MCM 554 Construction

Cost Management
Lecture 1

Course Objectives and Learning Outcomes

By the end of the course, students should be able to:
Understand the importance ofConstruction cost
management.
Explain basic Construction cost management principles,
concepts, and terms.
To discuss different types of cost estimates and methods
for preparing them.
Understand the processes involved in cost budgeting and
preparation of cost budget for construction project.
know the types of cost estimates, how to prepare cost
estimates, and typical problems associated with
construction cost estimates

Course Objectives and Learning Outcomes

By the end of the course, students should be able to:

Explain what cost control is, and cost control

systems
Explain the purpose and significance of cost control
Explain cost analysis and use the analysis of
existing projects to set cost targets.
Explain how construction claims arise and how
these can be effectively managed
Develp and appreciation of effective filing and
information management systems for constructin

Course Content/Outline

1.Cost Estimating
2.Cost Budgeting
3.Cost Control
4.Financial administration and
records
5.Claims management

Further Reading
Ashworth, A. (2004), Cost Studies of Buildings, Pearson Prentice Hall,
4th Edition

Burke, R. (2002), Project Management- Planning and Control

Techniques, John Wiley &
Sons Ltd, Third Edition

Cook, B. and Williams, P. (2004), Construction Planning, Programming

& Control,
Blackwell Publishing, 2nd Edition

Garold, D.O. (2000), Project Management for Engineering and

Construction, McGrawHill Int. Editions, 2nd Edition

Further Reading
Johnson, H. T and Kaplan, R. S. (2004) Relevance lost: The Rise and Fall of
Management
Accounting, Harvard Business School Press, Boston

Harris, F and McCaffer, R. (2001), Modern Construction Management, Blackwell

Science
Ltd, Oxford

Rangwala, S.C, Rangwala, K.S and Rangwala, K.K (2009), Estimating, Costing and
Valuation: Professional Practice, 12th Edition, Charotar Publishing House PVT Ltd,
Gujurat, India

Rodney-Turner, J (2000), The Handbook of Project Based Management, McGraw-Hill

Book Company, Second Edit

Construction Cost
Management (CCM) An
Introduction

CCM is based on the overall business

objectives and the specific requirements of
the project.
It provides the basis for the establishment of
the optimum costs of project development.
The inadequacy of cost accounting systems
particularly in the construction industry has
led to a disconnect between cost
management and production control
processes.
This course will explain the basic principles of
cost management and the core themes of

What is Cost?
Cost is a resource sacrificed or
COST MANAGEMENT
foregone to achieve a specific
objective, or something given up in
exchange.
Costs are usually measured in
monetary units, such as Cedis, dollars
etc.

Construction Cost
This is the costs incurred in acquiring
a construction project.
Involves the costs of the resources
required to undertake the project
labour, materials, equipment etc

Construction Cost
Management
Construction cost management
includes the processes required to
ensure that the construction project
is completed within an approved
budget.
Effective and efficient cost
management is a critical success
factor in the procurement of
construction (infrastructural)
projects.

Construction Cost Management

Linked to control and management of
design,
Cost management functions to
monitor costs and initiate corrective
action to keep the costs within
budget or acceptable limits.

The importance of cost management

Construction projects have a poor

track record for meeting budget
goals.
Studies show the average cost
overrun (the additional percentage or
cedi amount by which actual projects
costs exceed estimated project was)
is 43 percent.

Some of the many reasons for

construction cost over runs are:
1. Cost estimates that were too low to
begin with;
2. Poorly defined requirements;
3. Many projects involve the use of new
technology or business processes
where there is no previous cost track
record; and
4. Poor overall planning.
5. Inflation / price changes

Basic Principles of Cost Management

Cash Flow Analysis is used to

determine monthly or annual costs
and benefits for a project.
This is especially important when a
company is undertaking a number of
projects simultaneously to ensure
that they dont create a cash crunch
or severe cash shortage in any one
given period.

Basic Principles of Cost Management

Tangible costs or benefits are those

costs or benefits that an organization
can easily measure in dollars.
Intangible costs or benefits are
costs or benefits that are difficult to
measure in monetary terms.
Direct costs are costs that can be
directly related to producing the
products and services of the project.

Basic Principles of Cost Management

Indirect costs are costs that are not directly
related to the products or services of the
project, but are indirectly related to performing
the project.
Sunk cost is money that has been spent in the
past; when deciding what projects to invest in or
continue, you should not include sunk costs.
Learning curve theory states that when many
items are produced repetitively, the unit cost of
those items decreases in a regular pattern as
more units are produced.

Basic Principles of Cost Management

Reserves are dollars included in a cost
estimate to mitigate cost risk by allowing for
future situations that are difficult to predict.
Contingency reserves allow for future
situations that may be partially planned for
(sometimes called known unknowns) and
are included in the project cost baseline.
Management reserves allow for future
situations that are unpredictable (sometimes
called unknown unknowns).

Processes of Cost Management

Involves four main processes:
resource planning;
cost estimating;
cost budgeting; and
cost control.

Processes of Cost Management

Resource Planning developing a list of
project resource requirements- (people,
materials, equipment) - and in what quantities
Cost estimating: Developing an approximation
or estimate of the costs of the resources needed
to complete a project.
Cost budgeting: Allocating the overall cost
estimate to individual work items to establish a
baseline for measuring performance.
Cost control: Controlling changes to the
project budget.

Resource Planning
The process of developing a list of
resources required for a construction i.e.
human, materials, plant and equipment,
etc).
WBS can be used to plan out your resource
requirements.
Effective management and judicious
deployment of these resources
construction will have implications on the
overall project cost.

Resource Planning
The Construction Manager needs to ensure that
there is a clear understanding up front on the
availability and commitment of these resources for
their project!
Start the process of resource allocation by
developing a Resource Responsibility Matrix (RRM).
The RRM is developed after completion of the
Works Breakdown Structure (WBS).
The project manager can use the WBS to create a
matrix to assign resources according to the key
deliverables of the project.

Cost Estimating
One of the key outputs of construction
management is a cost estimate.
Construction managers / owners must take
cost estimates seriously if they want to
complete projects within budget
constraints.
It is important to know the types of cost
estimates, how to prepare cost estimates,
and typical problems associated with
construction cost estimates.

Importance of Cost Estimating (Pre-Tender

Estimates) to Project Stakeholders

Promoter/Client
Determine capital investment costs
Assist financing to raise finance
e.g. Bank, sell assets, etc.
To determine economic viability
returns on investment.

Importance of Cost Estimating

(Pre-Tender Estimates) to Project
Stakeholders

Designer

To aid site selection

To determine the design of the facility
To choose between alternative designs
To monitor likely construction costs e.g.
negotiated contracts
To negotiate variations especially on
negotiated contracts
Adjudication of Tenders checking tenders

Importance of Cost Estimating

(Pre-Tender Estimates) to Project
Stakeholders

Contractor
Submission of bids for lump sum
contracts
Negotiating Contracts
Costs control of projects during
construction
Cash Flow forecast to enable them
to put the forecast into the
companys forecast

Methods of Estimating

The choice of method depends on:

Time Available
Required level of accuracy
The detail of the work (scope of work) amount
of information
The knowledge and experience of the person
doing the estimate
Purpose
Type of work
Knowledge of the client

Types of estimates
Guestimate: Very approximate forecast (capital cost)
very rough.
Prepared basically before any drawings; and practically
less expensive
Order of magnitude: This estimate is made very early in
project planning with an accuracy of -25 percent to +75%.
It is based only on the Preliminary Drawings;
It is quick, less time used to establish whether the project
is feasible;
usually use data from previous similar projects; and add
installation cost.

Types of estimates
Budgetary Estimate is a cost estimate used
to allocate money into an organizations fund.
Accuracy is typically 10% to +25%.
Preliminary Estimate: Based on developed
Drawings producing the basic contract
documentation.
It is fairly accurate contract info legally to be
produced.
Consultants should be able to recognize the
fundamental concepts from experience.

Types of estimates
Definitive Estimate is the most accurate of
the three types. Based on itemized costing of
all anticipated project resources, it is usually
made within one year of project completion.
Accuracy is typically -5% to +10%.
It takes more time, more information;
it is based on detailed design;
and it is based on approximate quantities