Construction costs are one of many metrics that a general contractor has to keep an eye on. There are others, of course, such as the schedule, quality, safety and much more. But if the construction cost goes over budget, that’s coming out of the contractor’s pocket.
That’s why construction cost management is so important. Knowing exactly what construction cost management means and what a construction cost is can be the difference between project success or failure. We’ll go over those definitions and explain the construction cost management process so you can manage projects better.
What Is Construction Cost Management?
Construction cost management is the process of keeping projects on budget. For general contractors, this keeps projects from overspending and chewing away at their bottom line. Effective construction cost management ensures that the spending throughout the project life cycle is on track.
Every project phase is impacted by construction cost management. It begins with the planning and design and goes hand-in-hand with estimating and even on-site specialty contractors, change orders and the finished product. Good construction cost management will give your company a positive reputation in the industry. Property owners prefer to work with general contractors who are proactive, efficient and accurate with cost estimation and keeping to their budget.
ProjectManager is award-winning construction project management software that gives general contractors the systems they need to ensure that the construction project is completed on budget and within scope. Get all construction costs accounted for when planning with our powerful Gantt chart. You can manage resource costs, set a baseline and then track your planned costs against your actual costs in real time to quickly catch any overspending. Get started with ProjectManager today for free.
What Is a Construction Cost?
A construction cost is all costs that are associated with the contractor and anything that the contractor purchases. This is mostly made up of labor and materials. But a construction cost can also include the contractor’s fees, subcontractors’ fees, exterior shell, interior buildout and finish, plumbing, electrical, mechanical, telecommunication systems and more.
Types of Construction Costs
All construction costs can be divided into two categories: hard construction costs and soft construction costs.
- Hard construction costs: These are costs that are directly related to construction, such as materials and labor.
- Soft construction costs: These are costs that aren’t directly related to the construction budget and can be architectural and permit fees.
Construction Cost Management Process
As with anything project management-related, there’s a process involved to better control the outcome. The construction cost management process is no exception. There are construction project management software tools that facilitate this process, which we’ll get back to in a moment. For now, let’s focus on the steps you need to take to manage construction costs and keep to your project budget and stay within an acceptable scope.
1. Create a Cost Breakdown Structure (CBS)
Before the construction project starts, you want to have an accurate view of the financial elements. That’s where a cost breakdown structure comes into play. A cost breakdown structure allows you to identify all the costs that are incurred during the life cycle of a project. It’s a hierarchical chart where each line or row is a specific cost type, item, work or organizing activity. The CBS works at the task level to create a bottom-up analysis of project costs. It’s a long yet thorough process and is more accurate than a top-down estimation. By using a cost breakdown structure, general contractors can get granular cost information for each step in their workflow, which is more useful than simply having an estimate of the project’s total cost.
2. Estimate Construction Costs
The cost breakdown structure is a tool to help determine construction costs. The more accurately you estimate construction costs from the start, the more likely you won’t have to eat into your profits during execution. But estimating costs accurately isn’t easy, even with the use of estimating techniques such as a CBS. There are multiple sources of materials, time to consider and every other detail that goes into a construction project. Thankfully, there’s more than one model-based estimation platform. These tools help you to make estimates based on 3D environments. There are also estimating techniques, such as analogy, parametric or statistical and actual costs. It’s helpful to look back at historical data for similar projects and seek the guidance of experts for their judgment.
3. Create a Construction Budget
The next step is building your construction budget. This takes your estimates that anticipate the total project cost and allow the general contractor to create a budget with help from supplier and contractor quotes. This provides accounting services for the client or developer. The construction budget will also help the general contractor determine a viable project timeline, the skill set of the crew you’ll need and what equipment and other resources will be necessary to execute the work. Every construction budget should have a contingency plan. A contingency is an amount of money, usually a percentage of the total cost for the project, that’s set aside to use in case there’s some unseen cost during the project, such as weather, personnel costs, design changes, etc. Be sure to consider contingencies at the beginning of your budget rather than tagging them at the end.
Related: 11 Free Excel Construction Templates
4. Define a Cost Baseline
Once you’ve created a budget and it’s been approved, you’ll want to capture a cost baseline. The cost baseline will give general contractors and project managers the means to report project variance. That is, they can now tell you the cost baseline to compare the planned cost of the project against the actual cost. This is a valuable cost management tool. It gives managers a way to see where they are in terms of costs. If those costs are outrunning where they should be at this phase in the project, corrective measures can be implemented to get the budget back on track. A baseline includes the costs, project schedule, scope and resources, and can be used to track progress and keep projects running on schedule.
5. Track Construction Costs During Project Execution
The cost baseline is a snapshot of the approved budget. As noted, it can be used to track construction costs as you enter the execution phase of the project. The execution phase exists at the same time as the monitoring and controlling phase. The cost breakdown is one of the tools used in monitoring the project. To monitor more accurately, you’ll want to use construction project management software, which has tools such as dashboards and reporting to view the project’s progress and performance from a high-level view and a more granular view. Cloud-based tools are preferred as they provide project managers with real-time data that allows them to identify discrepancies and resolve them quickly.
6. Control Construction Costs
During execution, there’s also the monitoring and controlling phase, which we touched on above. But we didn’t talk about controlling construction costs. Monitoring is important; it’s how you identify cost overruns. But controlling is how you get the project back on track. It involves monitoring, but also analyzing expenses and reducing project costs to increase profitability. Areas that project managers focus on include labor and material costs and tracking the actual cost and the cost variance, which is the difference between the planned and actual costs and return on investment. Controlling construction costs begins with a properly planned budget, monitoring execution, applying change control systems and time management and, finally, tracking earned value.
7. Control Changes to the Construction Plan
The best way to control construction costs is by sticking to the approved plan, schedule and budget. This is rarely possible, especially with a construction project, and so changes have to be controlled to avoid bleeding money. You need to plan for change as you do with contingencies in your budget. Set expectations, but also have an effective change order policy to get approvals and track changes throughout the project. Again, construction project management software can be a life-saver with tools that help you monitor, control and track changes to reduce the negative impact on your project.
ProjectManager Has Construction Cost Management Tools
ProjectManager is award-winning construction project management software that helps you plan, manage and track your construction costs in real time. When you create a project in our software, you can set the budget or set it anytime you want. There are two types of costs, resource costs and general costs, both can be tracked as planned and actual costs. General contractors can plan out their projects on Gantt charts that track costs and resources, setting a baseline to monitor project variance in real time.
Track Construction Costs With Real-Time Project Dashboards
Once you’ve set a baseline on the Gantt chart, you can track live costs throughout the software. If you want to get a high-level view of the project, just toggle over to the dashboard, which automatically collects real-time data and displays it on easy-to-read graphs and charts. Besides a cost chart that shows live actual and planned costs, there are time, workload and other metrics to keep you updated on progress and performance. Unlike lightweight tools, you don’t have to waste time setting up our dashboard. It’s ready to go when you are.
We offer several reports available that help you manage and track construction costs. If you’re managing more than one project, use our portfolio status report, which has a color-coded cost column to see if you’re over or under budget at a glance. Use our project status report for the same cost details for one project. If you want to see tasks in relation to your work breakdown structure (WBS), generate a project plan report to see the budget and costs spent to date. Drill down into specific tasks with our task report and track planned and actual costs and resource costs. There are more reports, and all are customizable to show only the data you want to see. They can be easily shared across platforms and even printed for stakeholder presentations.
Construction cost management is only one part of construction project management. Our software covers all those bases, from task and resource management to keep your crew working at capacity to risk management that identifies and tracks issues until they’re mitigated. We’ll help you deal with project cost, cost planning and project cost control and everything else you need to deliver a successful project.
ProjectManager is online construction project management software that empowers teams to plan, manage and track their projects in real time. We connect architects and engineers in the office with your work crew on the job site so they can share files and comment to foster better collaboration. Get started with ProjectManager today for free.