7. Project Cost Management Managing Funds Effectively

Cost Challenges In Construction Industry

Demand Side Challenges : Recession & Falling Demand

Supply Side Challenges : Increasing Cost Of Resources

Increase In Construction Cost In India

Managing Construction Cost Is Critical For Project Success And Company Profitability

Pareto's Principle - The 80-20 Ruleroughly 80% of the cost management come from effective control of 20% of the causes.

Costs Components Approx %**

Pre-acquisition costs All costs incurred for aquiring land 10-15

Construction Development and construction costs 40-45Amenities cost 10-15

Administrative & other

Site administration 8-10Marketing & sales 5-8

Insurance, taxes & regulatory charges 7-10Allocation of capitalized costs 5-10

**Based on our survey with few builders in Pune for joint venture projects with land owners

Costing & Quantity SurveySurveyor plays a critical role in real estate construction project management by supporting project manager for all commercial activities as follows:

Cost planning Cost estimating Cost control & monitoring budget Contracts negotiation Procurement advice Preparing bill of quantities (BOQ) Preparation of payment invoice and certification. Assessment of variations Contract dispute resolution Valuation for insurance purposes

Surveyor also helps project manager for preparing feasibility studies, risk management , investment appraisal and auditing

Project cost management includes the processes involved in planning, estimating, budgeting, financing, funding, managing and controlling costs so that the project can be completed within the approved budget.

Project Cost Management

Group 7. Project Cost Management

Initiating

Planning

7.1 Plan Cost Management

7.2 Estimate Costs

7.3 Determine Budget

Executing

M&C 7.4 Control Costs

Closing

It is the process that establishes the policies, procedures and documentation for planning, managing, expending and controlling project costs

7.1 Plan Cost Management

Fixed Cost Vs Variable Cost Total Cost = Fixed Cost + Unit Cost X Units Used

Direct Costs Vs Indirect Costs

Plan Cost Management

Cost Management Plan : Also includes

Rules for performance measurement

Organizational procedures links : The WBS component used for the project cost accounting is called control account.

Control Thresholds : Variance thresholds for monitoring cost performance to indicate an agreed-upon amount of variation to be allowed before some action needs to be taken. Typically expressed as percentage deviations from the baseline plan

Cost estimating involves developing an estimate of the costs of all resources needed to complete the project.

The accuracy of estimates tends to improve as a project moves though its life cycle.

7.2 Estimate Costs

Order of magnitude estimates: “Ballpark” estimates without detailed data, done at the feasibility stage for selecting right construction project. The range of accuracy is given as -25 to +75% and would be used for initiating or project approval.

Budget estimates: Based on slightly better data and used to establish initial funding during the early stages of planning. This budget is used for alternative resource analysis and getting funding approval for the project. The range of accuracy is given as -10 to +25%.

Definitive estimates: A bottom-up estimate using estimates of WBS work packages This estimate would be done in the latter stages of planning and be used to establish a cost baseline and monitor spending. It is progressively elaborated. Range of accuracy is -5 to +10%.

7.2 Estimate Costs

7.2 Estimate Costs

Inputs

1. Cost Management Plan2. Scope Baseline3. Project Schedule4. Risk Register

5. Human Resource Management Plan

6. EEFs7. OPAs

T & T

1. Expert Judgment2. Analogous estimating3. Parametric estimating4. Bottom-up estimating5. Three-point estimating

6. Reserve Analysis7. Cost of Quality8. Vendor bid Analysis9. Group decision making

techniques

Outputs1. Activity cost Estimates2. Basis of Estimates3. Project Documents Updates

Reserve Analysis Applied to the base cost to account for uncertainties in quantities,unit costs work elements or other project requirements duringconstruction. requirements for an activity or work item. Contingency Reserve

It used to manage identified risks It is estimated based on decision tree method or Expected

Monitory Value (EMV) The project manager has authority to use

Management Reserve It is used to manage unidentified risks It is calculated as a percentage of the cost, or time of project Management approval is required to use management

reserveThe use of either type of reserve is intended to reduce the chance of a cost overrun

Determine Budget

For Small construction projects use Small internal workshops using the Pre-defined Excel workbook

For mid size project use Cost Risk Assessment (CRA) workshops typically held internally

For large projects / programs / portfolio use Cost Estimating and Validation Process (CEVP) workshops which includes external subject matter experts

Cost budgeting involves aggregating cost estimates for all individual activities or work packages so that a cost baseline can be established for measuring performance.

The baseline includes authorized budgets and contingency reserves, but excludes management reserves.

7.3 Determine Budget

Challenges For Budgeting In Construction Industry

Budget / costing need to be decided at very early stage of the project life cycle with very little room to change latter.

The compilation and uncertainty of project may result in poor budget reliability

Working drawing at initial stage might result in unpractical budget

It is difficult to control costs especially for contracts and external workers if basic construction procedures are followed

The financing structure is unreasonable if it depends on one financing channel too much which contributes to the rise of costs

Most builders do not have relevant systems and processes in place

Cost Aggregation

Cost estimates at lower level are aggregated or “rolled up” at higher levels (including control accounts) and then finally for the entire project.

Outputs Cost Baseline : The approved version of the time-phased project

budget excluding management reserves. The management reserves plus the cost baseline give the project budget.

The baseline is often displayed in the form of an S-curve. Large projects may have multiple cost baselines.

Determine Budget

Effective cost control requires management of the approved cost performance baseline (often simply called the cost baseline or approved budget) and any changes to that baseline.

7.4 Control Costs

Tools &

Technique

1. Earned Value Management2. Forecasting (EAC)3. To-complete Performance index (TCPI)4. Performance Reviews5. Performance Management software6. Reserve Analysis

Outputs1. Change requests2. Project Management Plan Updates3. Work Performance Information

Earned Value Management

Term Definition & Equation

Planned Value (PV)

Also called Budgeted cost of work scheduled (BCWS)PV or BCWS = Hourly rate * Total hour planned or scheduled

Earned value (EV)

Also called budgeted cost of work performed (BCWP)EV or BCWP = sum of the planned value of work completed or Baseline cost * % completed actual

Actual cost (AC)

Also called actual cost of work performed (ACWP)AC or ACWP = Sum of all costs actually incurred for the work completed by the specified date

Term Definition & Equation

(BAC) Budget At Completion- The value of total planned

work, the project cost baseline

Cost

varianc

e (CV)

CV = EV – AC

+Ve = under planned cost, Neutral = on planned cost,

-Ve = over planned cost

Schedu

le

varianc

e(SV)

SV = EV – PV

Positive = ahead of schedule, Neutral = On schedule,

Negative = Behind schedule

Varianc

e at

comple

tion

(VAC)

VAC = BAC – EAC

Positive = Under the planned cost, Neutral = On

planned cost, Negative = Over planned cost

Term Definition & Equation

CPI CPI = EV / AC

Greater than 1 – under planned cost, exactly 1 – on

planned cost, less than 1 – over planned cost

SPI SPI = EV / PV

1< ahead of schedule, exactly 1 – on schedule, 1>

behind schedule

Estimate

at

completi

on (EAC)

1. If the CPI is expected to be the same for the

reminder of the project, EAC can be calculated

using EAC = BAC / CPI

2. If the future work will be accomplished at planned

rate, use EAC = AC + (BAC – EV)

3. If initial plan is no longer valid , use EAC = AC +

Bottom-up ETC

4. If both the CPI and SPI influence the remaining

work , use EAC = AC + [(BAC-EV) / (CPI*SPI)]

Term Definition & Equation

Estimate

to

complete

(ETC)

ETC = EAC – AC

To

complete

performa

nce

index

(TCPI)

1. The efficiency that must be maintained in order to

complete on plan TCPI = (BAC-EV) / (BAC-AC)

2. The efficiency that must be maintained in order to

complete at current EAC TCPI = (BAC-EV) / (EAC-

AC)

Greater than 1 – Harder to complete, Exactly 1 –

Same to complete, Lesser than 1 – Easier to

complete

Trainings by Vidya Bhagwat

08 Quality Management : Gateway For Customer Satisfaction

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