PROJECT COST MANAGEMENT

Project Cost management

Each of these activities
consume resource

Project Resources

01. 02. 03. 04.

Activities Money/Cost
A project consist of number of Resources cost money
activities

 Project cost control is all about controlling cost of the resources

needed to complete the project
 Project cost - Controllable and Uncontrollable cost 2

 Controllable cost Project cost management

 Uncontrollable cost Risk management
Key Definitions

• Cost Estimate :Asystematic process of aggregating all cost heads of bid items of a contract to arrive at a
final value which includes all the direct & indirect costs.
• It involves resource calculation, rate analysis and compilation ofcost data.
• It is bid price minus the mark up (margin+ contingency+ overheads)
• Cost Budget :Aprocess of allocating the overall cost estimate to individual work items of aproject.
• Work items are groups of similar activities taken from bill of quantities.
• Budget involves creation of cost code which groups similar activities of BOQ and creation of cost
statement for periodic review.
• Cost Control:AProcessto ensure final cost of a project does not exceed the planned cost.
• It involves cost record, comparison with available standards, computation of variance and corrective
measures.
Project Cost Management

• Approximation of monetary resource requirement to

Estimate
the cost complete project activities.

• Aggregating estimated cost of individual activities or work

Determine packages to establish an authorized cost baseline.
the Budget

• Monitoring the financial status of the project to manage the

Control changes in cost baseline.
the cost
Project Cost management
Resource
Planning
Schedule

Project
Cost Cost
Cost
Control Planning
Mgmt

Cost
budgeting
 Resource Planning Schedule

 Preparation of different resource

schedule – Labour, staff, Plant and

machinery, Sub-contractor

 It shows the quantity requirement

each of these resources needed

either on weekly or on monthly

basis
Cost Planning

• Objective is to identify the estimate to complete for each alternatives

• Estimate to complete = Total unit of resources X Unit cost
• Cost Planning aims ascertaining cost before many of the decision
made related to the design of facility
• It establishes needs, setout various solutions, cost implications and
finally the produces the final cost of the project while maintaining
the balance between cost, quality, utility and appearance.
Cost Budgeting
 The process of allocating the overall cost estimate to individual work
items of the project.

 Work items are Group of similar activities taken from BOQ

 Before understand the cost budgeting we should understand the

cost estimation

 In practice, similar activities such as excavation in open might be

clubbed with excavation up to depth of 1.5m, and excavation from
1.5m to 3m depth under one common head, excavation work.
 Accepted Cost Estimate (ACE)

• Once the project is awarded to contractor, The QS team prepare the

estimate of executing the each bid items as well the overheads
• Cost codes are established and the budgeted estimate to each cost
code are prepared. These budgeted estimate considered as an
Accepted cost estimate.
• Lower than the bid rate (Estimated profit scenario)
• Higher than the bid rate (Estimated loss scenario)
 Steps in Cost Control

Observe the cost Compute the variance

expended for an item,
activity or a group of
activity or cost code
Observation Variance
analysis

01. 02. 03. 04.

Comparison Communicate

Compare with Communicate the

standards, It can be warnings immediately to
accepted cost estimate the concern person
or can be tender cost

1
Collection of cost related information
PrepareCost
Codes

Collect Costs

Labor Material Equipment Subcontractor Consumable Overheads

Labor
Indent Log Book Work Order Store Records Financial Ledgers
attendance

S/C
Plant Cost Specific Cost
S/C Bill Receipt Note Measurement
Statement Codes
Books

Client Issue
Register
Cost Codes : Collection of cost related
information
• Cost Codes are designed based on the work packages of aggregated
activities.

• Cost Codes shall be such that they are easily compatible withBOQ.
• Number of cost codes should neither be too small nor too large.
• Cost Codes are grouped in the same degree as the abstract of accepted
cost estimate for better facilitating the monthly baseline progress
comparison.
• Higher the number of cost codes, higher is the probability of misallocation
of items in different cost heads. Ideal number is 15. (Harris & McCaffer,2005)
Example - Budgeted Expenditure Creation from BOQAbstract
1. Extract from BOQ for boundary wall constructionproject
Activity ID Description Quantity Unit Unit Rate Amount
1 Earthwork 500 Cum 100 50000
2 PCC 40 Cum 3750 150000
3 Concrete Raft 120 Cum 8500 1020000
4 Concrete Wall 312.5 Cum 10750 3359375
5 Barbed Wire Fencing 500 Cum 800 400000
Total 4979375

2. Cost Code Details

Sl. No. Description Cost Code
1 Earthwork 100
2 Formwork 200
3 Reinforcement Work 300
4 Concrete Work 400
5 Structural Steel 500
6 Barbed Wire 600
7 Overhead 700
 Continue.
3. Budgeted Expenditure

Activity Cost Code 100 200 300 400 500 600 700 Total

ACE

Rate Amount
EW 80 40000 36500 3500 40000

CC 3000 120000 800 8000 100000 12000 120000

CR 6833 819960 70000 70000 450000 217964 81996 819960

CW 8576 2680000 625000 625000 999000 797000 268000 2680000

FE 850 425000 180000 42500 425000

Total 36500 703000 703000 1440000 1114964 180000 4079960 4084960

Collection of cost related information
PrepareCost
Codes

Collect Costs

Labor Material Equipment Subcontractor Consumable Overheads

Labor
Indent Log Book Work Order Store Records Financial Ledgers
attendance

S/C
Plant Cost Specific Cost
S/C Bill Receipt Note Measurement
Statement Codes
Books

Client Issue
Register
Collection of Cost

 The Collection of cost for a project needs involvement of

number of people including Planning, Billing Plant & Eqp.
Engineer, Time keeper, store keeper, accounted &
Purchase.

 The process of recording the cost data against the

different cost code and analyzing them against these code,
description, qty rate etc and then comparing with some
standard such as accepted cost detecting variance if any
and corrective action against deviation will fall under
project controls
Collection of cost related information
 Labour cost
 Departmental/Main contractor and subcontractors labour
 Labour cost for each cost codes identified = No of days in each cost
code x Avg. mandays rate for that month

Name of Category Cost Code In time Out time signature

the worker

A typical format for recording daily labour attendance

 Material cost
 Client supply
 Free or chargeable
 Cost code wise allocation, necessary provision for wastage should
be considered
Collection of cost related information
 Material cost
 Own purchase
 Bulk or basic materials – such as sand and aggregate
 Total Quantity consumed to a cost code including wastage
 Heavy tools
 Usage,wear and tear and operational cost assigned to a
relevant cost code
 Scaffolding/staging material
 Considered as rental value to a suitable cost code
 Temporary structures/installations
 Proportion cost to invoicing till each cost code is considered
 Small tools – fully charged to a cost code at the time of issuance
Collection of Cost
 Plant and equipment cost
 Owned & hire charges, for both category the debit hire
charges from cost code
 Alsoconsider the operational, maintenance cost, labour, fuel,
spares, one time installation, erection and dismantle charges
 For each P&E an asset code is assigned
 Asset code and respective cost is assigned to each cost code
 Subcontractors
 Periodic measurement bills
 Code against each items
Collection of Cost

 Overhead cost
 General & Project specific overheads
 General - In proportion to the contract value of project
 Projectspecific – In proportion to month & weightage of
each cost codes
Cost statement
 It is a method of collecting expenses at the job site under
various heads of accounts called cost codes
 Collect – Labour cost , Subcontractor cost , materials cost ,
consumables cost, Plant cost and overheads if any.
 Determine the provision of expenses.
 Determine deferred expenses
 Compile above cost in given format, finalize total cost code
wise and arrive at project cost
 Reflects both cost i.e. during the month and cumulative
 The application of Cost statement is in the preparation of
project cost report.
Cost statement
Budgetary Cost Control System

Calculate the
variance cost code
Freeze the cost codes
wise and take
corrective action

Update the periodic

Prepare budgetary
progress of schedule
cost estimate for all
& calculatebudgeted
activities
expenditure

Prepare/refer the Collect the periodic

construction cost data for each
schedule cost code
Cost Control : Overview
 Tools & Techniques – S Curve
 S Curve can be used to monitor the cost of the construction
project.
 It depicts the very nearly progress profile of a construction
project.
 S Curve depicts the slow progress at the beginning and rapid
progress towards the middle, followed by slow progress towards
the end.
 The amount planned to be invoice and actual bill amount raised
can also be monitored through the S curve.
 A similar graph can also be plotted for the amount planned to be
spent Vs amount actually spent.
S Curve
S Curve
Cost Control – Earned Value
Management
 EARNED VALUE
 Every steps earns the value.
 Whatever you do in project has some value, so they return a value.
 This value is the amount of work which we achieved against the
budget.
 EV measure the performance in terms of schedule & cost.
 It measures the schedule performance in monetary terms.
 It uses same unit, same terminology for Schedule & cost performance
 EV is value of Work completed in Budgeted terms.
 Measuring Project Progress – Earned
Value Method

 BCWS – Budgeted Cost of Work Scheduled – Original Schedule and Cost

 BCWP – Budgeted Cost of Work Performed – Original Cost, Schedule
updated as per actual progress
 ACWP – Actual Cost of Work Performed – Cost and Schedule both updated
as per actual progress
 Schedule Variance = BCWP – BCWS
 Cost Variance = BCWP – ACWP
 Schedule Performance Index = BCWP/BCWS (SPI<1, behind schedule)
 Cost Performance Index = BCWP/ACWP (CPI<1, Cost Overrun)
Control Cost : Forecasting
 EAC (Estimate at completion) = Actual Cost (AC) + Estimate to complete (ETC)
 Method 1: Future work will perform @ budgeted rate
 Accept the performance to date & assume future work will be completed at budgeted
rate.
 Formula : EAC = AC + BAC - EV
 Method 2: Future work will perform @ present cost performance rate
 The present rate of performance (cost wise) will continue to future till completion.
 Formula : EAC = BAC/Cumulative CPI
 Method 3: Future work will perform @ present performance rate
 The present rate of performance both cost wise & schedule wise will continue to
future till completion.
 The most practical approach as the schedule always impacts the ETC.
 Combines both CPI & SPI
 Formula : EAC = AC + (BAC-EV)/(CPIXSPI)
Unit Cost Method
 Setting up the cost code.
 Preparation of cost statement (Cost code wise amount expenditure)
Cost code wise details of labour, materials, equipments, Plant &
Equipment cost, subcontractors cost, overhead cost
Total Cost = (Cost of
Labour+Materials+Plants+Subcontractor+overheads) – Deferred
expenses
 Preparation of project cost report
Prepared normally on monthly basis, work outs the variances in each
cost code
Unit Cost Method
 Estimate to Date (Ed) = Cd /Qd
 Estimate to complete balance quantity - Eb = Cb /Qb
 Revised estimate for revised quantity
Er = Cr/Qr = (Cd+Cb)/(Qd+Qb)
 Original estimate for revised quantity
Eo= Co/Qo
 Variance C = Co-Cr
 The Process gets repeated for each cost code to arrive at the total
cost code at the time of monitoring
 Project cost Project Project cost
estimate budgeting control

Project budget - The process of allocating the overall cost estimate to

individual work items of the project
 Project budget : Key Components

Distributed
Budget
Management
reserve

Undistributed

Unallocated

Budget - The process of allocating the overall cost estimate to individual work items of the project.
Project Budget : Time Phased Budget
Budget & Cash Flow

 Projected rate at which project’s cash resources will be spent

 Developed from the cost estimate and the project schedule
 Working capital management to maximize return on
investment / minimize interest payment
 Projected monthly expenditures, represented by series of
vertical bars
 S Curve – Cumulative monthly project expenditure / income
Project Cash Flow
 Projects needs continuous inflow of money to operate
smoothly.
 Money comes in and goes out simultaneously.
 Usually payment from client against work done is deferred.
 But subcontractors/suppliers need to be paid upfront.
 A proper cash flow diagram can help estimating the future fund
requirement.
 At no point of time there should be a negative cash balance.
 Forecasting eventual cash inflow & outflow is key to a healthy
budget plan.
Cash flow analysis
 Done by both owner and contractor separately.
 Owner- regular progress payments to the contractor
 Timingof those payments is a matter of contractual
agreement and cannot be delayed
 Payment lag can be used as a negotiation parameter
 Contractor
 Working capital during the construction
 Cash flow analysis made before the work starts, the amount of
working capital needed each month is determined
 Front loading

 Front loading is achieved by assigning higher costs to early

activities and lower costs to late activities – total project cost
unchanged
 Many professionals consider front loading unethical
 Contractors consider it essential
 Managing cash flow effectively
 Least expensive source of borrowed money