Topic: y.

strategic planning for cost control on project of a construction compan

Introduction The construction industry plays a vital role in any countrys economic growth, bot h developed and developing ones. Construction cost control did not consider bein g a major concern as developers rushed to capitalize on the booming market, as w hat was happened in Vietnam in the years 2006, 2007 and the beginning of 2008.Ho wever, in the late 2008, the world economy as well as in the Southeast Asia sank into recession. Thus, project cost control became a critical issue for the deve lopers as well as the construction companies in managing construction projects. A significant number of projects in the world had suffered cost overruns as the prices of materials are spiraling with no signs of abating in the near future. Cost control is the activity which compares against cost performance the cost pl an, adjusting one or the other dynamically by reference to the changing circumst ances in the project s financial environment. It is a process that should be con tinued throughout the construction period to ensure that the cost of the buildin g is kept within the agreed cost limits. The cost control can be divided into three major areas: the control of cost during the design stages, the control of cost during the tendering stages and the control of cost by the client once the construction of project has start ed. In many large projects, professional construction consultants or senior quantity surveyors play a critical role in estimating construction costs, scheduling con struction activities and implementing various techniques to complete the project s. During the current economic recession, the cost of construction tends to exce ed the budget. This is one of the major problems that need to be addressed by cl ients, construction management consultants and contractors. To minimize cost ove rruns, client, project management and contractors need to improve their skills a nd abilities in dealing with project cost control. Recessions and poor economic times have put pressure on the average company for better cost control. Cost Control Definition As per the business dictionary, cost control can be defined as, "Application of (1) investigative procedures to detect variance of actual costs from budgeted co sts, (2) diagnostic procedures to ascertain the cause(s) of variance, and (3) corrective procedures to effect realignment between actual and budgeted cost s." In simple terms, cost control is a procedure to see if the company is spending m ore or less than its budgeted amount. If yes, then to know the reason behind the increase or decrease of expenditure. Further, it works at finding a way to make the actual cost and the budgeted cost meet. Cost control management also takes care of the same arena of work. The Project Budget For cost control on a project, the construction plan and the associated cash flo w estimates can provide the baseline reference for subsequent project monitoring and control. For schedules, progress on individual activities and the achieveme nt of milestone completions can be compared with the project schedule to monitor the progress of activities. Contract and job specifications provide the criteri a by which to assess and assure the required quality of construction. The final or detailed cost estimate provides a baseline for the assessment of financial pe rformance during the project. To the extent that costs are within the detailed c ost estimate, then the project is thought to be under financial control. Overrun s in particular cost categories signal the possibility of problems and give an i ndication of exactly what problems are being encountered. Expense oriented const ruction planning and control focuses upon the categories included in the final c

ost estimation. This focus is particular relevant for projects with few activiti es and considerable repetition such as grading and paving roadways. Forecasting for Activity Cost Control For the purpose of project management and control, it is not sufficient to consi der only the past record of costs and revenues incurred in a project. Good manag ers should focus upon future revenues, future costs and technical problems. For this purpose, traditional financial accounting schemes are not adequate to refle ct the dynamic nature of a project. Accounts typically focus on recording routin e costs and past expenditures associated with activities. Generally, past expend itures represent sunk costs that cannot be altered in the future and may or may not be relevant in the future. For example, after the completion of some activit y, it may be discovered that some quality flaw renders the work useless. Unfortu nately, the resources expended on the flawed construction will generally be sunk and cannot be recovered for re-construction (although it may be possible to cha nge the burden of who pays for these resources by financial withholding or charg es; owners will typically attempt to have constructors or designers pay for chan ges due to quality flaws). Since financial accounts are historical in nature, so me means of forecasting or projecting the future course of a project is essentia l for management control. Financial Accounting Systems and Cost Accounts The cost accounts described in the previous sections provide only one of the var ious components in a financial accounting system. Before further discussing the use of cost accounts in project control, the relationship of project and financi al accounting deserves mention. Accounting information is generally used for thr ee distinct purposes: Internal reporting to project managers for day-to-day planning, monitoring and c ontrol. Internal reporting to managers for aiding strategic planning. External reporting to owners, government, regulators and other outside parties. External reports are constrained to particular forms and procedures by contractu al reporting requirements or by generally accepted accounting practices. Prepara tion of such external reports is referred to as financial accounting. In contras t, cost or managerial accounting is intended to aid internal managers in their r esponsibilities of planning, monitoring and control. Below are common causes of cost problems: Poor estimating techniques and/or standards, resulting in unrealistic budgets Out-of-sequence starting and completion of activities and events Inadequate work breakdown structure No management policy on reporting and control practices Poor work definition at the lower levels of the organization Management reducing budgets or bids to be competitive Inadequate formal planning that results in unnoticed, or often uncontrolled, inc reases in scope of effort Poor comparison of actual and planned costs Comparison of actual and planned costs at the wrong level of management Unforeseen technical problems Schedule delays that require overtime or idle time costing Material escalation factors that is unrealistic Mr. Nguyen Dang Thong Nhat made a case study on An Owners Project Cost Control Str ategy for Building Projects to identify the key components of cost control. How t he owner in construction industry can become more efficient and respond better t o the current economic recession with non-stop prices increase of material and l abor cost. His conclusions for Owner Project Cost Control Design Stage - the project owner did not define the (a) project scope which is a crucial first step towards making the project a success; and (b) failed to set realistic expectation at the design stage.

He did not know how to manage expectations before going to the designer, consult ant and contractors. And it became a struggle when he needed to meet changes alo ng the way. Since he wanted to reduce the fees for architects and engineers, the ir input became limited and insufficient specifications subsequently caused many problems during construction. Also, he did not give the project management team , designer and consultants the authority. When the contractors suggested changin g the amount of materials to be purchased and to import some materials that are out of stock, it resulted to project cost control problem and delayed schedule. Tendering Stage - the project owner did not conduct face-to-face interviews with the bidders. As a result, the project bidders did not discuss directly with the project owner the changes that were made. A lack of understanding on the owners expectations also hindered the process. He did not have any chance to negotiate price and costs with contractors as well. Construction Stage the project owner did not give some authority and responsibil ity to the project management team, designer and consultants. Therefore, they ne eded to get his approval before sending and approving any change orders. The project owner did not establish project objectives and project expectations clearly and carefully from the beginning of project. He wanted to reduce the fee s for architects, designers and engineer resulting to limited input, insufficien t specification, and incomplete detailed drawings and project specifications. In addition, he did not understand clearly the benefits of investment license and he did not hire a third party to evaluate the design drawing to check the qualit y of site works as required by Vietnamese construction law. Recommendations for owners cost control management improvement are: Project Management - The project owner must work with the project management tea m to detail five major project issues with a comprehensive list in the project d efinition phase such as: (1) programming/functional needs of a facility; (2) site questions and concerns; (3) building systems requirements; (4) construction schedule; and (5) project budget. The owner and the project management team have to make sure that each issue need s to be reconciled with the others and updated frequently. If any issue is ill-d efined, there is a chance that the project will go out of control. Project Change Control - When changes must be made that will change the plan, th e project manager must control and track them. The guidelines for controlling ch anges are as follows: Changes can be requested by anyone associated with the project, but submitting the Project Change Request Form to the project manager and the project change co mmittee will start the change process. Project change requests must be evaluated to determine the effect of a request. The project manager and the team must estimate the effort, dependencies, and res ources required to institute the project change. The project manager must communicate the impact of proposed changes in terms of cost, scheduling, and performance to the customer. If a change is approved, the signatures of the client and the project manager au

thorize the project team to make the requested change. The project plan must be revised after the change has been approved for implemen tation. The project manager must inform the project team of all approved, unapproved, an d deferred changes. The Project Change Request Form must be logged, regardless of its approval or de nial. Cost Control Cost control should be approached as an application of Pareto s Law, which essen tially states that 80 percent of the outcome of a project is determined by only 20 percent of the included elements. Thus in establishing a cost control system, the idea is to isolate and control in detail those elements with the greatest p otential impact on final cost, with only summary level control on the remaining elements. The greatest variable in the final cost of a construction project is u sually the labor cost. Most of the other cost elements in the project are materi als, labor, equipment, and overhead. Cost control is a process that should be ca rried out for all types of construction stages and activities. Comparison with a cost standard method is complicated and expensive but it is more accurate than other methods. Subdivision by detail is a method that is not expensive but risky operation, involves little or no control of cost. The integration with other fu nctions method has to take into account other functions and not as a separate en tity and control is kept on the functions combined. Cost Control problems come about for many reasons including incorrect estimating techniques, predetermined or fixed budgets with no flexibility, schedule overru ns, inadequate WBS development, and so on. Good project management planning tech niques during the planning processes may prevent cost problems later in the proj ect. At a minimum, proper planning will reduce the impact of these problems if t hey do occur. Cost Control, like many of the other Controlling processes, is concerned with mo nitoring project performance for variances. As the project owner, we try to keep a close eye on the factors that cause variance to keep their impacts to a minim um. An important thing to remember is that Cost Control makes certain all approp riate parties agree to any changes to the cost baseline. This process is ongoing and continues to manage cost changes throughout the project. It is important to have formally cost control system for contractors. It helps p roject owner to understand and control project costs easier and faster. Using Computers: Its hard to imagine a project, especially larger projects, movin g forward without the use of computers. Project managers can rely on project man agement software and spreadsheet programs to assist them in calculating actual c osts, earned value, and planned value. Which Cost-Control Strategies Work Best? The choice of project delivery method depends on variables like funding, time co nstraints, and project objectives. This view from the experts substantiates that , regardless of delivery method, effective cost controls depend on a commitment to thorough planning, good communication, and rigorous monitoring of a project f rom start to finish. Building professionals and owners should find it easy to bo rrow and incorporate many of these cost-control strategies into their practice.

CASE STUDY

SHAN CONSTRUCTION COMPANY Shan construction company has come a long way since our humble start in 2001.Suc h phenomenal expansion in such a short time period has been achieved through har d work, devotion to the cause and sincerity to the organization by our work forc e and management .in FY 2001-2002 our turnover stood at approximately Rs.5 milli on while in FY 2005-2006 we crossed Rs.250 million. We competed with the biggest names in the business and our finished works drew praise from our clients on mo st challenging projects. Their growing confidence in our abilities can be judged from the list of works accomplished so far. Right now Shan construction company is actively engaged in major projects in Pun jab, sindh and Balochistan with diverse nature projects including ,optical fiber laying, civil woks, GSM turnkey projects. Town development works, major enginee ring works like building of spillways and much more. We believe in quality work, always to the satisfaction of our patrons and expect our dedicated work force t o achieve even higher levels of excellence, exemplary quality of work and maximu m output through flexible planning and efficient management. Our on going project s including lying of optical fiber link (wateen longhaul) from Karachi to rahim yar khan. Construction works on akra dam (GWADAR) major drainage works in korang i area and DHA in Karachi and laying of broad band internet network in Islamabad . We have recently completed warid network GSM in Multan region as well as CDMA pr oject in the same area. Handling and management of such diverse works speaks its elf of competent organization and skilful management that we possess. With a voluminous experience and immaculate track record, we are consistently re ndering world class services in the domain of technical management, planners and engineering services. So far we have worked with many corporate societies and leading architects and h ave successfully completed small as well as big projects. We always strive to of fer the best of our services to our customers with a commitment to deliver value for every rupee they invest. Our Strengths Highly professional team with years of experience Well organized and comprehensive set up Immaculate track record Highly creative and cost effective VISION " SHAN CONSTRUCTION COMPANY has a vision to broaden its activity base to diversi fy into other infrastructure disciplines and achieve a healthy growth rate. The Company has established its ability to deliver quality jobs within budget and sc hedule."

THE COMPANY IS ENGAGED IN DIVERSE RANGE OF CONSTRUCTION RELATED ACTIVITIES ON A NATION WIDE Lying of fiber optical cables Industrial Construction, Residential Construction, Institutional (time bound cha llenging) Civil Constructions with professional planning and management.

 Civil, Building, Structural Construction and Roadwork. Residential, Mass Housing, Construction Work Maintenance of Telecom Network. laying Internet Networks Building of spillways Estimating and tendering services for sites anywhere in PAKISTAN on percentage b asis. Project planning, technical supervision and management of time bound projects on percentage basis.