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Last edited 09 Sep 2016

Cost control in building design and construction

A development budget study is undertaken to determine the total costs and returns expected from the project. A cost plan is prepared to include all construction costs, all other items of project cost including professional fees and contingency. All costs included in the cost plan will also be included in the development budget in addition to the developer’s returns and other extraneous items such as project insurance, surveys and agent’s or other specialist advisers’ fees.

The purpose of the cost plan is to allocate the budget to the main elements of the project to provide a basis for cost control. The terms budget and cost plan are often regarded as synonymous. However, the difference is that the budget is the limit of expenditure defined for the project, whereas the cost plan is the definition of what the money will be spent on and when. The cost plan should, therefore, include the best possible estimate of the cash flow for the project and should also set targets for future running costs. The cost plan should cover all stages of the project and will be the essential reference against which the project costs are managed.

The method used to determine the budget will vary at different stages of the project, although the degree of certainty should increase as project elements become better defined. The budget should be based on the client’s business case and should change only if the business case changes. The aim of cost control is to produce the best possible building within the budget

The cost plan provides the basis for a cash flow plan, allocating expenditure and income to each period of the client’s financial year. The expenditures should be given at a stated base-date level and at out-turn levels based upon a stated forecast of inflation.

Examples of a construction expenditure graph and cash flow.jpg

Figure: Examples of a construction expenditure graph and cash flow histogram.

The objective of cost control is to manage the delivery of the project within the approved budget. Regular cost reporting will facilitate, at all times, the best possible estimate of:

  • Established project cost to date.
  • Anticipated final cost of the project.
  • Future cash flow.

In addition cost reporting may include assessments of:

  • Ongoing risks to costs.
  • Costs in the use of the completed facility.
  • Potential savings.

Monitoring expenditure to any particular date does not exert any control over future expenditure and, therefore, the final cost of the project. Effective cost control is achieved when the whole of the project team adopts the correct attitude to cost.

Effective cost control will require the following actions to be taken:

  • Establishing that all decisions taken during design and construction are based on a forecast of the cost implications of the alternatives being considered, and that no decisions are taken whose cost implications would cause the total budget to be exceeded.
  • Encouraging the project team to design within the cost plan at all stages and follow the variation/change and design development control procedures for the project. It is generally acknowledged that 80% of cost is determined by design and 20% by construction. It is important that the project team is aware that no member of the team has the authority to increase costs on its section or element of the work. Increased costs on one item must always be balanced by savings on another.
  • Regularly updating and reissuing the cost plan and variation orders causing any alterations to the brief.
  • Adjusting the cash flow plan to reflect alterations in the target cost, the master schedule or the forecast of inflation.
  • Developing the cost plan in liaison with the project team as design and construction progress. At all times it should comprise the best possible estimate of the final cost of the project and of the future cash flow. Adherence to design freezes will aid cost control. Developing the cost pan also involves adding detail as more information about the work is assembled, replacing cost forecasts with more accurate forecasts or actual costs whenever better information can be obtained.
  • Reviewing contingency and risk allowances at intervals and reporting the assessments is an essential part of risk management procedures. Developing the cost plan should not involve increasing the total cost.
  • Checking that the agreed change management process is strictly followed at all stages of the project. The procedure should only be carried out retrospectively, and then only during the construction phase of the project, when it can be demonstrated that otherwise significant delay, cost or danger would have been incurred by awaiting responses.
  • Arranging for the contractor to be given the correct information at the correct time in order to minimise claims. Any anticipated or expected claims should be reported to the client and included in the regular cost reports.
  • Contingency provisions are based on a thorough evaluation of the risks and are available to pay for events which are unforeseen and unforeseeable. It should not be used to cover; changes in the specification, changes in the client’s requirements or variations resulting from errors or omissions. Should the consultants consider that there is no alternative but to exceed the budget, a written request must be submitted to the client and the correct authorisation received. This must include the following:
  1. Details of variations leading to the request.
  2. Confirmation that the variations are essential.
  3. Confirmation that compensating savings are not possible without having an unacceptable effect on the quality or function of the completed project.
  • Submitting regular, up-to-date and accurate cost reports to keep the client well informed of the current budgetary and cost situation.
  • Ensuring that all parties are clear about the meaning of each entry in the cost report. No data should be incorrectly entered into the budget report or any incorrect deductions made from it.
  • Ensuring that the project costs are always reported back against the original approved budget. Any subsequent variations to the budget must be clearly indicated in the cost reports.
  • Plotting actual expenditure against predicted to give an indication of the project’s progress.

See also Change control.


The text in this article is based on an extract from PROJECT MANAGEMENT, by Eric Stokes and Saleem Akram. The original manual was published in 2008. It was developed within the scope of the LdV program, project number: 2009-1-PL1-LEO05-05016 entitled “Common Learning Outcomes for European Managers in Construction”. It is reproduced here in a slightly modified form with the kind permission of the Chartered Institute of Building.

--CIOB

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