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Cost Analysis and Control in Construction Management

CostAnalysis and Control in Construction Management

Themost appropriate Cost Analysis and Control too for ConstructionManagement

Abstract

Thisresearch work focuses on the importance of cost analysis and controlin construction management. The paper studies and analyzes therelevant issues associated with cost analysis and control inconstruction management. Moreover, it identifies the major problemsin the construction cost management at present. Besides, the researchpaper outlines the most commonly used techniques in construction costanalysis and control, and discusses their advantages anddisadvantages with an intention of suggesting better methods.

Thisresearch paper is organized into sections. The first section is theintroduction. Here, the research topic is introduced. In addition,the concepts of cost analysis and control are highlighted here. Thesecond one focuses on the background of the study. Here, theimportance of the research study is discussed. Furthermore, thesection includes the problem statement. The third section reviews thecurrent literature. In this part, the most commonly used methods ofcost analysis and control are discussed. Also, the various issues incost management are outlined. The fourth section focuses on theimportance of cost analysis and control in construction management.Also, the most effective ways of cost analysis and control methodsare discussed here. The fifth and final part of the paper is theconclusion and recommendations. In the recommendation part, thedirection of the future of similar studies are suggests. Also, theareas that still needs research studies are identified. The paperconcludes that effective cost analysis and control in constructionmanagement are vital for the achievement of any construction project.Byproper understanding of cost and budget implication of a project, theplanner can minimize the project timeframe and costly procedures ofredesigning or reviewing the project.

Keywords: CostBenefit Analysis (CBA), Cost of Quality, Value Analysis, Budget,Control

Contents

Abstract 2

Introduction 3

1.1 Background of the Study 3

Purpose of the Study 4

2.0 LITERATURE REVIEW 4

3.1. Issues in Construction Management 6

3.0 METHODOLOGY 7

3.1 Research Design 7

3.2 Data Collection 8

3.3 Sampling and Analysis 8

3.4 ANALYSIS AND FINDINGS 8

References 12

1.0 INTRODUCTION

Constructionmanagement is the process of putting controls in the process ofproduct development which could be an infrastructural development.The most important component of construction management just as therest is cost control and analysis. Cost analysis also known as CostBenefit Analysis (CBA) is a process of having a detailed outline thatanalyses probable risks that stand to be incurred if they occurredand the gains that would be welcomed while implementing a project.While examining the costs versus benefits of a development project,some factors are involved in making the process a success. Thosefactors considered include making CBA an art more than a scienceeven if the quantitative skills must be part of the qualifications,theoretical considerations since the knowledge of the projectimplementation is a requirement, it gives the general informationabout what to expect at the application level.

1.1 Background of theStudy

Theimportance of cost analysis is the fact that it is the basis on whichdecisions are made in project implementations as it includes lookingat payback period, internal rate of returns, Net present valueanalysis, and other economic benefits that would come with theproject (Mao et al., 2016). The analysis requires one to brainstorm,research, and analyze the data from previous similar projects thathave been undertaken during the same period. Controls are done on thecosts and utilization of raw materials, labor, and timeliness ofdelivery. The main components of costs in construction management areenergy, materials and management of the projects while timeliness tothe provision of the final product which is the real development isthe non-monetized cost (Yin et al., 2016). In cost analysis,projected cost-benefit analysis, the real cost of intendedundertaking, and intangible costs are put into consideration as onecalculates the payback time, benefits and comparison of the same withthose of a previous project. Further, one calculates the paybackperiod and then makes a decision on the project to implement if thereare options or decision on whether to take the undertaking and pursuethe development.

Allthose considerations and understanding to the process of costanalysis are as important as understanding the reasons why that studyshould be undertaken. It is for that reason that this research shallseek to understand the importance of cost analysis and control inconstruction management. It also aims to address the issues that areintricate with the cost analysis and control in constructionmanagement. Further, the paper shall also research on the problemsthat are encountered in the process of the analysis and monitoring ofstudy in project management. And besides, it shall seek anunderstanding of various methods of cost-benefit analysis, with theirpros and cons.

1.2 Purpose of theStudy

Theobjectives that the research aims to achieve are

  • To identify the importance of cost analysis and control in construction management

  • To identify the issues associated with costs analysis and controls

  • To outline standard methods used in project cost analysis.

Theaims will then help reach the decision of the best methods to use incost analysis and control on project management and further, thepaper shall present the recommendations proposing the mostappropriate technique which could be utilized by the company infuture development construction projects.

2.0 LITERATURE REVIEW

Costcontrol is a process of looking for a more efficient way and a moreeconomical mode of completing every task. Further, it is in plainlanguage to prevent wastage, pilferage and leakages in the process ofexecuting a project. However, each control measure must be put inplace and put into consideration that standards remain uncompromisedand the quality remains intact as the project and should not bealtered. Controls are actualized when the official results arejuxtaposed against the actual outcome so that the pilferage ismeasured regarding variances and the appropriate action is taken forcorrective purposes. The standards are set by the analysis of thepast and similar projects and are used as the base for establishingthe budgets with a provision for an increase in costs and changes inthe present value of money. There is a further requirement forchanges in inflation levels, economic situation and regulations,

Nayak,Gupta and Pandey (2016) proposes that the most appropriate andefficient technique for cost analysis and control is varianceanalysis. Variance is the deviation from the standards set for theproject standards by the actual outcome. Variations are caused bypolicy changes in labor due to unions interventions, changes in workrates and thereby salary levels product mix could change in theprocess of executing a construction project so as to fit theconditions where the work is being carried out. Technological changeswhich would improve productivity and efficiency thereby reducingcosts also cause variation. Also, changes in project design bringabout changes in costs and value, thus ending up in a variety.Lockouts and layoffs also cause variances due to the amount of quiethours which result from being overstaffing. When new equipment isbrought in to replace the old machine, there are changes in the levelof efficiency thereby causing changes in costs and thus a variance.Lastly, the value for money in a volatile economy may change and thusa change in the cost of executing the project and especially if it isbeing carried out by a foreign firm which demands to be paid in theirhome currency. Devaluation, revaluation, appreciation, anddepreciation of currency bring in an overall change in the cost ofimplementing the project. They further argue that if the variationis significant, it warrants investigation and be personalized throughcontrollable variances through which the management ascertains themagnitude, reasons, factors involved, the department to which thatbelongs, and the corrective measure to be taken.

Accordingto Azar, Militaru, and Matar (2016), the most appropriate techniquefor cost analysis and control is through the use of ratio analysis.Though considered to be a more of consultancy and external method,the ratio analysis sets the actual outcome against what was projectedto be the usual result. Further, the analysis is mostly used tocompare the performance against that of another firm in the industry.For instance, if one is to consider the cost of having a fivekilometers road, we take the cost that was incurred by another firmin the construction of a similar road with the same features as theone being demanded. The ratio analysis for that business is taken tobe the base or point of reference for the construction companyseeking to have a similar road. Ratios could also be used to comparethe cost and performance of the firm over time. Azar et al. (2016)also assert that ratios are the benchmarks which measure the level ofconnection between two figures being compared where the fair value inpercentage or proportion or a rate is determined first. Then theactual ratio is calculated and then the comparison is made to knowwhether the company is on track or there is a need to investigate andtake a corrective action to mitigate the adverse differences. Ratioscould be used to compare two similar projects undertaken by the samecompany. That allows the firm to identify the areas that demandimmediate action as it seeks to address the other vital areas. Ratioscome in the form of material costs to production costs, labor toproduction costs and overheads to production cost.

Yin,Yang, and GAO (2016) argue that the purpose of any constructionproject is to add value to the society in which the project is beingundertaken. Therefore, cost analysis and controls should be based onvalue analysis where the project design focuses on cost cutting butremain with the same quality and standard desired. In this situation,the purpose which any equipment or material is studied before thepurchase is done. Questions of what are these for? Would that otherdesign which is of a lower cost still work well? Could there be acheaper material mix which would serve the same role? Therefore asasserted by Yi et al. (2016), value analysis is a process throughwhich specific functions are attached to products or components,thereby establishing the most appropriate costs and gives options andreviews those alternatives so as to get the best value for money. Theobjective of cost analysis is to determine expenses in a project thatdo not contribute to the set specifications or the value that was setas functional. Cost analysis ends up in being the process of reducingcosts without altering the substantive standards of the expectedperformance in delivering the product. Value engineering is closelytied to cost analysis, and it is very helpful as a proportion ofsaving in costs is significant to the firm.

3.1. Issues inConstruction Management

Issuesin cost management arise while in the construction projects, and theyare usually either a thorn in the flesh or sweet to the tongue asboth occur. Mao, Xie et al. (2016) argue that the complexitiesshrouding the issues of costs have given the global managerssleepless nights trying to devise means to eradicate losses that comewith construction projects. However, they are working to keep pacewith the world and adapt new methods and strategies so as to becomecompetitive with a clear edge in the new environment. Theseprocedures are shown in the form of

ActivityBased Costing (ABC): A model that assigns costs to each undertakingand allocates resources to the projects according to the actual setconsumption by each. Indirect costs are allocated being more asoverheads into direct, or the prime costs (Yi et al., 2016). Thus,the organization can point out the unnecessary costs and strictlyfocus on the relevant costs and hence reduction of cost ofproduction. That delivers a higher social benefit and thus a widersocial welfare. The method has improved the project processes sincethe expenses incurred are tested for reasonability before theorganization bears them.

TotalQuality Management (TQM): A construction company would love to builda name and reputation for itself and its subsidiaries. Therefore, itis the responsibility of the whole organization to satisfy thesociety or the stakeholders with the best and the highest qualityproduct or development project that will entice the generations tocome to engage the company for the solutions of having their plansexecuted. Further, TQM also comes with an efficiency which isdepicted by having a cost effective outcome for the stakeholdersthereby providing a wide social welfare. It is scientific in natureas it values the company reputation and not only the products or theservices offered (Yin et al., 2016). Quality is the major pillar forthose firms as they set it as a priority so as to satisfy customer`sneeds, and brings every employee as an internal stakeholder on boardto feel enthusiastic to create value for the firm.

Thecost of Quality: They come in the form of prevention costsassociated with the reduction of possible defective parts of aproject. Appraisal costs are related to the evaluation of processes,services, parts of a development project, and the final product.External costs are incurred after delivery of a poor outcome of theconstruction, either as a whole or in parts. Internal failures arecosts resulting from constructing defective project before handingover the clients.

3.0 METHODOLOGY3.1 Research Design

Therequired data was collected using two ways which were interviews anduse of secondary data. Secondary data was adopted so as to gatherinformation from the literature that exists from the wealth of thelibrary. Secondary data would be useful in having conclusions thatwere made before in the earlier studies on similar thesis problems.Interviews were carried out with various professionals and experts inthe construction industry. The specialists in the sector were verycooperative with the researcher as they took their time to answer allthe queries raised by the scientists. The interview questions wereopen-ended, and the interviewees had the liberty to give the answersin line with their experiences, knowledge and countenances they havehad in the industry. In the interactive sessions with those who wereinterviewed, vital information was collected, and the quality of datacollected was reliable to conclude on the thesis problem at hand.

3.2 Data Collection

Themethods that were adopted by the researcher were to use the secondarydata and interviewing the experts in the construction industry.Secondary data collection is the use of the already analyzed datathat has been turned into viable information that has been provedbeyond reasonable doubt and thus suitable for further use inresearch. The interviewees that the researchers approached to collectprimary data are the engineers, quantity surveyors, project managers,cost analysts, and construction economists.

3.3 Sampling andAnalysis

Asample of fifty experts was approached and interviewed for thepurpose of collecting data on the first magnitude. Those that weresought were ten each in the categories of engineers, cost analysts,construction economists, project managers, and quantity surveyors.They all gave their views on the importance of cost analysis andcontrols in construction management.

Thedata was analyzed through the use of logics and assessing the mostappropriate methods of cost analysis, and the most exceptionalimportance of cost analysis and control. Further, the secondary datawas analyzed by use of reading and sorting out the most excellenttechniques that are best for use in the cost analysis. The data isqualitative and therefore cannot be transformed into the quantitativedata for the purpose of statistical analysis as it is meant to studyon the importance of the analysis and controls. Qualitative data isthe data that cannot be presented in the form of statistics and thusderives the information as needed.

5.0 ANALYSIS ANDFINDINGS

Costanalysis and control is a major component of construction managementas it is the only factor that gives real value to the project. If aconstruction project was carried out and delivered at a good time butwith an exorbitant cost, which undertaking becomes an exercise infutility as it does not provide the value for money to the clients.It is, therefore, imperative to understand that a project isconsidered economically viable if it is cost effective. Thus anydevelopment which should give the highest consumer welfare shouldhave been executed under water tight cost control system (Shin etal., 2016). The importance of cost analysis and control is taken as apillar in managing a construction project.

Theprimary need for a contractor is to be in business for anunforeseeable future and therefore needs to run an economicallyviable business. That is only realized by being profitable and withstable cash flows. When a contractor is accorded an opportunity tohandle a project, the company has the obligation and an amount ofmoney for discharging that mandate. Profit being simply thedifference between the revenues received and the costs incurred, thecontractor has the right to reduce costs as long as that does notdent the quality and the standards set for the project (Shin et al.,2016). Further, controls and cost analysis will help the contractorto be able to reduce deduction risks via liquidated damages or setoff.

Itis not a walk in the park to control costs as it is not thecontractor spending the cash but those he has assigned duties to doso. As such it becomes an uphill task to deal with procurementmanagers purchasing large ticket items and sub-contracting, to theforeman doing various material on purchase card. Further,subcontractors will look for means to boost their revenues even iftheirs is a fixed income, as they will put in some funny costs whichbloat the same (Mao et al., 2016). As long as another party doesspending than the contractor, the control becomes difficult andalmost impossible. Controls help in minimizing the risk of growth ofsubcontract cost by having a well and apparently drafted terms ofengagement and then managing it in a proper way.

Controlsand cost management begin at the tendering stage where a contractorhas a value system that has a resource code that will be used by thedepartment of finance, and ideally is applied to all to theresources. All those resources are then included in the estimatesthereby making the process of reconciliation simple between theworking and the budget forecasts. However, there is a need to tunethe process fine so as to accommodate the intentions of the projectmanager and the plans to subcontract to another firm.

Costplanning tools should be utilized by the contractor so as to keeptrack of all up to date costs and the projected costs that will havebeen incurred at the completion of the undertaking. Most importantly,reasons for discreet value movements between the present and previousplan for costs are identified (Azar et al., 2016). Tracking allchanges in value for particular resources or cumulatively will promptquestions over inefficiencies, an unidentified scope of changes, andbad rates. That will help the contractor recognize the trends thefirm has taken being negative or positive, reconcile the recoverablecosts with the real variation register and take the mitigate steps toavoid potentially escalated costs.

Pricecontrols and analysis are necessary as they use Work BreakdownStructure (WBS) where resources are allocated in the form of budgetsand actual spending to discrete segments of the project. A member ofthe delivery team is assigned responsibility to monitor a strand ofthe budgetary allocation and its related costs. Cost coding costcapture and WBS system will help the contractor in specifying thecosts should they require to document to support a claim, as well asto proactively minimize and manage costs (Mao, et al., 2016). Thesystem is efficient to capture what others would otherwise would not,and as such its effectiveness has been necessitated by the need tohave a transparent mechanism to track costs in constructionmanagement.

6.0 RECOMMENDATIONS AND CONCLUSION

Fromthe analysis of the techniques used in cost analysis and control forthe contractors in the construction industry, and their importance,the following would be recommended

Themost powerful tool of analysis is the use of variance analysis. Thatis because the technique usually uses premeditated standards whichare realistically calculated for the purpose of that particularproject. It puts into consideration the present value for money,inflation levels, foreign exchange rates and the real income of acountry. During the project planning and design, the standards arecome up with which puts into perspective the expected outcome and thecosts to be incurred in the project. Then the actual outcome ismeasured after the completion of the project where the variation isascertained, and the corrective action is taken to mitigate theadverse differences. However, the weakness of the method is that itdoes not end up in recovering the recoverable since the analysis isdone in the form of an audit. Therefore, the only corrective actioncould be done in the next projects. However, with the use of costcodes, cost capture and WBS system, the issue of being proactivecomes into set-off the losses that may occur.

Itis also an option to use the value adding method of cost analysis andcontrol. That is because the process is secure for to use in theconstruction industry where engineering is much entrenched, and thusthe concept of value engineering (Yin et al., 2016). IndustrialEngineering has been using the value concept in cost controls andanalysis as a tool as it gives the clear picture of the value thestakeholders and clients would derive after the construction project.It is the highest value and minimum cost that the customers want asit gives the maximum value for money which is most important.

Inconclusion, cost analysis and control in construction management is apillar that cannot be replaced by another in delivering a product.The importance of the checks and analysis is clear as it has so manybenefits and learning sources for the contractors for the solepurposes of helping them deliver the quality and standard projects.With the systems that have been brought out by the importance’s totrack costs either cumulatively or as an individual, it is evidenthow important it is to have analysis and controls. The mostoutstanding mechanism is cost coding, capturing, and WBS as they helpthe contractor to track costs and initiates the most important valueswhich are proved to be the most reasonable to spend. Value analysiswas an interesting part as there was learning on how one should sortcarefully and strictly only that which is reasonable, and necessaryto devote to. If a cost does not add value to the project, it shouldbe done away with and only focus only on what adds value andminimizes cost. In construction, the contractor has an obligation todeliver a high-quality project at the minimum cost possible so as tomaximize the consumer welfare and money value as well.

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