. For bidders to bid Bill of quantities provided as a platform, based on their technical, financial and management capability to carry out the tender offer so that bidders can fully take into account many other factors, such as: bidding construction scheme for its own schedule, risks, resource scheduling, and so on. So the bidder can be flexible adjustments for these quotes, so quotes can accurately coincide with the project. This valuation method of engineering construction risk and reasonable distribution of tendering party “quantity” risk bidders bear the “price” of risk. While traditional fixed pricing method, which no bidder’s technical advantage and price advantage. Engineering change management is the key of construction contract management of engineering changes in process engineering is inevitable, but construction should try to reduce engineering change, because change is often in addition to  the costs of the project itself, but also will bring a lot of machines or the duration of a claim.

Cost in real settlement contract (Cost Reimbursement Contract)

Cost plus honoraria contract (Prime Cost and Fee) cost plus honoraria contract is bid people by tender file provides early estimated project of artificial, and material, and mechanical of cost price, and by requirements (consultations) take early estimated cost of percentage value or fixed costs as bid people of honoraria (contains costs and profit), constitute tentative contract price, stay engineering completed shí, by actual occurred of cost settlement, but honoraria proportions or total not variable.Such contracts apply to tight deadlines, emergency rescue and disaster relief work. No such contract in Hong  Kong standard contract forms.

Reasons of Projects over Budget:

• Inexperience of Project Leader
• Poor Communication/Management of Personnel
• Loss Through Damage or Malfunction
• Human Error
• Employee Absenteeism
• Vendor Relationship Issues
• Environmental Factors
• Poor Workmanship
• Lack of Foresight

Conclusion

Construction project cost control is complicate system engineering. Actual operation an application and flexibility of needed to adapt applications under the local conditions, various sizes, different construction company and different administrative systems are different, However in under any circumstances the construction of production and operations of amount of human resources and materials resources and costs, guidance, supervision, monitoring and restrictions. Therefore, the “to increase production and conservation, increase revenue and reduce expenditures,” is a common building construction enterprise, which requires constant practice in reviewing and improving cost control, methods and means to ensure that the project costs. As a business that only deepen the financial management system, advanced cost management center, to further strengthen cost management and stringent cost negative, complete implementation of, the whole process of cost control and constantly adapt to the overall market competition, to overcome of adversity to achieve target of cost control