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PROJECT COST CONTROL

 

Introduction

Project cost control has two aspects. First, is the need for a design firm to control internal design costs—this requires careful monitoring of expenditures against fee budget. Some of the material discussed below is a recap of earlier information to emphasize the importance of controlling costs. Second, is the need to estimate and monitor the construction budget—failure to adequately do this may result in exceeding an owner’s willingness or ability to pay for constructing the facility.

Controlling Internal Project Costs

Perhaps the most difficult task of a design firm project manager (PM) is staying within the project design fee budget. This is a tough challenge for even the most experienced manager. A PM will need help in meeting this challenge. Many factors will affect his or her ability to meet the design firm’s goals. As noted elsewhere in this book, the matrix management/ strong project management system has its weaknesses, but it does provide for an individual to manage and monitor the project from beginning to end. To ensure its proper functioning, the matrix system must provide for an equality of responsibility and authority.

No project management system will function well without a capable staff. A high level of experience, accompanied by individuals who are able to make quick and accurate decisions, will go a long way toward keeping you within your fee budget. The goal is to achieve accurate decision making at the lowest effective level in your organization. Many events occur before you sign a design services contract that can have a significant impact on your profit potential. Specialization in one or a few types of projects allows your staff to become knowledgeable in the particular needs and problems of those projects. Research and programming materials, time, and problems can be reduced.

A poorly prepared design scope of services can leave many questions unanswered. This may result in conflict with clients or require excessive, unbilled change orders to meet the program. Poor scope determination can lead to an inaccurately calculated fee budget. The extra work or change orders required to overcome this problem can be very costly. Some firms compound this error by failing to forward price their work. Contracts that last over a long time period (a year or more), or are likely to be delayed must have an inflation clause. Without this clause, overhead increases and staff raises can eat away at the profit margin built into your project multiplier.

Communicating with Clients

Many design firms hurt their chances at controlling project design costs by failing to adequately communicate with clients. This failure covers a multitude of issues. Not adequately defining a scope of services leaves too many issues open for challenge or question, or may result in additional unpaid requests for services. A disciplined process of recording time and expenses related to change orders is essential. It is important to recognize that it is far easier to consolidate information than it is to segregate after the fact.

Scheduling a client’s input is essential to controlling costs. Failure to plan for this input can result in delays in decision making. A key to making a profit on a job is to keep it moving smoothly through the design office. Any delays penalize the bottom line. A regular meeting process with your client allows not only better use of your time, but can also provide a decision-making forum. PMs also have an obligation to keep their clients informed. Communication methods such as change order documentation, meeting minutes, and regular telephone calls all help to inform clients.

Information Systems

Perhaps the most important tool needed by a PM is an information reporting system that allows monitoring of costs against the fee budget. This information should be prepared by computer. Many commercially available computer software packages exist. Rarely should a firm seek to design its own software. Any claims that the commercial packages do not meet the particular record-keeping needs or method of doing business of your firm may indicate an incorrect approach on your part.

Most well-run design firms today collect time sheets daily and use electronic timesheets. This improves the accuracy of information and allows more current updating of project status reports. This also allows an interactive process where the PM can use any web enabled device (tablet, phone, laptop, etc.) to check the current status of a project. No information system is of value if the information collected is not accurate.

To control project costs, PMs must understand the information provided by status reports and know how to take action based on the information. If percentages of completions are used, they must be calculated and posted as accurately as possible.

Outside consultants must also be brought into the process of controlling project costs. If they fail to meet deadlines, arrive at incorrect or incomplete solutions, or if they do not segregate change order information, your efforts will be affected or delayed. Wherever possible, communication processes must be established to assist in working with your consultants. If a project seems to be going over budget, prompt action must be taken. It is vital to catch problems as early as possible. This is especially true if your projects are of short duration where any delays in obtaining status reports can prevent effective, corrective action. Staff may need to be changed in order to quickly complete the work or to correct mistakes. Time schedules and budgets may need to be revised to reflect the reality of delays or budget slippage. And, the scope of services must be reexamined to ensure that you are providing what you agreed to do.

Estimating and Controlling Construction Costs

Projects must be managed in a manner that allows for the control of all expenditures. The following examples of estimating construction costs are used with the help of data gathered and rules of thumb. When a quick estimate is required, these methods should serve adequately, but ultimately, more definitive methods must be used.

  1. From past projects, cost is divided by the gross building square footage or square meters to determine the cost per square foot or square meter. In order to determine the new building budget, the cost per square foot is multiplied by the gross square footage.

  2. Another method similar to No. 1 above, but more specific, is to use past data gathered for individual building types.

  3. A third method that is more specific than Nos. 1 and 2 is to use past data pertaining to each trade to determine costs.

  4. The method of determining cubic footage or meter costs in lieu of square footage or meter costs has its advantage in projects with large gross volume areas, such as theaters and auditoriums.

  5. Other rules of thumb for quick estimation of project costs are cost per unit (material), cost per bed for hospitals, and cost per student for educational facilities.

Various methods that offer more sophisticated results than the rule of thumb methods are available for use by the cost estimator. All of these methods are dependent upon historical data and, obviously, the more current and detailed these data are, the more reliable the estimate will be. Some of the methods used are as follows:

  1. Building unit estimating (based on unit costs of material and labor)

  2. Statistical and analytical estimating (based on trends, mathematics, and the use of graphs and an overwhelming amount of information input)

  3. Quantity survey estimating (based on the determination of the quantity of materials and the amount of time needed to complete specific parts of the construction)

Some methods lend themselves to earlier phases of a project while others are required when a more detailed, concise result is needed. The estimator must have several methods at his or her disposal and must be able to determine which method is most applicable to both the type of project and the particular phase of that project in which the estimate is required. Most of the costs of labor and material information are acquired from suppliers, contractors, and all of the other price determining sources where costs are initiated. These data may be presented directly to the estimator or by way of publications that assemble these data for the estimator who subscribes.

Many publishers of periodicals and magazines offer various types of construction cost information. The estimator’s good judgment is ultimately the determining factor as to whether or not the ongoing generation of cost analysis is maintained as accurately as possible. The human factor is not replaceable. Human error, on the other hand, can be somewhat eliminated by the use of computers, which not only calculate costs and analyze results, but also store cost data for use in determining construction costs. There are additional factors that cause cost differentials in building projects and these factors must be considered. They are the elements of solution for one portion of the building against those decisions made for other parts (or systems) of the building. It involves an overview of all parts of the project and the evaluation of all implications of a design solution.

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What capabilities should a PM possess?

 

  1. Strong organizational skills: The successful PM must be able to organize a project, the team, and address the many details that arise. This employee must be strong at organizing staff schedules and be able to handle more than one major project if necessary.

  2. Generalization: While a manager may have an interest in a particular project area, he or she must be familiar with all aspects of the project. However, PMs do not need to know all of the technical details for themselves. Being effective at delegation is very important. To be effective as a PM, one must have a strong ability to examine the broad scope of a project without becoming bogged down with the details.

  3. Ability to monitor the project: A PM must be able to monitor project status and display a willingness to ask for assistance when the situation warrants. Effective communications between members of the project team is vital.

  4. Communication: PMs must have good communications skills for both public speaking and writing. They must be able to communicate to both individuals and groups as marketers and as managers of the project team. In addition, they must be good listeners.

  5. Experience: Successful PMs must have broad experience in a variety of project types. They must have strong skills and experience in project budgeting, negotiating, marketing, and estimating. Their own database of previous project experiences is extremely useful.

  6. Leadership ability: The strong PM must be a leader; an individual who can direct and motivate the project team. He or she should have demonstrated leadership ability prior to becoming a PM.

  7. Ability to make decisions: A PM is a decision maker. The ability to make decisions and to carry them through is vital. In addition, the manager must be able to admit a mistake, and must be able to say no to a client or staff member when necessary.

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MENTORING PROJECT MANAGERS

Mentoring Programs

One of the most effective devices to train and develop aspiring PMs (or any staff for that matter) is through a mentoring program. This device will likely achieve the fastest development of key staff and will enhance the performance of all who participate. Younger staff gain the benefit of the experience and wisdom of older hands and the more senior individuals are exposed to new ideas and techniques.

While mentoring seems to be a win/win situation for all involved, it is not always embraced in design and owner/client organizations. Depending on how extensively the program is developed, there can be sizable costs for staff time, administration, training fees, lost billable time, and many other items. Older staff may resist mentoring newcomers for fear of job security. Senior management may ask, “Why pay the higher salary of the older staff when the younger individuals can do almost the same (or the same) job?” Personality conflict can also be an issue if the assigned mentor is unable to achieve a good working relationship with the individual to be mentored.

In some situations, firms are strongly in favor of establishing mentoring programs; however, sometimes the younger staff members fail to appreciate the benefits of the program or the opportunity being presented to them. A number of years ago, as the chair of the Chicago AIA chapter Practice Management Committee, I helped to establish a mentoring program. A chief goal of the program was to match up architectural practitioners in Chicago with fourth, fifth, and sixth year architecture students at the local architectural schools. Practitioners were grouped by their spe-cialty such as design, technical areas, computer technology, and management, and students could select from their area of interest. Many practicing architects were enthusiastic about the program and readily signed up. Despite heavy promotion at the three local architecture schools, very few students applied for mentors. Sadly, this was a lost opportunity to learn a great deal about their chosen profession from those with real-world experience.

Types of Mentoring Programs

Mentoring programs exist in many forms; however, they can be broadly classified into two major groupings.

  1. Formal mentoring programs: A formal mentoring program requires a significant commitment of resources. Extensive record keeping is required, training budgets must be expanded, administrative systems for the program need to be developed, and lost billable time must be anticipated and monitored. There are typically four steps to the development of a formal mentoring program:

a) Description: Each job/position in the organization must have a written position description. Career paths must be laid out for each job grouping such as project managers. The criteria for advancing into a particular job/position needs to be described, and the criteria for performing a particular job/position must also be outlined. This step requires the organization to develop a process for mentoring. The firm must evaluate each position, staff advancement practices, training needs, and so on. It also provides benchmarks to measure performance and goal setting. For staff, this step provides a road map for advancement and improvement. Obviously, the achievement of goals must bring an appropriate reward such as a promotion or salary increase.

b) Skill assessment: Less experienced individuals participating in the mentoring process must first be assessed as to their current skill level and performance. This provides a benchmark for them and for the firm to measure their growth. Mentors must also be assessed for their capabilities in meeting the requirements of their role.

c) Mentoring: The actual mentoring process is time-consuming and continues over a long period of time. Implementation may require less experienced staff to seek an advanced degree, take other college courses, attend professional development seminars, read books, or undertake a myriad of other activities. The mentor must monitor and encourage this effort. Eventually, a mentor’s role may end and a new individual may take over as mentor.

d) Performance assessment: The success or failure of the mentoring effort must be regularly assessed. This process must be on an individual basis and for the program as a whole. The mentoring program must be continually appraised and adjusted to reflect the needs, capabilities, and growth of your staff.


  1. Informal mentoring programs: This is the most common type of mentoring program and is widely practiced in the construction industry. Informal programs occur in two types.

a) Kismet: In this type of informal program, mentoring is left to fate as younger and older staff develop friendships and working relationships. In some cases, a more experienced individual is committed to the development of junior staff and seeks to help them advance. Generally, the firm plays little or no role in this mentoring process.

b) Active encouragement: In some firms, the informal mentoring process is developed by encouraging more experienced staff to mentor junior members of the team. Activities may be planned to foster this effort, budgets may provide funds for mentoring and training programs, and a general atmosphere of concern for the development of younger staff may pervade the organization.

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COST DECISIONS

 

Project managers are often called on to make decisions between different opportunities or different ways of accomplishing the goals and objectives of a company. The three types of cost that are used to make decisions are differential cost, sunk cost, and opportunity cost.

Differential Cost

Differential cost is simply the difference in cost between choosing one of two or more options to pursue. The other side of differential cost is differential revenue. When considering the different options to pursue, the differential cost and revenue of each option is reviewed, and the option that presents the higher income usually is chosen.

Let's look at an example of how differential cost may be used to choose between two options. ABC Web Company creates and supports Internet web sites for other companies. Often its revenues are tied, in part, to the success of the web sites it designs. ABC Web has been approached to produce a web site that it feels will be very successful, but currently its resources are working over capacity and cannot begin the work immediately.

ABC Web's alternatives are to ask the client to wait three months or to subcontract the work to another vendor that it has worked with in the past. The client has indicated that if ABC waits three months, it will pay a commission on the site's revenues for only 9 months instead of 12. Yet subcontracting is fairly expensive. Here is the differential calculation that ABC Web made:

According to this analysis, the differential revenues were $30,000, while the differential costs were $10,000, meaning that ABC Web would have $10,000 more revenue by choosing to subcontract this project to a vendor. By doing a differential cost study such as this, ABC Web is able to make a decision (see Exhibit 4.3).

 

  In House Production Sub-Contracted Differential Revenues
Revenues from Site Production $50,000 $50,000 $0
Commissions (Monthly)[*] $90,000 $120,000 $30,000
Cost of Production ($35,000) ($45,000) −$10,000
Gross Profit $105,000 $125,000 $20,000
Overhead ($2,000) ($2,000) $0
Net Revenue $103,000 $123,000 $20,000
[*]Project Monthly Commission $10,000
 

Differential Costs Example

 

SUNK COSTS

A sunk cost is any cost that is already incurred or sunk into a project. At times, when making decisions, managers may not wish to throw away money that has already been spent and will decide to continue so as to recoup the money already spent. This happens frequently in projects that are not going well. For example, take a software development project that was budgeted to cost $300,000. Now, with the delivery date six months past and the cost topping $400,000, the company must make a decision as to whether to continue or not.

Several of the programmers on the project want to continue. They say, "We think we are almost there, and besides, we've already spent $400,000. We don't want to waste the money!" However, the money that has been spent is gone (or sunk). It must not enter into the decision. The decision as to whether to continue or not should be made only on the chances of successfully completing the project, no matter what costs have already been sunk into it.

Therefore, spending more money when the success of the project is not clear (or when failure is all too clear) is not justified. In reality, since the money is already spent, it cannot be used to make future decisions. Sunk costs should never have a place in deciding future activities or operations.

 

OPPORTUNITY COSTS

Opportunity cost results when a decision is made to pursue one benefit over another. Although opportunity cost is important in making decisions, it is not a cost that enters into accounting statements, such as income expense reports or balance sheets. Some examples of opportunity cost could be:

  • The selection of one project over another. Since both projects represent potential revenue to the company, the revenue of the project not chosen is an opportunity cost.
  • Not pursuing a particular new product in order to invest in other areas. The potential revenue of this product is an opportunity cost.

As we can see in each of the decision costs descriptions, often the information used to make a decision comes from the same source and is in a similar format as other costs, but is used for a different purpose. For example, in the differential cost example the production cost of the software could include variable, semi-variable, and fixed cost, but in order to make a decision about whether to subcontract, the type of cost was less important than the difference in cost between the two options.

DELEGATION

 

Which Manager you prefer to work with?

 

OR

 

Which type of Manager are you?

 

Manager A:

“Call Tom Burton at Cavalier Computer. Ask him to give you the price list on an upgrade for our personal computers. I want to move up to Quad-core processor with 8 gigs of RAM and at least a 1.5-terabytes hard drive. Ask them to give you demonstration of the Windows 8 program operating system and Microsoft Office 365. I want to be able to establish collaboration capability for the entire group. Invite Cochran and Snow to the demonstration and let them try it out. Have them write up a summary of their needs and the potential applications they see for the new systems. Then prepare me a report with the costs and specifications of the upgrade for the entire departments. Oh yes, be sure to ask for information on service costs.”

 

Manager B:

“I’d like to do something about our personal computer system. I’ve been getting some complaints that the current systems are too slow, can’t run current software, and don’t allow for networking. Could you evaluate our options and give me a recommendation on what we should do? Our budget is around $2,000 per person, but I’d like to stay under that if we can. Feel free to talk to some of the managers to get their input, but we need to have this done as soon as possible.”

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