The Factors Important For Effective Cost Management

Published Date: 02 Nov 2017

Describe and explain the factors important for effective cost management for real estate projects.

Cost Management

Introduction

Generally speaking, a client is dependent on the costs of a particular construction project. Said costs must be kept at a minimum, whilst keeping quality at its best, when possible, and ‘in the context of the defined aims.’ On the other hand, the contractor is required to know the profit that is going to be made with respect to the particular project. This is why certain market rents adapt to a maximum budget, rather than any arbitrary project costs, irrespective of the possible marketing-promoting equipment. To achieve effective cost management for real estate projects, one must comply with the following:

Factors

Obligatory cost scaffolding is required to be done, which entails a comparison with other projects. Moreover, the cost scaffolding needs to be kept constant during the entire project execution, so that ‘control is possible for the highest aggregation level at any time.’ By using other projects that are similar to the one being tackled, the budget may be investigated in detail, fault-free and as exact and broken down as possible. Moreover, the client needs to be notified periodically of the total costs.

Another factor worth pointing out is that all activities follow a predetermined plan.

The project cost control system of the construction manager must always – via suitable interfaces – supply the superseding data through a translation program adapted to the type of structure the respective client wishes to receive.

Planning must be done as well as possible, due to the fact that it is more difficult and costly to change something after the Planning Phase. Therefore, careful cost planning, will in turn decrease the chances of unforeseen future costs.

What makes planning tough is the fact that there is only little information known about the tasks for a project, and therefore, to a certain extent, changes are bound to occur, hence why cost statements with a high degree of detail and precision is key. This means that during the execution, whilst keeping track of the specification and of the budgeted costs, the course is as smooth as possible without any unforeseen factors.

TASK 2

Why is an accurate cost assessment in the beginning of a construction project so important?

Definition of Cost Assessment

‘The accumulation, examination, and manipulation of cost data for comparisons and projections.’

Business Dictionary

To achieve an accurate cost assessment, a defined cost assessment with different degrees of precisions must be set for every project phase. Bole, M. states that the ‘proportion of detail increases simultaneously with advancing project progress.’

Accuracy in the early stages of a project, with respect to Cost Analysis is required so that a clear idea of the expenses that a client has to go through is defined. Moreover, when a contract is created and discussed with a client, before signing of said contract, a budget must be set. This budget may be obtained from past, similar projects. If said budget is exceeded by a certain amount, penalties to the contracting entities may be put into action, and said extra expenses must be paid for, unless the client is the one altering the initial contractual design and specifications. PROFIT FOR CLIENT, expenses with revenue

Accurate cost assessment at the early stage of a project will in turn help a client know what he/she is paying for. This will not only build trust between the client and contracting parties, but also shows how competent a company is.

TASK 2.1

What are the difficulties of cost assessments at an early stage of a construction project?

It is quite complex to derive the cost of a particular project in the early design stages. Consequently, the design being shown to the client can in turn only be a conceptual form, meaning that the provided data may vary from the final design. This may lead to a great deal of uncertainty for the client. Moreover, if the design is only a concept, there will not be enough factors on which one may base costs on.

Usually, early evaluation of costing is only based on the spaced being used, type of project, and quantity of materials being used. Unforeseen risks and issues also affect the final cost of a project, and is usually neglected in the initial stages of a construction project.

TASK 3

Describe and explain at least six (6) main reasons for claims and at least six (6) others for cost overruns of construction projects.

Definition of a claim

‘Legal demand or assertion by a claimant for compensation, payment, or reimbursement for a loss under a contract, or an injury due to negligence.’

Business Dictionary

The common reasons for claims to arise on a construction site are as follows

Due to an unbalanced contract.

Due to causes for which owner/ employer is responsible.

Due to causes for which contractor is responsible.

Due to causes beyond the control of both sides.

The reasons mentioned above may in turn be subdivided as follows:

In the case of unbalanced contracts, the following reasons lead to claims:

A contract that is biased, and is in favour of the client, and against the contractor.

In the case that risks are not divided properly between the client and contractor.

Progress of said project is not in compliance with the contract.

In the case of an owner or employer being responsible, the following reasons may lead to claims:

The site is poorly investigated by the client at the pre-tender stage.

Delay in the acquisition of land, and handing over to the contractor.

Delay in the issuing of working drawings by the owner.

The delay in releasing payments, which in turn leads to cash-flow problems for the contractors.

In the case of CONTRACTOR that is responsible:

Fluctuation in rated that have been quoted, for a number of items.

Managerial problems of the personnel working under the contractor.

Labour related problems like strikes, in the contractor’s organisation.

In the case of causes beyond the control of both sides:

Heavy rains, flooding, snow, landslides, or earthquakes.

Political related problems.

Definition of cost overruns

‘Amount by which the actual cost exceeds the budgeted, estimated, original, or target cost.’

Cost overruns may occur due to several reasons, some of which, including their solutions, will be listed hereunder.

Errors in the estimation and budgeting of a project

Reasons

Mathematical errors which may be due to an error in transcribing, mistyping, omissions and miscalculations.

Errors in Project plans and specifications, lack of detail in the drawings, and not keeping with the predetermined plans.

When estimators that are inexperienced in their field, which may result in inaccuracies.

Errors in Estimating programs.

Unique bid requests by the client.

Lack of expertise by the contractor and locations that are new.

Solution

An experienced estimator will double-check the estimates and include suppliers' and subcontractors' pricing so as to increase the accuracy of the final estimate. Further decrease in error may occur though triple check by a third person, like for example a manager. This will in turn prevent errors that may be foreseen, and review estimates.

In the case of specifications that lack detail and information, the client requests for further documentation in the text that may help.  Clarifications with respect to the bid proposal are key, In the case of lack of response or inadequate information.

When working in a new environment. Research I necessary to get all the necessary data on the area. Data may include consideration to required resources, which included personnel, construction material and equipment, site conditions, meteorological data, and safety requirements.

The costs required beyond the scope of work

Unforeseen conditions

Requests by the client that were not part of the planning phase or scope of work

The client fails to fulfil commitments that were predetermined.

Solution

In the case of conditions that have not been notified to the contractor, may be due to lacking documentation. A Change Order may be determined to be fit or not, depending on the client’s practicality.  In the case of lacking documentations of cost overruns, the contractor would be found liable.

A valid option to clarify issues, is a field order, which is done prior to any changes, or changed in the scope of work. Note tat the client is advised to sign the field order prior to the contractor undertaking the task, and in turn, additional costs. This will eliminate the chances of conflicts or claims. It is advised that, no matter what type of field order is chosen, being time and material based or price, all costs must be noted.

In the case of a client that does not abide by the contract, a change order is an appropriate method of action. The main disadvantage of this is unnecessary delays. This may include, equipment and material that does not abide to the specifications. In the case of increased costs, being through the late schedule delivery, or a correction by the contractor for manufacturing or engineering that is not up to standard, ‘a systematic approach method is necessary to assess capital, personnel and equipment resources that are affected by the client's responsibility’.

The longer a project takes, the more costs are attached to it.

Task 4

List and explain the fundamental activities and milestones in successful time scheduling.

Scheduling process can be described as the process that determines the timing of each work activity that has been appointed in the Planning process, which results in a project schedule. Normally, a schedule is representing sequentially, and divided into individual activities, which are required to arrive to the ‘finish’ of the project. A schedule is a management tool that is used to estimate the ‘Finish’ date of a project, which in turn gives a rough idea of the materials and personnel required on site at a particular point in the project. Some of the steps required to produce a successful time schedule, are as follows:

Calculating the time that is required for the project to be completed.

Identifying the start and end of each task. These are called milestones.

‘Identifying the activities crucial to timely project completion’ [Clough et al. 2000]

Milestones

States that milestone, ‘are points in time that have been identified as being important intermediate reference points during the accomplishment of the work.’ Note that milestone events

For a successful project, you need a specific milestone may include dates that have been imposed by either the client or the contractor, setting particular tasks or actions. Generally speaking, a milestone is a scheduled date for either the start of a particular task, and its end completion date. A Time schedule is indispensable for a contractor, as it is used as ‘reference points for project monitoring’.

Project Management Fundamental For Successful Time Scheduling

Select An Effective Project Management System

The use of effective project management system greatly decreases the chance of errors and delays in the project. The systems that are available for project management vary from simple systems, such as a Gantt chart or an Excel spreadsheet, to those that are highly advanced, like variations of PERT or any other computer-based project management, systems such as Microsoft Project. Note that nowadays, software is also available for portable tablets and phones as well. Note that the type of system chosen should be in line with the type of project, and be as simple as possible for ease of use. However, the software must be able to handle the project properly for successful project completion.

Clearly Specify The Project Beginning And End Dates

Even though these are the two most critical dates, they are overlooked in the planning of company project. These dates are the start date of the project, and completion date of the project. These dates are commitments, and should not be overlooked.

Clearly Establish Milestones For Each Project Goal Or Objective

Project milestones are essential for the success of any project monitoring and tracking, and time scheduling, irrespective of type of project. A milestone is a major event in the project, which in turn can be divided into several minor events which in all mark the completion of a clearly defined section of the project. Said milestones and sub-sections must be clearly defined with a date in the project plan, and can be used by the client or contractor to keep track of the process, and produce reviews quicker. Accomplishing each task on time assures that the project is on track, and on schedule with the ‘planned outcomes and objectives of the project’. This will also keep the budget as close to the predetermined budget as possible.

Ensure Weekly Monitoring And Reporting

Another area that usually leads to failure in time scheduling, is a lack of monitoring and reporting of the project on a weekly basis. The entities in charge or Monitoring and reporting are the project manager and his team.

Note that weekly monitoring and reporting are indispensable, and cannot be viewed as optional to save on the budget. Thanks to weekly monitoring and reporting results in a healthy project management system where every action falls into place, and no clashes occur.

 

Weekly Budget Tied To Major Milestones

To keep track of the budget, a series of breakdowns are required, first on a weekly basis and then tied to certain milestones. This will in turn increase accuracy with respect to tracking the progress and costs for the delivery of important milestones. This requires impeccable project monitoring, control and keeping to the predetermined budget.

Visibility To Leadership

Personnel in charge must be willing to monitor the progress of the project they are in charge of, and regularly ensure that the weekly review is used at its best, efficiently and effectively. Follow up will make sure that the success rate for the project is at its best. Supervision must be there from the start to the end of the project. Participation in the reviews done on a weekly basis will ensure that every entity knows his role, and in turn, know that their performance is under control, meaning that the highest levels of performance are required.

Ensure Weekly Client Contact

Client management depends on two crucial components, which the project manager is responsible for:

‘Insuring on time presentation of the client deliverables as required for project success’

Weekly contact with client to keep him/her up to date.

One of the most common excuses during a project is blaming the client for not getting their deliverables on time. To ensure that this does not happen, the project manager has the role of ensuring that deliverables are on time with the schedule. ‘Failure to manage the client, or in some cases the vendor, will result in project delays. During the project planning stage, establish realistic and achievable client deliverables.’

Weekly contact with the client must be done so as to avoid any clashes or dissatisfaction. Concerns must be dealt with immediately, and notified to the highest authorities so that a solution is found in the least time possible. A weekly report with respect to the client deliverables should be provided. The client should be updated on a weekly basis to ensure his/her satisfaction. Lastly, Weekly client calls and emails should be noted and filed for reference, as they may be used in claims and lawsuits.

Task 5

Explain the individual value method and the method of value added regarding maximising cost safety and compare the differences between the two methods.

When taking into consideration of the user program in conjunction with the use-referred spaces, the project management team has the ablitity to analyse and generate an investment cost estimate for the Profitibility Analysis.

One can make use of two methods to determine the costs, even in the early stages of a project. These are listed hereunder:

Individual Value Method (volume/space X cost index [€/m²; €/m³] = estimated costs)

Types of Cost Spaces Method (type of cost space X parameter = estimated costs).

Note that with the help of the investment calculation methods, one has the ability to quickly calculate the total profitability of the investment, even when various alternatives and options are analysed.

Static and Dynamic Investment Methods

To obtain an accurate profitability analysis, one has to make use of both the Static and Dynamic Investment Methods. The difference between both methods is simple. The Static method analyses only one average period of time, whilst the Dynamic Investment Method includes time.

The methods that fall under the Static Investment Method are listed hereunder:

Cost Comparison Method

Profit Comparison Method

Average Rate of Return Method

The methods that fall under the Dynamic Investment Method are listed hereunder:

Net Present Value Method

Internal Rate of Return Method

Cost comparison method

An average of the costs in the design period is determined for each investment alternative, and each one is compared. The one that is most profitable is the one that has its total costs lower than an alternative investment project.

Profit comparison method

This method considers the costs and the revenues of a particular investment. When the profit is higher than zero, and leads to a higher profit than other projects, it means the the investment is profitable.

Average rate of return method

In the case of this method, an investment can be considered as profitable when its average rate of return is higher than a predetermined percentage, or when said return is higher than that in other investments.

Net Present Value Method

In the case of the net present value (NPV) method, the discounted cash flows are equated against the initial investment. In the case of a project have a positive NPV, said the project should be accepted. In the case of a negative NPV, the project should be declined, as the cash flows will be negative as well.

Internal Rate of Return Method

It is considered to be the most sophisticated capital budgeting technique, and in turn more difficult that the NPV method. Basically, ‘the internal rate of return is the discount rate where the present value of the cash inflows exactly equals the initial investment.’ Therefore, IRR is the discount rate when NPV = 0. Therefore, the higher a project's IRR, the greater the profitability. Thanks to IRR one may rank several prospective projects a firm is considering.

Comparison between Internal Rate of Return and Net Present Value

Usually, both methods will generate the same exact accept-reject decision. However, the difference may be in conjunction to the assumption that may cause a project to be ranked differently. However, the most important differentiating factor is the difference in magnitude and timing of the cash inflows. In the case of NPV, the assumption is made with respect to the fact that the cash inflows are reinvested at the cost of capital. On the other hand, IRR assumes reinvestment at the project’s IRR, meaning that NPV is usually a more conservative approach.

One may consider the timing of the cash flow as well. Early year cash inflows are usually at a lower cost of capital, and in turn are more predictable, than the following years. Due to this fact, companies tend to opt for larger cash inflows in the early years rather than the following years.

Task 6

Explain at least five areas of conflict that could exist concerning an efficient realization process.

Give advice to the client how these potential areas of stress could be handled well and point out precise measures that could be taken to avoid these conflicts.

Vague clients that give vague, and requirements that are being constantly changed

In the case of a client that is not experienced in construction, he/she may not know what they want. Therefore each decision point made by said client have to be added as milestones in the construction project. When a clear path is taken, with respect to a project, from start to finish, the client is forced to to be specific with the requests.

A client should always be reminded that changes may lead to extra costs and compensations to the contractor, and other entities working on the project. Therefore, the project Manager must make a clear outline about the number of adjustments that can be made, and charge accordingly.

If you can, quantify these adjustments with a number; it makes it much easier to keep track of things.

Client is Slow with Communication

When a client is not easy to communicate with, a project may start lingering and delays start to occur.

A simple method of increasing the response rate of a client is to simply start working ahead, and then seek verification from the client. This will result in ease for the client to answer, with a simple yes or no. Hereunder, one may find a sample text written by Clear, J. (2011),’

Hi Mark,

Last time we spoke, you mentioned that we needed to make a decision on task X. I went ahead and started doing Y since that sounded best based on our previous discussion. If you’re happy with that, I can move forward and we can review the progress as scheduled on Friday.

Sound good?

- John ‘

The advantage of this method is shifting from a client taking decisions, to a simple yes or no. As a hired professional, one should always know what is best for the project, and what needs to be done to succeed. This will also result in a faster response from the client. If the client agrees with the progress, a yes or no is enough, however if he does not agree, it is in his interest to reply, and therefore he/she is obliged to answer, so that progress does not drift away from the target.

One must keep in mind that progress should be sound, and has to stick with the project, as a ‘no’ by the client may result in unnecessary costs and changes.

The Project Doesn’t Start On Time

In the case of a hold up from the project manager, it is important to make up for lost time. A more realistic timeframe may be given for the first milestone. Communication with the client to discuss their expectations will help the client feel like there is some sort of progress going. However, this does not have to occur very often, because it will reflect on the project manager’s reputation.

In the case of a hold up from the client, said client must be notified how this will affect the progress of the project. In this case, the client has to be notified with the alterations in the future milestones and how these will affect other commitments.

Trying to Manage Every Project the Same Way

One must realise that a method of managing a project is distinct, and should be modified with respect to each project. Requirements, needs, and clients vary from a project to another, and therefore one must adapt to each.

Instead of applying the same template to the same project, one must spend some time adapting specific milestones to the project in question.

The Client Doesn’t Like What You Created

This usually results through lack of communication between the project manager and the client. The project manager must make sure to understand, not only the technical part of the his job, but also the way the client looks at his project, as the client may not be as technical in this sector. A project manager should ask questions like, why did the client take certain decisions, or ‘How do they see your project fitting in with their overall strategic vision?’ (Clear, J. (2011))

A good project manager creates an ongoing communication and friendship between all parties. It is the Project Manager’s responsibility to understand the direction that a project is going, and the client’s needs, and try to match them up.

Point of Contact does not show interest About the Project

A project that is not highly regarded by the client may be very tedious to manage. This usually results in lack of communication and lack of interest for the client. The end result would not affect them, and they would not be willing to answer any question, or give any advice.

The best solution when tackling said projects is to foresee these kind of projects. Analysing the client and his interest in the project is necessary. A project manager must also seek their level or urgency when choosing an end date, and their desire to communicate and help. In these cases, a project manager should seek a second point of contact, instead of the client, or avoid the project.

TASK 7

Recommend and evaluate methods of satisfying your client in terms of time, cost and quality, contemporaneously in real estate projects.

Introduction

Managing a construction project is difficult, even when the project may be a simple one. The role of a project manager is to satisfy his client, whilst maximising, time, cost and the quality of a project, even technology keeps evolving, and demands of the client may be unreasonable. For a project manager to succeed in client satisfaction, he/she may follow the tips listed hereunder.

Laying the necessary groundwork for achieving success.

Proper planning of the project.

Proper estimation of work.

Keeping track of Progress.

Altogether, the practices that are mentioned above define the project management system with which client satisfaction may be achieved.

Laying the necessary groundwork for achieving success.

Defining the project success criteria

The main goals required to be achieved by the project manager, so as to satisfy the client are the following. Note however, that the project manager must discuss what the interests and expectations of his/her client/s are. Then, clear goals must be identified. Some examples are:

Increase market share by a certain amount, by a predefined date, which is traceable and can be seen by the client.

Achieving customer satisfaction.

Saving money on the overall budget.

As previously mentioned, time, cost, and quality need to be analysed carefully in terms of customer satisfaction, and a project manager must notify the client that increase in quality, leads to increase in expenditure, and to a certain extent, overall end time of the project. Therefore, certain trade-offs must be accepted.

Proper planning of the project

Writing a plan

Planning is a part of a project that is overlooked so as to save on time and money. However, a well-thought budget will not only help a project manager know where he stands, but also helps the client understand more where his money is going and what to expect in the following weeks and milestones. This will give the client peace of mind, and in turn gives a clear idea of what is expected by each member working on said project.

As previously mentioned, a plan done correctly may have much more than just a work schedule, or a work breakdown structure. Other factors may include:

Required staff, budget for each milestone, and other resource estimates and plans on required material.

Roles and responsibilities with respect to each team.

Assumptions, dependencies, and risks.

Descriptions of, and target dates for, major deliverables.

Identification of the software development life cycle that you'll follow.

How the project is going to be tracked and monitored.

How subcontractor relationships are going to be managed.

In the case of small projects, excessive documentation that only adds little value and unnecessary detail will only confuse the client more.

Decomposition of tasks

Tasks need to be decomposed into milestones, and in turn, said milestones should be further divided into sub-milestones. This will ease tracking of each task, and will in turn make it easier and quicker to notify a client of the progress, and issues that may arise throughout the project. It is easier to ask a client for a specific task, rather than a vast milestone. Moreover work activities that have not been thought about, which can save up on the overall budget, might be recognised when using this method of planning. These smaller tasks can be defined as being inch-pebbles, when compared to the larger milestones. Defining the project's work in terms of inch-pebbles is an aid to tracking status through earned value analysis (Lewis, 2000).

Managing project risks

Risks have to be foreseen and prevented so that extra costs are eliminated. ‘A risk is a potential problem that could affect the success of your project, a problem that hasn't happened yet, and you'd like to keep it that way’ (Wiegers, 1998). A risk that has been prevented on site may save thousands of Euros to a client. Prevention is better than cure, therefore, risks need to be identified and evaluated, through risk assessments.

Record of Estimates

Identification of estimates is required so as to give an idea to the client where the budget is being used up. The project manager needs to write down said estimates, and how they were derived. By helping the client understand the assumptions and methods used to create an estimate will make it easier to defend and adjust when issues on site arise.

Keeping track of Progress

Record actuals and estimates

Recording of the actual tasks that has been finished, will not only help during that particular project, but also for future projects. Keeping a written track of each finished task will help with the weekly reviewing of the project with the client, and makes it possible to compare the actual costs and time with the estimated ones. In turn, records make it possible to keep track of where the budget is being used up. This documentation should be handed to the client. Lastly, in case of delays, reasons may be given just be reviewing these records and documentations.

Lastly, a project manager may use these records to show the client why is he getting paid for, and in case of unsettled payment, said records may be used in the claims.