Cost Control as a Management Tool

Cost overruns increase project costs and diminishes profits. The

management is sensitive to the costs of all project activities.

Cost Control

Early detection of actual or potential cost overruns is vital to

management: more opportunity to initiate remedial action,
eliminate overruns, or minimizing their impact.
Effective cost control requires an effective cost reporting system,
which provides information on the general cost performance of
field construction activities.
Cost control data are important not only to project manager in
decision-making processes but also to the companys estimating
and planning departments.

Project Cost Control Systems

Project Cost Control Systems

1. Chart of Cost Accounts

Steps in Cost Control

The design, implementation, and maintenance of a project cost
control system can be realized through a five-step process:
1. Chart of Cost Accounts
2. Project Cost Plan
3. Cost Data Collection
4. Project Cost Reporting
5. Cost Engineering

What will be the basis adopted for estimating project costs?

How will this basis be related to the firms general accounts and
accounting functions?
What will be the level of detail adopted in defining the project
cost accounts?
How will the cost accounts interface with other financial accounts?
2. Project Cost Plan
How to use cost accounts to compare the project cost plan with
actual costs recorded in the field?
How to relate the project budget to construction plan and
schedule?

Project Cost Control Systems

3. Cost Data Collection
How will cost data be collected and integrated into the cost
reporting system?
4. Project Cost Reporting
What project cost reports are relevant and required by the
management in its cost management decisions?
5. Cost Engineering
What cost engineering procedures should project management
implement in its efforts to minimize costs?

Steps in cost control

Cost Accounts

Cost Accounts

The first step in establishing a cost control system is the definition of

project-level cost centers.

The design, structure, and development of a cost coding system and

its associated set of expense accounts have a significant impact on the
cost management of a company or project.

Chart of Cost Accounts

The division of the total project into significant cost control units, each
consisting of a given type of work that can be measured in the field.
Each account is assigned an identifying code known as a cost code.

The cost accounting system is essentially an accounting information

system, or part of this system.
Management is free to establish its own chart of accounts in any way
that helps it in reaching specific financial and cost control objectives.

Cost accounts are grouped into associated cost centers.

All elements of expense (direct/ indirect labor, materials, equipment
costs, etc.) can be properly recorded by cost code.

These objectives may be related to general company performance, to

the control of a specific project, or to specific contract requirements.

Cost Coding System

A variety of cost coding systems exist in practice, and standard
charts of accounts are published by some professional organizations.
In some industries, cost codes have a company-wide accounting
focus. It emphasizes expense generation based on a departmental
breakdown of the firm.
In some industries, cost systems have a structured sequence
corresponding to the order of appearance of various trades, e.g., the
types of construction processes in a companys construction activity.
In most construction companies, detailed project costs accounts are
used. This method recognized the fact that construction work is
project oriented and that to maximize profit, projects must be
accounted for individually.
List of typical construction cost accounts

Cost Coding System

For a construction company, it is better to maintain cost accounts on
a project-by-project basis. Both billings (revenues) and cost (work in
progress) are maintained for each project.
The actual account descriptions or designations vary in
accordance with the type of construction and the technologies and
placement processes peculiar to that construction.
Building construction contractors are interested in accounts that
describe the cost aspects of forming and casting structural
concrete as used in building frames.
Heavy construction contractors are interested in earthwork-related
accounts, e.g., grading, ditching, clearing, grubbing, and excavation.

Project Cost Code Structure

The UCI Master Format code as used by the R. S. Means Building
Construction Cost Data identifies three levels of cost detail.
First level: major work classification; two-digit code
Second level: a designation of the physical component of the
construction; three-digit code.
Third level: a more precise definition of the physical
sub-element; four-digit code.

Classification of accounts: typical data structure for a computerized cost code.

Cost Accounts for Integrated Project Management

In large and complex projects, it is advantageous to break the project
into common building blocks for control both of cost and time.
The common building blocks are the work packages, which is a
subelement of the project on which cost and time data are collected
for project status reporting.
The set of work packages constitutes the work breakdown structure
of a project.
The work breakdown structure and work packages for control of a
project can be defined by developing a matrix.

Three-dimensional visualization of work-package-oriented cost accounts

Basic cost code structure

Earned Value Method

Earned value method is a widely accepted way of calculating
progress on complex projects using a work or account based
breakdown system.
This method analyzes project progress by addressing both
schedule status and cost status.
This method was originally implemented by the US Department
of Defense in late 1970s.
The idea of earned value is based on the development of percent
completion of the budgeted costs associated with individual work
packages.
Project control matrix with scheduling of subtasks

Earned Value Method

Baseline of Cost/Production
The contractor usually establishes an expected level of work to
be completed over time through an S-Curve. This
cost/production curve is referred to as the baseline.
Budget Cost at Completion (BCAC)
Each work package has an initial budget which is defined as the
BCAC. This is the contracted total cost for the work package.
Budgeted Cost of Work Scheduled (BCWS)
The budgeted cost for the work scheduled to be completed at a
given time as indicated by the baseline.

Earned Value Method

Actual Cost of Work Performed (ACWP)
The actual cost for the work actually completed.
Budgeted Cost of Work Performed (BCWP)
The budgeted cost for the work actually completed.
BCWP = (% completion) X BCAC
% completion = AQWP/BQAC
Actual Quantity of Work Performed (AQWP)
The actual quantity of work completed as measured in the field.

Earned Value Method

Budgeted Quantity at Completion (BQAC)
Total value of the quantity baseline at project completion. This is
the contracted total value of quantity for the work package.

Earned Value Method

Schedule/cost performance can be characterized by cost/schedule
variances and cost performance/schedule performance indices.

Estimated Cost at Completion (ECAC)

Cost Variance (CV)

Cost Performance Index (CPI)

This is the cost estimated for a work package at a given time after
commencement of the job based on the performance so far.

CV = BCWP ACWP

CPI = BCWP/ACWP

Schedule Variance (SV)

Schedule Performance Index (SPI)

SV = BCWP - BCWS

SPI = BCWP/BCWS

Example 1

Scenarios for Permutations Between ACWP, BCWP, and BCWS

Labor Cost Data Collection

Purposes of the Payroll System
(1) Determining the amount of and disbursing wages to the
labor force
(2) Maintaining records for tax and other purposes
(3) Providing information regarding labor expenses

The source document used to collect data for payroll is a daily or

weekly time card.

Construction companies usually have a payroll data structure,

which allows flow of raw data from the field to management.

Foreman's daily labor distribution report

Charges for Indirect and Overhead Expense

A construction project involves two types of costs:
1. Direct Cost
Consumed in the realization of a physical subelement of the project, e.g.,
labor and materials costs in pouring a slab.

2. Indirect Cost Production Support Cost

(1) Project-related indirect costs (e.g., superintendents salary, site
office costs, project related insurances);
(2) Home office overhead: Costs associated with the operation and
management of the company as a viable business entity (e.g., costs
associated with preparation of payroll in the home office, marketing,
salaries of company officers).

Payroll data structure

Project Indirect Costs

Fixed Home Office Overhead

Indirect costs are usually calculated as a percentage of the direct

costs.

Whereas the project-related indirect charges are unique to the job

and should be estimated on a job-by-job basis, home office
overhead is a more or less fixed expense that maintains a constant
level not directly tied to individual projects.

Assume that the direct costs of a project are determined to be

$200,000. If the contractor applies a fixed factor of 20% to cover
field indirect costs and home office overhead, then the required
flat charge would be $200,000 X 20% = $40,000.

A percentage prorate or allocation factor is often used to allocate

home office expanses to each project. This percentage is based on

If the contract adds 10% for profit, his total bid amount would be

1. The general and administrative (G&A) (home office)

expenses incurred in the past year

($200,000 + $40,000)X (1+10%) = $ 264,000

2. The estimated sales (contract) value for the coming year

3. The estimated gross margin for the coming year.