In the Construction Industry, Cost Control is a critical process that can determine the success or failure of a project (and your business). It’s a complex process that requires a deep understanding of the industry and a strategic approach by your business and its leadership, and it’s worth learning more about Cost Control to give your project (and business) the best chance of success.
Introduction to Cost Control
Cost Control in Construction refers to the systematic approach used to ensure that the total cost of a construction project does not exceed the predetermined budget. It involves planning, monitoring, adjusting, and controlling costs so that the project can be completed within the set budget while maintaining the desired quality and standards.
While there are Cost Control Specialists, the process of controlling costs within a project and inside a business must be undertaken by a number of people to ensure the best chances of success.
Key Takeaways
- Cost Control in construction is crucial for the successful completion of projects within budget.
- Cost Control also applies at an organisational level, where a group of relevant staff are responsible for planning, monitoring, adjusting and controlling a wide range of organisational costs.
- Effective Cost Control strategies include budgeting, cashflow forecasting, regular budget monitoring, strategic purchasing and procurement, efficient resource management, and the use of Cost Control software.
- Many businesses discount the importance of Cashflow Forecasting and Management Accounting – and many are not aware that this is a service they can procure externally on a retainer or hourly-rates basis rather than employing a Management Accountant or Costs Accountant.
- It is important for leadership of an organisation to understand Cost Control strategies and measures to give each project, and the business overall, the best chance of success.
- Future trends in Cost Control point towards an increasing reliance on technology, but many players within the Construction Industry in Australia have not yet made the move towards comprehensive use of cost control software and other technological advances.
- It is, however, possible to implement effective Cost Control strategies through the use of more basic software such as Microsoft Excel.
Importance of Cost Control in Construction Projects
Cost overruns in construction projects can have a significant impact on an organisation’s bottom line. They can lead to project failure, financial losses, damage the organisation’s reputation, and even lead to legal disputes.
Therefore, effective Cost Control is vital for the success of any construction project.
The Impact of Cost Overruns
In my experience, cost overruns in construction projects can quickly spiral out of control if not managed effectively. Many constructioni projects in Australia run above budget, and this can be problematic for Principals who only have a certain budget allocated and approved for a particular project.
Project overruns also cause problems for Contractors, and they count as a “black mark” against a Contractor in many circumstances (even where the cost overrun was not all (or mostly) caused by the Contractor.
While Project Managers work hard to control costs within particular projects, Cost Control is not a process that can be left solely to the PMs. The same applies for Cost Controllers – where one is appointed to a project or employed within a business.
The Benefits of Effective Cost Control
Effective Cost Control can lead to improved profitability, reduced financial risk, and a competitive advantage for Contractor. Those Contractors who come in under for a project are more likely to be awarded the next project.
If part or all of the Contractor’s margin is at risk for the project, coming in under budget can potentially lead to the payment of a large cost underrun bonus (eg in Alliance Agreements).
For Principals, coming in at or under budget is affirming – that they selected the right Contractor – and carried out the right project. For government entitles and Councils, they provide a public services by carrying out the project, and a further service by bringing in the project at or under budget (so further taxpayer funding is not required).
The Role of Cost Control in Competitive Advantage
In the competitive Construction Industry in Australia, Contractors that can deliver projects within budget have a significant advantage. They are more likely to win bids, retain clients, and build and maintain a positive reputation.
Project Managers can also build a name for themselves by earning a reputation of bring in projects under budget (and on time).
Find out how to stop your business losing money on a Construction Project
Detailed Strategies for Cost Control in Construction
There are several strategies that can be employed to control costs in construction projects. These include budgeting, cashflow forecasting, regular budget monitoring, efficient resource management, engagement of a Management Accountant or Cost Accountant, the use of cost control software, effective communication, and risk management.
Contracts Lawyers and Construction Lawyers like myself can also actively help in cost control, particularly where we practice across business advisory and management consulting rather than narrowly focusing on purely legal advice. For example, I work with clients to build and revise their whole Contracting Strategy, from drafting contracts, putting procurement templates in place, helping to prepare workflows and contracting strategies, teaching staff how to contract better (and with a view to maximising profit from their contracts), and providing combined business and legal advice.
Rachelle Hare – Blaze Business & Legal (Construction Lawyer, Strategic Business Adviser, Management Consultant)
I do note that “Cost Control,” in the ordinary sense, usually involves controlling costs of a construction project, and does not usually involve forecasting and other preliminary management strategies. However, I view Cost Control as a much broader process as well, ie controlling costs within a business, and I discuss this broader context as well as the narrower in this article.
1. Budgeting
It goes without saying that all businesses should put a budget in place. The budget should be at the high-level – across the organisation as a whole – and also for each Division and SubDivision. Staff should be given delegations and responsibility for managing their part of the budget at all different levels, with the intention that – at all times – the Financial Division of your business can see at a glance where the budget stands, both actual and forecast.
Each project should also have a budget, which identifies how much money has been allocated to a construction project, sets out the contingency (if any), keeps track of any variations or changes, and keeps track of any other cost implications for the project. It is usually the Project Manger’s job to manage the budget and bring in the project under budget, and some PMs specialise in Cost Control in this manner.
2. Cashflow Forecasting
This brings us to the importance of Cashflow Forecasting. While many businesses understand the need for a budget – and while most businesses do put a budget in place to some extent – unfortunately many businesses in the Construction Industry do not yet undertake Cashflow Forecasting (or Cash Flow Forecasting or Cash Forecasting as it is sometimes called).
Cashflow Forecasting is critical for all businesses with revenue above $5 million per year. It involves taking the current revenue of the business and projecting what the future revenue of the business will likely be over the next 1, 3, 5 or 10 years. Each projection is then adjusted on a rolling basis, as certain factors impact on the current Cashflow Forecast. This allows the Owners, the Board, the CEO/MD and the Finance Division, to see at a glance where their business is heading. And whether the business will have enough money to take their planned actions.
As an example, Blaze Business & Legal is growing with increased demand for our unique services. Shannon has prepared a budget and a cashflow forecast for our business, and we are projecting that we will need to employ another Business Adviser and another Construction Lawyer within the next 4 months.
Shannon has done some magic stuff with the numbers (yep, I’m not a Management Accountant!), and he has projected the cashflow we will require in order to employ those staff and continue to employ them into the future.
This has allowed us to set aside the necessary funds each month to allow the employment of 2 additional staff to take place, so we are not scratching around at the time for the funds we require. Cashflow Forecasting – seems magic to me, but is critical to any business that wishes to be proactive and reactive (which I’d suggest should be all businesses).
3. Regular Budget Monitoring and Adjustments
Regularly monitoring the budget and making necessary adjustments is crucial for Cost Control.
Budget reviews allow businesses to identify potential cost overruns early and take corrective action, whenever the need is there. Many businesses schedule annual or 6-monthly budget reviews, but it is also important to review the budget whenever circumstances within the business change.
For example, if a loss is made on a construction project, the budget should be reviewed to consider whether (and how) to allocate the other funds of the business to mitigate that loss. For Principals, this may involve taking some funding from another project, or using funding from a different “bucket” of money such as marketing and advertising.
For Contractors, if interest rates increase, the budget may need to be reviewed to help businesses determine how to “spread” that increase across their business so it doesn’t unfairly impact on Division’s budget.
There is no fixed rule on when budget reviews should take place, but in my view, they should be carried out at least yearly. Any more that, and industry changes can effectively make the current budget superflous.
4. Efficient Resource Management
Where a business is able to efficiently manage resources such as labour, materials, and equipment, this can significantly reduce costs. And there are steps that can be taken to manage resources that have a positive effect on cashflow and the bottom line.
On a recent project for a client, for example, we helped them save7.5% on costs across the board by optimising their Division structure, ensuring the Board’s strategy was clearly articulated, fixing up their employment contracts, adding KPIs that were linked to the Board’s actual strategy, optimising work schedules, negotiating equipment loan refinancing and reducing actual staff downtime.
5. Use of Cost Control Software and Technology
Cost Control software and technology can improve efficiency and accuracy in Cost Control, even though it is not manadatory. It is particular useful at the project level for cost estimation, calculating variations and keeping track of costs incurred to date.
6. Effective Communication and Coordination Among Teams
Clear communication and coordination among teams can prevent misunderstandings and costly mistakes.
In one project I oversaw, regular team meetings and clear communication channels helped avoid costly rework and delays. And I’ve recently provided training to a Council in Queensland on how the Local Government can communicate more effectively at Project Team level on a large construction project involving a Collaborative Project. This was fantastic to see, because in my view, if the Principal leads the way in encouraging effective communication and coordination, it sets the tone for a project as a whole
7. Risk Management and Contingency Planning
Anticipating potential problems and having a backup plan can help control costs, both at a business level and within a project.
In a large construction project I was involved in, a well-planned contingency budget saved the project when unexpected costs arose. The Principal had originally intended just to go into the $200 million fixed price build without a contingency. I advised them to include a contingency in their internal budgeting, and they sought approval from the Delegate for the Contract Sum plus Contingency Amount. We did not include the Contingency Amount in the Contract Sum – it was for the Principal’s benefit (and the project as a whole), but it was there if they needed it. Not surprisingly, the project ran over budget (compared to the Contract Sum), through no fault of the Contractor. Because the Principal had already preapproved the contingency amount there was no need to go back to the Delegate, a Variation was instructed by the Superintendent and the project ultimately finished with money still remaining in the contingency.
Future Trends in Cost Control
With all the recent changes we are seeing with AI, the future of Cost Control in construction is likely to be heavily influenced by technology. Digital tools and software are becoming increasingly sophisticated, offering more accurate cost predictions and real-time budget tracking.
For instance, the use of Building Information Modelling (BIM) is becoming more prevalent, allowing for better visualisation and control of costs throughout the project lifecycle.
It’s also crucial to stay updated with the latest technology trends in the industry, as they can offer new ways to improve Cost Control and lead to additional savings.
In My Experience…
In my experience, the key to effective Cost Control in construction lies in detailed (and advanced) planning, Cashflow Forecasting, regular monitoring, and clear communication.
Because Cost Control is not just about cutting costs, but is also about optimising business or project resources to achieve the best possible outcome within the budget, there are a number of actions you can take to improve your Cost Control process and better lock down your finances.
Conclusion
Cost Control in construction can significantly impact on the success of a project and the finances of a business overall. By employing effective strategies such as budgeting, Cashflow Forecasting, regular budget monitoring, efficient resource management, and the use of cost control software, organisations within the Construction Industry can complete projects within budget, improve their bottom line, and gain a competitive advantage.
FAQs on Cost Control in Construction
1. u003cstrongu003eWhat is the difference between Cost Control and Cost Management in construction?u003c/strongu003e
Cost Control is a part of cost management. While cost management involves planning and forecasting costs, Cost Control focuses on tracking and managing costs to ensure they stay within the budget.
2. u003cstrongu003eHow does technology aid in Cost Control in construction?u003c/strongu003e
Technology aids in Cost Control by providing tools for accurate budgeting and Cashflow Forecasting, cost estimation, real-time budget tracking, and efficient resource management. Examples include Cost Control software and Building Information Modelling (BIM).
3. u003cstrongu003eWhat are some common challenges in implementing Cost Control strategies in construction?u003c/strongu003e
Common challenges include inaccurate cost estimation, unexpected changes or issues during the project, and lack of communication among teams.u003cbru003e
4. u003cstrongu003eHow can an organisation start improving its Cost Control practices?u003c/strongu003e
An organisation can start by regularly monitoring and adjusting the budget, carrying out Cashflow Forecasting, optimising resource management, introducing Cost Control software, and improving communication among teams. For Principals, it is prudent to include a Contingency in significant projects.
5. u003cstrongu003eWhat role does Risk Management play in Cost Control?u003c/strongu003e
Risk Management plays a crucial role an important role in Cost Control. It involves identifying potential risks that could lead to cost overruns and developing strategies to mitigate those risks.
6. u003cstrongu003eHow often should the budget be reviewed for effective cost control?u003c/strongu003e
The frequency of budget reviews can vary depending on the size and complexity of the project. However, regular reviews are crucial for early detection of potential cost overruns.
u003cstrongu003e7. Can Cost Control strategies compromise the quality of a construction project?u003c/strongu003e
If implemented correctly, cost control strategies should not compromise the quality of a project. The goal of Cost Control is to optimise the use of resources and manage costs effectively while maintaining the desired quality and standards. If a project is ever at the stage where the Contractor feels they need to cut quality in order to save costs, this should be a project decision made in discussion with the Principal.
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About the Author
Rachelle Hare
Rachelle Hare is a highly experienced Construction Lawyer and Contract Lawyer, with over 23 years of experience in Tier 1 and Tier 2 Construction Firms, Top Tier Private Practice and Government.With 23+ years of experience as a Senior Lawyer, Strategic Contracting Adviser and Management Consultant in Construction Law, Contracts, Major Projects, Commercial Advisory, Compliance, Procurement, Contract Management and Risk Management, Rachelle has the rare skills to offer you seamless business advice and legal advice to help support your organisation.
As well as a Lawyer and Business Adviser, Rachelle has also acted as a Strategic Procurement Adviser, Compliance Manager, Strategic Risk Adviser and Commercial Manager.Rachelle owns Blaze Business & Legal, a combined Commercial Law Firm and Business Advisory Firm located in Brisbane, Queensland, Australia. Blaze Business & Legal assists a broad range of clients in the Construction Industry and related industries, and advises owners, contractors, subcontractors, NFPs and other organisations on a broad range of Construction Law, Commercial Law, Business Advisory and Management Consulting issues in Brisbane, Queensland and around Australia. Rachelle also owns Blaze Professional Learning, where she offers practical contracting skills, hands-on experience in drafting and working with contracts, and industry insights to help Professionals upskill and advance their careers with real-world skills.
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