Cost Control Is Very Important in the Construction Industry - Essay Example

Construction cost control consists basically of monitoring actual performance against cost estimates and identifying the variances. The traditional cost control system is good in contract management but cannot be practiced during the execution of the project. The new methods are based on activity-based costing which helps in cost control up to the managerial level.

Cost Control and Project Management
Cost control has become a very important management tool for the construction industry as it not only helps to make a certain project successful but also gives ideas to the construction firm about the most profitable project. The cost control systems can generate data that can be used for progress payment requests and future bidding predictions.
Cost Control Systems and Cost Accounts
An efficient cost control system is necessary for the proper execution of a project. Following are the steps which are mandatory for a successful design and maintenance of a Cost Control System:

1. Determination and allocation of cost accounts is the first step for a cost control system. Proper breakdown of a project into various heads based on the type of activity and work is essential. These heads into which the project is divided are known as cost accounts. Establishing cost accounts helps in maintaining a relationship between the project expenditure and the general accounts of the firm.

2. The formulation of a proper project cost plan is the next step because it helps in setting up a mechanism according to which the actual cost of the project could be compared with the estimated/budgeted cost. Moreover, the project cost plan also helps in relating the costs of the project to the project schedule.
3. Cost Data Collection is the next step in which the actual cost data is collected by various means which include historical data, vendor quotations, supplier catalogs, and market surveys.

4. Project Cost Reporting should be done according to the requirement of managerial staff and the Cost Control Engineer should be able to identify the data which is beneficial to the managerial staff.

5. After collecting the data and analyzing it, the final step is a selection of Cost Engineering techniques best suited to the project scenario.

Cost Coding System and Structure
Since the construction projects are of a very large magnitude and there is a huge amount of data that has to be organized. Cost coding systems are used for organizing the cost control data so that the required information can be accessed easily. Various organizations like American Road Builders Association, Associated General Contractors and the Construction Specifications Institute have developed cost coding systems, and a project manager and cost control engineer can select the appropriate system according to the project under consideration. The cost coding system helps in giving a proper structure to the cost control breakdown of a project. Various cost accounts are given cost codes according to the detail incorporated in them. Cost control codes have various detail levels, the longer the cost code the higher the detail present in it. The various details which are present in a cost code are project initiation year, project type, project number, construction type classification, work classification, functional classification, etc. This makes project codes as long as 13-digit, but these details can easily be processed on computers and are also understandable as the people working in the cost control department have a very clear idea of these codes. The cost control matrix is another way of controlling cost which traces the overlapping areas between material and work cost accounts.

Earned Value Method
Earned Value Method is the most effective and most widely used method in cost control these days. It draws a comparison between the budgeted cost and the actual cost of the project and also the elapsed time of the project vs. the scheduled time of the project. This gives an idea to the contractor whether the project is under-budget, over budget, or by estimate. This method also gives an idea about whether the project is on time or late. The most important advantage of this method is that it gives an analysis of each work item or cost account separately which allows the contractor to determine the area of the project which is problematic. The various parameters used in this method are:
BCWS: Budgeted Cost of Work Scheduled; this is the value of the baseline at a given time
ACWP: Actual Cost of Work Performed; this is calculated by observing the on-site progress
BCWP: Budgeted Cost of Work Performed; this can be calculated using the work progress and total estimated budget
BCAC: Budgeted Cost At Completion; The total estimated cost of the project or cost account
AQWP: Actual Quantity of Work Performed; this is measured in the field
BQAC: Budgeted Quantity At Completion: Total estimated quantity baseline
These parameters also help in checking the percentage of project completion. Read More