3 keys to successful construction cost management

Construction project owners track cost differently from the way their contractors do. Their tools aren’t built around construction project owners’ priorities, but construction project owners still must stay within budget and deliver the expected return, both in the short and long terms. Is there a way to track costs effectively to stay on top of every aspect of the project?

Managing construction costs isn’t just about having the funding and spending it on the right things. It’s also about having the proper cash flow to meet expenses when they arise. There are many places where money is spent and many opportunities for costs to get out of control.

Manual processes that contribute to cost spirals

• The slow-start factor. It’s not unusual for a project to be conceptualized and funded at one point in time, then signed off on much later ― without any adjustments to the budget.
• Invoicing delays. Manual invoice-approval processes can add as many as 90 days to the accounting cycle, making accounting records quickly out of date.
• Compliance issues. Accounting is governed by strict rules that have serious consequences. Violations and spiraling fines can result from inconsistent tracking methods or from a spreadsheet or paper-based system’s inability to track the required information accurately. Busy project managers can be taken off their projects for weeks every year to help track down documents required by auditors.
• Administrative burden. Transactions are often handled through email, where they can languish for days or be completely overlooked. Costs can creep easily because of this inefficient administrative style.
• A paper-based mentality. Many organizations still rely on spreadsheets and paper-based documentation to manage their capital improvement projects, even multibillion-dollar ones. Plus, when new commitments and change orders arise, the copies of documents increase, quickly making most previous copies out of date.
• Litigation. Construction is a very litigious industry. Profit margins for contractors are low, typically around 3 percent. If an additional unplanned cost arises, a contractor will fight hard to not carry the burden.

In addition, many construction project owners oversee multiple projects. Staying within budget is so crucial that some build significant over-budget contingencies into their capital project planning. Sticking to that projection then is considered a win.

Managing costs is about visibility into costs and then controlling them. Shaving even 1 percent or 2 percent off a construction budget can yield significant savings. For many project owners, that’s a big challenge but one they can address effectively through a three-pronged approach: Begin with strong leadership; be proactive, not reactive; and align people, processes and technology.

1. Begin with strong leadership

As a project progresses, hundreds of vendors, dozens of spreadsheets, disparate tracking systems and thousands of decisions come into play. Cost management can get out of control quickly. Projects have been known to exceed the original budget by anywhere from 100 percent to 300 percent. Few private businesses could survive many such cost overruns, and officials who answer to taxpayers could find themselves out of a job.

A primary factor in the success of any project is leadership. Construction project owners must be invested in a project’s success and take full responsibility for it. Contractors, designers and building material manufacturers are there to provide services, but the buck stops at the project owner’s desk. When managing construction costs, project owners have several responsibilities, including:

• Integrating cost summaries from project conception to post-construction facility occupancy
• Ensuring that funds are allotted for every stage of the project, from real estate acquisition to architecture and design, permitting, engineering and, of course, construction
• Making cost decisions that improve the total cost of ownership for the project over time, beyond just the immediate cost of construction
• Creating transparency around how, when and where money is being spent to ensure regulatory compliance and proper oversight
• Planning for contingencies that could impact projected and actual costs
• Forecasting final cost at completion at any time during the project delivery

By switching from a manual, paper-based process to a digital solution, a leader can help insulate their projects from these types of risk and more.

2. Be proactive, not reactive

Even the best-laid plans are subject to change, and that’s certainly true in the construction industry. Construction project budgets are particularly vulnerable to change orders, most of which are attributable to errors and omissions in plans or specifications, unforeseen site conditions, code changes, construction project owner-driven changes and technology advancements.

Change orders are disruptive to both time and resources and can take up a sizable portion of project costs, but it doesn’t have to be that way. While some change orders are unavoidable, others are unnecessary. Collaboration, transparency and the right construction cost management approach can minimize change orders on both current and future projects.

Strong, accurate forecasting based on real-time data enables construction project managers to anticipate and plan for changes before they happen or in some cases to avoid them altogether. A proactive mindset requires the demand of transparency from contractors, implementation of formal approvals, and auditing of the decisions contractors make. An automated, data-driven cost management system helps anticipate cost risks readily, mitigate and eliminate those risks and leverage past project performance in present and future decision-making. Successful project owners don't tell themselves, "That’s the contractor's responsibility." Rather, they understand that any mistakes or oversights on the contractor's part ultimately will be paid by themselves, either in direct cost or via schedule delays. Top project owners have a "trust but verify" philosophy.

3. Align people, processes and technology

If a project owner’s team has access to the data it needs when it needs it, its member will do their best work. Processes and technology should integrate so each person has access to the information they need for their role. A strong cost management system and a willingness to invest in the people that will run it creates a solid foundation for success. When a construction project owner possesses simplified, unified control over funds based on accurate, data-driven forecasting, they can save millions of dollars while keeping all stakeholders happy.

Look for a flexible, malleable, yet detailed system capable of rolling up data across the project on a day-to-day basis, as well as across projects to the program level. A system that forces consistency will help ensure the project doesn’t go over budget. It should be easy to use, meet stakeholder needs and provide transparency and visibility in every area of project execution. A construction cost management solution should fit the business. Start by establishing specific goals, and then be iterative and focus on continuous process expansion.

A solution that fits the business and the industry

Construction costs don’t have to spiral out of control. A construction project manager can rein in costs, improve visibility and stay on top of every aspect of the project from beginning to end.

With e-Builder Enterprise, construction project managers can monitor events, monitor cash-flow burn rate, monitor how budget is being spent and mine the data from previous projects to estimate future costs accurately. The platform can integrate with a project owner’s accounting system to pull actual costs in directly from accounting solutions such as SAP, Oracle, Lawson and other enterprise resource planning systems, giving project managers everything they need to control costs and deliver on-budget projects without spreadsheets.

E-Builder Enterprise performs comprehensive cost management from funding and budget to change order management to invoicing. It covers all phases of the project life cycle, including capital planning, design, procurement and bidding, construction, and facility operations. Because it integrates cost capabilities with real-time workflow, everyone involved in a project can see consistently what funding is coming through on a budget or contract. And expert consultancy services can help design the right construction cost management process that can save money and make projects more efficient.

Construction project owners need program management that’s built for their businesses, not for contractors or vendors. It should offer:

• A flexible business process management engine built around the way they do business
• Data collection with intelligent forms that a workflow manager can route automatically through a drag-and-drop
• An integration API that connects to accounting and other enterprise systems
• A robust document management system with automated version control and audit trail

The e-Builder Enterprise platform provides all this and more to manage end-to-end project costs from capital planning through estimate through construction baseline and changes and to keep construction project managers on top of cost management for the life of each project.

To learn how e-Builder can transform your construction cost management, click here.