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Contents
                              
Section 1 Cost Control

Section 2 Control and Reporting Techniques

Section 3 Cost Value Reconciliation

Section 4 Purchasing

Section 5 Monitoring Costs                         

 

Description:  The purpose of this unit is to enable you to demonstrate an understanding for the need for cost control in the construction process.

Author:  Gates MacBain Associates

Section 1 Cost Control




Aims and Objectives

At the end of this section you should be able to:
  • Explain the need for cost control measures in a project.


The control of the programme will, to a large extent, have an effect on the costs, although costs can escalate due to a number of other factors, some of which are beyond the control of the contractor.  

Cost control must include all aspects of production, materials, labour (including subcontract) and plant. And involves the planning of cash flow, something which is looked at in Chapter 14 of the Cooke and Williams book listed below. 

The purpose of Cost Control is to control the cost of site expenditure and administration. It involves ensuring that the best price for all aspects ranging from the specification and in obtaining goods and services is the most beneficial for the company and in ensuring that all actual costs are assessed against expected cost. 

In order to do this a system is required which can collect and collate information from which the actual costs can be compared to estimated costs. It should be understood that there is a difference between cost control, which provides a system with some control over expenditure, and cost reporting, which just informs on the position with regard to costs. 

It is important that information should be collected regularly and often i.e. each week, thereby giving early warning of any increase in costs over those estimated. This will allow remedies to be instigated and also provide data for future projects. 

A good introduction to this area is Chapter 17 of the Construction Planning, Programming and Control listed below and this chapter should be read to gain an insight into the requirements for the control of money. You could also consult the Management Systems for Construction also indicated below.  It will also be worth visiting the Cost Control web link.   




Websites



Publications

  • Cooke, B & Williams, P (2009) Construction Planning, Programming and Control (3rd Edition) Blackwell: Chichester (Chapter 17)
  • Griffith, Stephenson & Watson (2000) Management Systems for Construction; Pearson : Harlow (Chapter 3)



Self-Assessment Task

  • Discuss the reasons that a company will need to ensure that they have cost control measures in place prior to the commencement of a contract.




Section 2  Control and Reporting Techniques 




Aims and Objectives

At the end of this section you should be able to:
  • Explain a number of the techniques used to control and report on costs for a project.


There are a number of ways that costs can be controlled though all of these involve recording and monitoring data.  In order to do that it is essential that a system exists for the collection and reporting of the data. 

The way that this is done is covered by Chapter 15 of the Cooke and Williams’s book listed below.  It covers the importance of site records and ensuring that anything is recorded, this would include cost, materials or decisions so you should be aware of how these are recorded in order to allow an efficient system of control.   


Effective Cost Control Systems 

To be effective the systems must: 
  • Have a budget set with a contingency figure
  • Cost should be forecast for all possible courses of action before decisions are made
  • Costs, actual and forecast, should be compared at appropriate and regular intervals in order to determine if any actions are required
  • Actual costs should be subject to a variance analyses to determine any deviation from the budget
  • Cost implications with regard to quality and time should be considered.
Any recording system must be cost effective to operate  


Budgets 

A Budget is a plan that outlines an organisation's financial and operational goals. So a budget may be thought of as an action plan; planning a budget helps a business allocate resources, evaluate performance, and formulate plans. Details of the types of budgets can be found in Chapter 15 of the Cooke and Williams book. 

The main cost control system used by contractors is Cost Value Reconciliation which will be looked at in the next section.  



Websites



Publications

  • Cooke, B & Williams, P (2009) Construction Planning, Programming and Control (3rd Edition) Blackwell: Chichester (Chapter 14, 15 & 17)



Self-Assessment Task

  • Explain the techniques that can be used to control and report costs within a project and state the advantage of using each type.





Section 3  Cost Value Reconciliation




Aims and Objectives

At the end of this section you should be able to:
  • Explain the process of Cost Value Reconciliation.


Cost Value Reconciliation (CVR) is the practice of determining and reporting profitability of a construction project on a regular basis. By comparing the costs with revenue at a certain date, it is possible to see the difference between the cumulative profit or the loss on the project.  

Reconciliation is defined as getting two things to correspond: We do this on a personal basis when we check that our bank statement has recorded all the cheques that we have written and the money we have paid in.  A similar process is undertaken within industry to ensure that all costs have been accounted for. A number of ways can be used to control finance and these are looked at in Chapter 17 of the Cooke & Williams book.   You should also read the Cost Valuation Paper on the website linked to below.  


Application of Cost Value Reconciliation (CVR)

The application of cost value reconciliation (CVR) in the subcontracting construction industry is considered an important part of cost management for the financial control of construction projects. However despite its’ uses it is often not widely used by subcontracting organisations. This is generally due to the perceived resource requirements, the cost and technical skills necessary to incorporate the technique into small and medium size subcontractors.  


CVR Shows:
  • Profit/Loss on each individual contract on a monthly basis
  • Profit/Loss for the current accounting period
  • Current cash position of the company
  • Details of overhead recovery on individual contracts
This will enable the company to:
  • Identify any actions and reduce cost liabilities on a monthly basis
  • Plan company expenditure
  • Monitor and adjust estimating rates based on the profit/loss reporting.
  



Publications

  • Cooke, B & Williams, P (2009) Construction Planning, Programming and Control (3rd Edition) Blackwell: Chichester (Chapter 17)
  • Potts, K (2008) Construction Cost Management – Learning from case Studies, Taylor & Francis; Abingdon (Chapter 13)



Self-Assessment Task

  • Explain the purpose of Cost Value Reconciliation.





Section 4  Purchasing



Aims and Objectives

At the end of this section you should be able to:
  • Outline the procedures relating to the purchase of goods and materials.


Purchasing relates to acquiring goods or services and  involves the procurement, storage, and monitoring of goods, machinery, supplies, or other raw goods used for the fulfilment of a contract. The purchaser is the person in charge of this aspect of the contract. For a contract to be profitable it is important that this function is carried out effectively.   

In many cases, purchasing will involve negotiating with manufacturers or wholesalers in the process of buying goods or materials in order to obtain the best possible price. 

Inventory is also a big part of purchasing in order to compare the stock held against that ordered and purchased. It will also enable the future requirements to be assessed.  

The people responsible for purchasing must stay up-to-date on new and emerging products on the market.  

Information relating to purchasing can be found at the Guide to Purchasing web link and from the Chartered Institute of Purchasing and Supply (CIPS) website which is linked to below.  


Ownership of Goods 

The Standard Forms of Contract are quite specific with regard to materials which have been obtained by the contractor specifically for a contract and will state the responsibility which each party has regarding ownership or loss or damage.  Details of these can be found in the relevant contracts though an overview can be obtained from Ashworth’s book listed below.   



Websites



Publications

  • Ashworth, A (2006) Contractual Procedures in the Construction Industry (5th Edition); Pearson: Harlow (Chapter 23)



Self-Assessment Task

  • Explain the procedures which need to be followed in order to ensure that materials are appropriately purchased.




Section 5  Monitoring Costs  




Aims and Objectives

At the end of this section you should be able to:
  • Explain the importance of monitoring costs and the ways that this can be done.


It is essential that a company monitors costs, one way of doing this is to adopt the use of forms. These can be produced according to the information that is required though they should be designed so that they are easy to understand and quick to fill in. 

A cost comparison can then be done by comparing work done to the bill of quantities and documentation regarding costs. This may be done by: 
  • Invoices from suppliers for materials and plant which are matched against orders and delivery notes
  • Material and plant issue sheets from within the company
  • Site wages sheets
  • Payment sheets to labour only subcontractors
  • Invoices from domestic subcontractors
 
The work done can be assessed by: 
  • Measurements by the quantity surveyor and the interim certificates
  • Bonus surveyor's sheets
  • Contract progress chart

Documents can then be used which transfer the information from the other sources and allow actual costs to be seen against budgeted costs. The way that this is done can be seen by reading through the specified chapters of the Cooke and Williams book below.  


Cost Control System 

The cost control system can monitor costs at three levels: 
  • Daily or weekly intervals.  This applies unit costing where materials are fixed into position i.e. square metre of brickwork. This would be in the Bill of Quantities and would be priced. The information obtained from the forms, as discussed earlier, would allow the actual cost to be ascertained. This is then compared with the amount it was estimated that it would cost.   
  • Interim valuation periods.  The interim valuation certificate by the Quantity Surveyor is compared with the actual costs for the month.
  • End of Contract.  Contract Account or Contract Job Cost Sheet - Reconciliation. This is used to calculate if the job made a profit and if it was in line with the profit initially envisaged. This is useful for future work which may entail the adjustment of unit rates or the improvement of site cost control.

Early awareness of excessive costs will allow action to be taken; this may be done at site level and may entail:
  • The use of alternative materials
  • The adoption of alternative methods of construction
  • Tighter controls on labour and materials
  • Better incentives for the work force
  • Changes in the type of plant used
  • Replacement of supervisory staff
It must be realised that poor estimating and accounting procedures can also create problems for the project.




Publications

  • Cooke, B & Williams, P (2009) Construction Planning, Programming and Control (3rd Edition) Blackwell: Chichester (Chapter 15, 16 & 17)



Self-Assessment Task

  • Outline the procedure that can be used to monitor costs for a project.





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