10/23/2016

COST CONTROL TECHNIQUES IN

CONSTRUCTION PROJECTS
























LITERATURE STUDY











































COST ENGINEERING – ENCM650

Martin Jeba Singh Selvaraj

43328111
COST CONTROL TECHNIQUES IN CONSTRUCTION PROJECTS

Literature Study

Cost control for the project estimation is an important role to manage the overhead costs and

contingency costs. Due to the alarming increase of variable cost, duration of the project might

have delay in accomplishing the construction. For this reason, cost estimators use different

methods and doing regular research in all mega projects. Now a days, the mega projects needs

unit price method than lump sum to predict the life cost and variable cost of the project.

Because of the demand for the materials, it will be the safer side. The article is about the

discussion of cost control methods and techniques in different regions in the world.

Keywords: Construction, Overhead and Contingency costs, Variable costs, Mega projects,

Cost control, Project estimation and Life cost of the project.

BACKGROUND OF THE STUDY

This is the study of cost control techniques in the construction project and how the estimators

managing overhead and contingency costs in the construction projects. In every firm, the

annual accounts (Profit and loss) plays an important role for the master control for the budget

costing and easy maintenance of the costs. In the same way, construction projects needs more

accurate cost estimation in every step like planning, design, construct and maintenance till the

demolition of the structure. This is called as life costing in the project. Before executing the

project, cost estimation is the prediction of the quality and delivery time. Also, it depends on

how the project is going to construct which mean the kind of project like innovation, quality

and fast delivery. These three kinds based on the cost estimation of lump sum, unit price and

cost price in contracts. However, it depends on the designer and owner’s choice. In lump sum

costs, the estimation is mere to precise with the approximate overhead cost. This method is

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easy to provide for residential and some commercial buildings with the normal design and

standard quality of material recommendations. This method is mostly followed by the

contractors and Tenderers. After estimation, its better to procure the materials to avoid the

market rate fluctuations. By the way, unit price is the approximate rates without market prices.

(Rasdorf & Abudayyeh, 1991). This is because, some of the materials are very difficult to fix

the price. In that case, they use unit price. For the new design projects and the innovation

projects, cost price is the best way to calculate the future. This is because, its impossible to

calculate the accurate duration and productivity per day. The reason is that they will concentrate

and performance of the structure (Ashworth & Perera, 2015). The success of the project is

defined by the objectives and scope which is prescribed by the technical performance,

maintaining the scheduling and the cost remained in the budget. The scope of project is

involved in managing the workers, machineries, materials and the methods which we need to

use for cost management (Frimpong et al., 2003)

DEFINITIONS

1. Overhead Costs

This can be identified during the time of project completion by the simple formula which

is given below:

Overhead Cost = (Final value of the project) – (Original contract value)

2. Life time Cost

Life time cost is defined as the whole value of project which includes the cost from the

planning stage to demolition stage. But, in some projects, demolition cost will not include.

Because, those building are estimate for long term sustainability. For example, Church,

mosque.

Life Time Cost = Cost of (Planning + Designing + Constructing + Operating +

Maintaining + Demolishing)

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3. Contingency Costs

Contingency is defined as a special monetary provision in the project budget to cover

uncertainties or unforeseeable elements of time/cost in the estimate associated with the

normal execution of a project, for example, labour rates and design development.

4. Cost Performance

If the overhead cost of the project does not exceeds the 10% of the initial budget, then the

performance of the project is good.

Cost Performance = Final value exceeds less than or equivalent to 10% of initial budget

OBJECTIVES OF THE STUDY

ü Analysis the cost control for the construction project.

ü Techniques used for controlling the overhead and contingency costs in some countries

ü Problems arise by the cost overrun and how it affects the duration of the project with the

help of articles and case study report.

ü Discussing about the cost predictability and controllability

LITERATURE REVIEW

Cost of the Construction projects are optimized and reviewed by various methods. By the way,

Delphi method is the familiar way to research about the cost estimation of the projects which

helps to rectify the errors which are happened in the previous projects. In this method, the

research is about asking questions which are sorted as questionnaire in an instrument. The

experts were asked to provide the feedback and comments. These questions are normally

involved with several iterations. In the final round, the comments and feedbacks are

summarized and analysed by the researchers. This will give the information about the cost

control techniques and to accomplish with cost performance by the errors of previous project

cost estimation (Gharaibeh, 2014).

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According to Jackson (2003), Cost control is accompanied by the contingency plan which mean

the alternative route for the primary procurement to manage the cost and quality of the

material. This is because of the cost for the unplanned expenses or unpredictable increase of

market rates in a particular material. Sometimes, this will give risk to the contractor which

leads to the cost overrun. For this, Literature gives the suggestions and experimental advices

to consider the contingency costs to the control the cost of the estimated project. It was an case

study conducted in Australia. This will be benefit for the contractor to reduce risks and avoid

the delay for the completion of the project.

Other authors suggested the monitory system to control the project cost in the construction

industry. With the help of periodic analysis of the cost by using various statistical formulas, we

can find out the point where the excessive cost escalation and underperformance of the cost

occurs. By using earned value analysis and earned schedule methods from the accounting

strategy, we can monitor each and every pennies in conventional approach which focused on

planned expenditure and actual costs. When comparing to the other methods, this method have

more subtle. The errors might occur. But, those are negligible (Al-Jibouri, 2003). In some

projects, the variable cost might be difficult to predict. It’s due to the material availability and

less transportation options will affect the estimation. For this case, some Canadian construction

company officials and Canadian contractors are designed the ‘Cost Estimate Variance Matrix’

with different classes of estimation to find the issues affecting the precise cost estimation in

every stage (Planning, Designing, Estimating and Constructing) and update the expenses in

terms of percentage in all classes. Also, it explains about the risk factors for the contractor and

owner in that project (Canadian construction association, 2012). For example: Tamil Nadu

Public Works Department (TPWD) Maintenance Projects, India having more critical

conditions for estimation. Because, 30% of the cost estimation is unpredictable due to the

demand of primary materials, climatic conditions and the transportation taxes.

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METHODOLOGY

This study having the qualitative inductive approach by using different kind of methods used

by researchers for the cost control analysis. Also, the cost control method having different

approaches for various countries among the world. Sometimes, it depends on the type of project

like Residential, Commercial, Canal, Check dam etc. Also, the study is included with the

discussions of different methods to control the cost within the initial cost value of the project,

risks for owner and contractor during the tender, assumptions about how the risks will happen

for the owners and the contractors.

During the stage of procurement, there is lot of risks which is related to cost of the material

might happen due to the market values. To discuss with that, we need a solid proof for the

variable cost from the cost estimation of previous projects. From the author’s side, some of the

unpredictable estimations are discussed with the appropriate study and analysis from the Indian

public-private partnership projects and other case studies.

VARIABLE COST CONTROLS

According to Ojedokun (2012), Variable cost of the project will occur in different parameters

such us labour cost (Skilled, Semi-skilled), Procurement costs (Primary procurement and

secondary procurement of materials), Sub-contractors, Transportation charges (Selection of the

vehicle for transporting the materials), Land cost (Inclusive of tax).

To manage all these parameters, the contractor and client should choose the right market

consultant for costing and experienced project manager. Contractor need to have good

relationship with the project manager to negotiate with all sub-contractors with good

communication which helps to accompanied the alarming escalation of the cost. For that

survey, experienced contractors, consultants, quantitative engineers are chosen to get response

about the cost control technique. In the first round, they asked from the market values with

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basic costs and how frequent, the inflation will happen. In that second round, the asked for the

perspectives on high cost variable in a project. At the end of the survey, the feedback and

comments are summarized to analyse the point of survey. The paper is done with the survey

from the Indian construction project which is related to the PPP Delivery method and how the

contractor managed the overhead costs and planned the contingency costs.

COST VARIABLES RISKS

v Unexpected increase of production cost due to the demand of manufacturing materials.

v Unavailability of primary materials to procure due to competitive demand.

v Unrealistic demand by the labour union due to wages or workloads

v Demand of skilled labour costs (Due to the shortage of skilled labours, the contractor

needs to pay more than the estimated labour cost.

v Increase of taxation rates from the materials by the government which are unexpected

due to the decrease of stock markets

CONTRACTUAL ISSUES

Due to the complications by the cost variable, some of the contractors having the tactics to plan

the alternatives before or during the inflation rates. In some cases, by the lack of cost

predictability issues which might affects the quality and duration, the chances for the stress are

targeted towards the contractor due to the tender agreement.

At the same time, some risks will affect the owner from the design which is not mentioned in

the contractual agreement. This depends on the type of delivery which is selected for that

project. So, the addition of contingency cost is recommended during the tendering of the

construction project to manage the cost performance. To do the optimization in procurement

system, Economic Ordering Quantity (EOQ) is the suitable option to take the control of the

cost in the way of statistic formulae to figure out the overrun cost which might happen in the

future (During the construction of the project). By this method, we can avoid the wastage of

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the materials during advance storage of materials, we can save up to 5% of the estimated final

value in cost performance (Patil et al., 2014)

CONTINGENCY COST MANAGEMENT BY THE CONTRACTOR IN INDIA

(Cost Survey took from the Government school construction at Chennai, India, 2015)

At the stage of tendering, Indian contractors having the techniques to deal with the cost to

manage with the quality and cost at critical situations. As we studied before, they increase the

duration of the project and submitting the market rate fluctuations for the materials Which

indicate the variation in the fixed costs. Where, those fixed costs are mentioned by the

government which are contrary to market rates.

For Example: Aggregates and cement.

1. Aggregates: As per the rate of government, the fine aggregate rate is $50 per load which

is controversial rate as $80 per load with the transportation charge and government

taxes. These are managing by negotiating for the Bulk quantity with the two different

blue metals agencies (Blue metals agencies are the suppliers of fine and coarse

aggregate in India). The reason for two agencies is to increase productivity and

negotiating with them by comparing the rates on both sides.

2. Cement: The rate given by the government for the cement is $5.5 per 25 kg and the

market price (Both for public and private projects) is $9 per 25kg. They managed by

giving the bulk order (excessive than the estimated loads) with the cost of

manufacturing rate. After that, the unused packs are sold to the retailers with the rate to

compensate the government rates for the cement costs.

COMPENSATION OF UNPREDICTABLE COSTS

v Cost of bore well à Gone beyond the estimated cost given to the government due to

the unavailability of water in the underground. This cost was claimed from the

government by the contractor. They asked to submit the legal proofs with well

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 documented from the supervisor of the bore well task. Because, the place of the bore

was given in the design by the PWD.

v Transportation of water due to the lack of water in Bore à This was compensated with

the claim amount received from the government. The water is used from the river which

is located nearer to the site.

v Machinery operation for the excavation to increase the productivity when the project

delay happened à Instead of recruiting extra machine, the excavator is operated for 22

hours per day (Before that, it operated only 10 per day). So, they saved about 40% for

the machine by giving extra wages to the operator.

v Bricks à In the tender document, they mentioned the red bricks for the construction.

Unfortunately, the rate of red brick is increased. So, they decided to use the fly-ash

bricks (Bigger size and having more strength). So, the quantity will decrease than the

red brick. So, they tested the red brick and fly-ash brick’s compressive strength to prove

that they having equal benefits.

v Sub Structure à As per the Geo-technical record, the condition of the soil is soft and

easy to excavate. On the contrary, after 2m, it having the rock which is hard to drill due

to strength of the rock. So, they withdraw the plan of deep excavation with proper

approval from the government. After that, with the consultation of structural engineer,

they mounting the concrete with reinforcement in that 2m dig (Instead of footing). So,

the cost of excavation and footing is saved. After finishing the super structure, non-

destructive testing is performed to prove that sub-structure is durable and safe.

v Labour Productivity à The most vital role for the project is the recruitment of masonry

and skilled labours. To reduce the cost of the labour, it was given as sub-contract. It

helps to maintain the stability of the productivity even in the shortage of labours. Also,

the contractor doesn’t need separate supervisor for labours.

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 Cost Performance
S. No. Particulars Statement Contingency Plan Reason
(Final Cost)
Controversy of We can easy to
Bulk order with Excessive of 2% from the
1. Cement government estimated compensate with
manufacturing rate estimated cement cost
rate and market price government rates
2% of estimated aggregate
Increase of transportation Ordering the To Negotiate the
cost is saved (Due to free
2. Aggregates rates and shortage of material to two rates and to speed-
transportation for bulk
Transports different agencies up the delivery
order)
Instead of 4
machines, 2 Machine’s rent is
Productivity lags due to
3. Excavator operators are too high than the Cost saving is around 2%
the shortage of machines
recruited to work operator’s wages
for 22hrs/day
Cost saved by 3%. The
Rocks below 2 metre
Rock serves as quantity of the concrete is
from the surface. So, it is Reinforcement of
Sub- footing at the point saved from substructure.
4. difficult to drill and lay concrete above the
structure (Suggested by Extra cost for 2% spent to
the footing. This might rock.
structural engineer) test the structure through
leads to the project delay
non-destructive testing
The shortage of
Labour contract
Problem arises from the labours won’t affect Excessive of 1.5% than the
(Easy to
5. Labours labour union to increase the productivity and estimated cost. Due to
compensate the
the wages for labours no separate labour labour contract.
delay)
supervisor needed.
Because, the
Using of water
expenses are
6. Bore-well No water in bore-well from the nearby No change in final cost
covered by the
river.
PWD authority.

CONCLUSION

This study is helped to know about the cost variable and cost control techniques to identify the

risks occurred in the project and how the contractor overcome the expenses without the project

delay. These risks can be rectified by the practices and the teamwork of the project crew with

the proper documentation of the rates for materials to procure in advance. Also, we are aware

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of client-related problems, factors which are affecting the project duration, stakeholder

alignment, Cost covered from the government to compensate the cost excess for PPP projects.

Though, the cost is controlled in that project with some contingency plan, the things which

seems to be easy is actually not. Because, at the point of issue, we need to spare the time and

reschedule the whole project and get approve from the government for alternative materials (if

it is PPP related projects)

In case, if the project team doesn’t enough experience to face the contractual issues, then the

EOQ method is recommendable. Because, it helps

i) To reduce the material wastage

ii) Handling the materials in an optimistic way

iii) Accurate forecast when compare to other methods

iv) Deliverance of the project with good cost performance

The issues in the cost control affects both quality and time of the project. Also, having the equal

amount of risk for both client and the contractor. To rectify this, project team’s collaboration,

involvement, passion, teamwork and problem-solving techniques are required. Therefore, it

became crucial part and the chance of improving the skills in the level of both project and

organization.

RECOMMENDATIONS FROM THE SURVEY

§ Continuous alteration in the objective of the project and its scope.

§ Increase productivity instead of recruiting high employee rate which leads to extra cost

and time

§ Practicing the new employee to understand the scope of the project and unity to enhance

the teamwork to increase productivity. This will achieve through the mentorship at the

training period.

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 § Application of the quantity observation in regular basis which helps to monitor the

material and labour quantity changes during the construction period.

§ Always review the task before implement to avoid the risks and reduce wastage of the

material.

§ Schedule the time for verification and recruit extra team for the supervision for the

innovative and high risk levelled projects.

§ Estimators are recommended to visit the site to know the performance of material and

know about the wastage in every aspect.

§ Refer the mere project work and conduct brain-storming section which helps to improve

the problem solving skills for the employees.

§ Always have contingency in all task which might help to save the cost than the

estimated cost. Sometimes, the contingency plan having the better performance in cost

and quality than initial cost value.

§ It is better to have the estimation in different classes (Every stage with alteration to

make cost economic and qualitative performance)

§ The barriers might be removed if the client and contractor are being in same project

team (Main project team). Under the main team, sub team will analyse the task

sequences and report the productive rate of the project which helps to train all the teams

and monitor the project in easy way.

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 REFERENCES

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construction. International Journal of Project Management, 21(2), 145-154.

Ashworth, A., & Perera, S. (2015). Cost studies of buildings. Routledge.

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construction of groundwater projects in a developing countries; Ghana as a case study.

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