Accurately managing construction costs and the construction project schedule is critical to success. Due to the continually changing nature of construction projects, managing these can be challenging for construction managers without a good system of checks and balances.
Cost controls are those checks and balances; the processes and methods companies use to mitigate risk and monitor costs to avoid financial losses and delays to the project schedule. This guide is intended to be an introduction to what cost controls are and to provide best practices that can be implemented to improve a company’s cost controls, communication and profitability.
Construction projects are notorious for exceeding budgets and falling behind schedule. KPMG found in their 2015 Global Construction Project Owner’s Survey conducted over the course of 3 years that:
These issues led to estimated total industry losses of $1.63 trillion per year.
Looking at these statistics leads us to ask: What is the root cause of these overruns? Why do so many projects go over budget and what can construction managers do about it?
Some of the most common causes of cost overruns on construction projects include:
A PMI study revealed that poor communication accounts for a third of construction project failures and that communication problems negatively impact projects more than half the time. Around 30% of work performed by construction companies is rework and 52% of rework is caused by poor project data and miscommunication.
To ensure a project's success, it is critical that all stakeholders have access to the same data and be able to efficiently communicate. That’s where technology and cost controls come in.
Rising costs and shrinking margins require managers to keep a close eye on the health of their projects and crews need to be well-prepared to be effective, safe, and profitable. Implementing effective project controls is key to understanding project health and planning for contingencies. This isn’t a process that will happen overnight, and there will be costs associated with the changes. However, owners appear confident that their investments in project controls have paid off. According to this study by KPMG, 74% of project owners feel an investment in controls and governance has reduced costs.
So, how do you get started?
There are many things construction companies can do to manage costs and risk on construction projects. We’ll focus on a few key areas here, including:
We will review these best practices in more detail here.
The estimate sets the tone for the project. A good estimate can set up the project for success while a poor estimate can cause major problems with the project schedule and financial performance. Some items that identify poor estimates are: missing key pieces of work; missing key details from specification (could also be included in key pieces of work); overly conservative estimates; and overly aggressive production rates, to name a few.
Poor estimates not only cause financial problems but put additional pressure on already strained field management because they do not have enough budget to complete the work or time in the schedule to accommodate the mistakes. However, if estimators are too conservative and put too much money in the bid, they will not be competitive enough, resulting in fewer successful bids.
How can companies reduce or eliminate poor estimates?
First, estimators need to take the time to read through the entire contract and not take anything for granted. Estimators should read every line of the specifications and make note of any language that stands out as a potential risk to ensure it is accounted for in the bid. A single line missed can cost a company dearly. One example of this is a contractor that missed the fact that all handicap ramps must be made of ductile iron. They failed to realize this until after the bid had been won and submittals were being prepared. Missing this single line in the specification cost them over $50k on a million-dollar project, severely impacting their bottom line.
Next, estimators should review previous performance to see if the current bid is realistic – validating production and cost estimates. Most contractors do similar work on many of their projects, meaning there should be plenty of data available if it is captured during construction. Reviewing previous projects allows them to see what type of equipment was used, how many feet can be installed per day, and how much was spent on ancillary materials such as concrete and bedding sand. Performing this type of analysis will result in more accurate estimates by reducing the urge to be overly optimistic or conservative on production rates.
Finally, estimates should be collaborative and not be created in a vacuum. Develop a plan and workflow for estimates to be reviewed. Everyone on the estimating team should review estimates before they are submitted to an owner for bid. It is quite easy to get so wrapped up in the details that an estimator might miss critical components. A simple gut check by teammates can reveal a problem that may have otherwise been overlooked. A final estimate review before submission can end up saving companies thousands of dollars.
We’ve all heard the phrase, “failing to plan is planning to fail.” This is especially true for construction projects. Once a project is awarded there should be a handoff to the project management team where all details of the estimate, including any anticipated risks and assumptions, are shared and discussed. The project manager and superintendent should review every component of the estimate and use this to create a comprehensive job plan including a schedule and budget. Consideration should be given to where the materials are being sourced, what subcontractors are being used, how long tasks are going to take, what type of equipment is needed, where laydown yards are going to be built, the phasing of the work itself, and so on.
Estimators will often build a simple schedule to understand how long certain activities and the project will take to calculate working days and overhead budgets. However, this is rarely detailed enough to use as a complete project schedule. Each item of work should be broken down into tasks as they are going to be performed in the field and scheduled out in the order they are going to be performed. Taking these steps will allow managers to see what resources are needed, identify issues and conflicts, and plan the work. This will inevitably change as the project progresses but having a project schedule allows you to pivot faster when changes arise.
Similarly, estimates are typically formatted differently than project budgets. Budgets should be broken down into small and manageable pieces that match up with the schedule and how the project is going to be built. For example, an estimator will have all the pipe lumped together in the estimate with a single LF cost for each size and type of pipe. This price includes Labor, Equipment, Materials, any subcontractor costs, etc.. When building out the project budget, it should be broken down into phases for each section since it’s not likely to be built all at once and separated into budgets by Labor, Equipment, Materials, Sub, Other, etc.
Task-specific budgets and targets will give superintendents and foremen better ideas of their goals and expectations. Tasks should also be assigned cost codes to accurately track common work items, create a historical cost database, and gauge crew performance.
The better the communication between team members, including subcontractors, the more likely projects are to stay on schedule and under budget. If teams are provided with the proper resources and understand what they need to do, when they need to do it, and how they need to do it, many problems can be avoided. In addition, with open lines of communication, problems can be dealt with faster when they do arise. Work plans can help with this, as well as utilizing the right technology solutions for your business.
Work plans are a highly valuable communication tool within successful construction firms. Think of a work plan as a playbook for field supervisors that breaks down tasks into all the components needed for success. Things to consider include details of the plans needed for each task, materials required, equipment needs, safety concerns, detailed step-by-step instructions, photos and expected production rates as well as a list of cost codes to be used. When foremen are empowered with this information, they can plan ahead and more easily meet their goals because they know exactly what their goals are.
It’s proven that organizations that communicate effectively have more successful projects than those that don’t communicate well.
Source: Project Management Institute
In addition to communicating the plan, construction teams should review daily reports on progress. Daily reporting is a critical component of cost control programs because it gives managers a clear picture of what happened each day vs. the plan. With the right reporting, stakeholders can see which items were profitable and which were not, allowing early identification of both successes and potential issues. If crews are not being profitable or production rates are lower than expected managers can start to ask questions to identify the root cause. Sometimes the work may just be more complicated than expected and the crew is doing the best they can. Other times crews may not be using the proper equipment or do not have access to the resources they need. Waiting to report on profitability until the end of the month or until after the project is complete is far too late to fix the issues and is akin to driving a car by looking in the rear-view mirror.
Additionally, all construction teams should have a postmortem review of how each project went, regardless of the outcome, good or bad. These reviews should include all project stakeholders. A great starting point is reviewing the initial budget vs. actual expenditures and a review of the schedule, identifying tasks that went over budget or took longer than anticipated. Discuss what went right as well as what went wrong and identify ways to avoid the issues encountered on the next project. Take a deep dive into the data and generate multiple reports from several angles to produce more nuanced insights. Attention should be paid to change orders, equipment usage and utilization, labor hours per task, production rates, subcontractor, and crew performance, and so forth. All this insight will help make future projects more successful.
Cost control in construction is nearly impossible to do well with spreadsheets. Even the smallest projects can have troves of data and connecting all the pieces is extremely difficult to do consistently without software specifically built for construction. Construction software packages consider the specific needs of construction firms, such as keeping data organized by jobs, streamlining workflows, minimizing manual data entry and reentry, assisting with planning and scheduling as well as many other tasks that are needed by construction managers.
Smart Construction has a variety of offerings and a team of optimization consultants that can help your company create smart cost-control processes, increase communication, and democratize data amongst project stakeholders.
Smart Construction Field gives field workers, foremen, and even subcontractors access to detailed work plans and enables them to collect field data quickly and accurately. Field can help your company reduce the lag between the field and office, improve crew communication and monitor jobsite performance.
Smart Construction Office gives managers the ability not only to plan projects but also to track their progress and costs in near real-time due to its seamless connection with Smart Construction Field. Gone are the days when managers spend hours updating schedules, having to manually enter and cross-check information across multiple systems. AI-powered risk detection alerts them to problems automatically and provides deep insight into the causes.
Smart Construction Dashboard gives managers a 3D visual picture of the jobsite as well as automated progress updates allowing them to keep a closer pulse on their projects as they progress.
Contact us today to learn more about how Smart Construction can help you manage your costs to unlock business growth.