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Vol. 38 (Nº 33) Año 2017. Pág. 37

Application of target costing in social

infrastructure construction projects
Aplicación del cálculo de costos de objetivo en proyectos de
construcción de infraestructura social
Svetlana Valentinovna ROMANOVA 1; Tatyana Dmitrievna POPOVA 2; Irina Ivanovna SLATVITSKAYA 3;
Daria Dmitrievna MIRONOVA 4

Received: 05/06/2017 • Approved: 25/06/2017

Content
1. Introduction
2. Methods
3. Results and discussion
4. Conclusion
References

ABSTRACT: RESUMEN:
Regional development largely depends on the El desarrollo regional depende en gran medida de la
availability and quality of social infrastructure. Under disponibilidad y calidad de la infraestructura social. Bajo
conditions of instability of the competitive environment condiciones de inestabilidad del entorno competitivo y
and various manifestations of the global crisis, diversas manifestaciones de la crisis global, los
contractors place a greater emphasis on the problems contratistas ponen mayor énfasis en los problemas de
of cost reduction in the construction of social facilities. reducción de costos en la construcción de instalaciones
The deficiency of budgetary resources and the need to sociales. La deficiencia de los recursos presupuestarios
use private capital in the public interest explain the y la necesidad de utilizar el capital privado en interés
growing popularity of non-traditional government público explican la creciente popularidad de los
procurement systems in construction. One example is a sistemas no tradicionales de contratación pública en la
public-private partnership (PPP). PPP projects are an construcción. Un ejemplo es una asociación público-
area where the advanced methods for calculation of privada (PPP). Los proyectos PPP son un área en la que
lifetime costs along with the method of target costs se pueden poner en práctica los métodos avanzados de
could be put into practice. One of the modern cost cálculo de los costes de por vida, junto con el método
assessment methods, which can fill the gap in Russian de costes objetivo. Uno de los modernos métodos de
business practices related to the management of evaluación de costos, que pueden llenar la brecha en las
accounting records, is the target costing. It assumes prácticas comerciales rusas relacionadas con la gestión
that the price of a product or service, in particular a de registros contables, es el costo objetivo. Supone que
service related to social infrastructure, does not depend el precio de un producto o servicio, en particular un
on the cost of providing this service. In order to achieve servicio relacionado con la infraestructura social, no
commercial goals, the service provider should calculate depende del costo de proporcionar este servicio. Para
the target cost based on the price and take actions to alcanzar objetivos comerciales, el proveedor de
reduce the actual cost of construction to the target level servicios debe calcular el costo objetivo basado en el
with the efforts of management, engineers, designers, precio y tomar medidas para reducir el costo real de la
marketers, etc. The general objective of this study is to construcción al nivel objetivo con los esfuerzos de la
 demonstrate the full applicability and usefulness of this dirección, ingenieros, diseñadores, comercializadores,
cost control method, widely used in the practice of etc. De este estudio es demostrar la plena aplicabilidad
management accounting in developed countries. As a y utilidad de este método de control de costos,
result of this study, it was concluded that the target ampliamente utilizado en la práctica de la contabilidad
costing method is applicable and is particularly useful in de gestión en los países desarrollados. Como resultado
the construction of social infrastructure, and its results de este estudio, se concluyó que el método de cálculo
may provide support to decision-makers. de costos objetivo es aplicable y es particularmente útil
Keywords: cost management, social infrastructure, en la construcción de infraestructura social, y sus
target costing, target cost, target price, target costing resultados pueden proporcionar apoyo a los
method. responsables de la toma de decisiones.
Palabras clave: gestión de costes, infraestructura
social, costeo objetivo, coste objetivo, precio objetivo,
método de costeo objetivo.

1. Introduction
The construction of infrastructure facilities is one of the most important areas of responsibility
of the municipal services, which directly affects the quality of life of the population. Modern
urban development projects involve the construction of social, commercial, engineering and
transport infrastructure, the state and the quality of which has a significant impact on the
comfort of the residents and also not least affects the cost of housing in a certain
neighborhood.
Since the economic development of regions and the country as a whole largely depends on the
availability and quality of social infrastructure and related services, this area needs to become
more effective. Social infrastructure projects are rarely profitable in themselves for commercial
purposes (Sobotka, & Czarnigowska, n.d.).
Unstable and competitive economic environment requires that the main factors, such as
functionality, price and development time of products and services, be managed properly. This
is necessary in order to ensure that the providing organization is commercially successful in the
long run (Mărginean, & Țepeș, 2014).
Modern information systems and technologies are a means for the formation of the material
and technical base for the development and reproduction of human capital, the increase of
labor productivity and efficiency of economic activity, thus creating conditions for the growth of
social significance (Cherkesova et al., 2016).
The success of implementing urban infrastructure projects is considered in terms of the efficient
use of the limited budget resources to provide social and communal services as soon as
possible and in the most cost-effective manner. As for costs for the operation and maintenance
of the facility, infrastructure projects usually involve thorough preparation and significant capital
costs. Over the years of operation, the infrastructure accumulates significant amounts of
maintenance costs, the level of which is closely related to the project designs and decisions
made at the initial stages of construction.
Any viable tool, the use of which allows controlling and reducing costs, becomes a real
challenge for government authorities and companies engaged in infrastructure construction. In
order to win tenders, construction companies need to have a competitive advantage that can be
achieved due to the highest cost-effectiveness indicators for construction and competent cost
management.
Production costs must be planned and managed in accordance with the construction estimates,
the cost of which is borne by the customer; moreover, they are normally decreased (lower cost
means higher profit) without compromising the quality. In many cases, this involves close
collaboration between suppliers, developers, contractors and self-regulatory organizations to
find better organizational and design solutions to the mutual benefit of all participants of the
construction process.
One of the management approaches used in a highly competitive construction industry is the
target cost calculation (target costing). Target costing is one of the modern methods of cost
management and, unlike other calculation methods, it allows monitoring and timely adjusting
the project, starting with the design phase, adapting the costs to the target unit price of
construction works. "Target costing" refers to a number of methods used in traditional cost
management, such as contract and cost management, along with the target cost (Zimina et al.,
2012). The introduction of target costing will help avoid budget overruns in the implementation
of the construction of urban infrastructure projects.
The basic characteristics of strategic management should ultimately be aimed at preserving,
dynamically developing and effectively managing the company's property. For these purposes,
adequate information and analytical support is needed. In general, the accounting and
analytical system is a set of accounting information and the analytical data obtained on its
basis, intended for decision-making (Krokhicheva, & Romanova, 2013).
The importance of strategic analysis and its ability to manage costs in the implementation of
infrastructure projects predetermine the need to create a methodology for targeting costing.
The objective of this study is to explore the applicability of a modern cost management system
in the process of developing public infrastructure projects.

2. Methods
The theoretical basis for the study is the literature on economics and finance. In order to reflect
the strengths and weaknesses of the target costing method in the implementation of urban
infrastructure projects, the authors of this study reviewed the publications of domestic and
foreign authors on cost management and, in particular, on the application of the target costing
method.
The study uses statistical data reflecting the volume of the construction of social infrastructure
in the Central Federal District, the actual data on management accounting of construction
companies.
In order to achieve the desired objective, several challenges have been solved:

The actual data on the construction of social infrastructure facilities in the Southern Federal District
has been analyzed;
The expediency of the application of target costing in the implementation of public infrastructure
projects is proved;
The methodology of the application of the target costing method in the construction of social
infrastructure projects is presented.

3. Results and discussion

3.1. Analysis of social infrastructure development in the
Southern Federal District
The problem of the construction of social infrastructure has become particularly relevant with
the development of mass housing construction. If in case of infill construction projects in the
most populated areas, the need for social services could be solved by the existing institutions,
in complex development of the territory this is impossible both because of the limited capacity
of existing facilities and because of their location outside the regulated radius of accessibility
(Surveyor International Group, 2014).
The Central Federal District of the Russian Federation significantly lags behind the rest of Russia
on the development of social infrastructure (with the exception of the Crimean Federal District).
The comparative indicators for the commissioning of social infrastructure facilities in the federal
districts of the Russian Federation are presented in Table 1.

Table 1. Indicators for the commissioning of social infrastructure

facilities in the regions of the Russian Federation in 2015
 Commissioning of Commissioning of
Commissioning of Commissioning hospital outpatient and
general education of preschool organizations' polyclinic
Regions of the institutions' capacities, educational capacities , beds organizations'
Russian student places per organizations' per 10,000 capacities, visits
Federation 10,000 population capacity population per shift

Russia 4.533 9.796 0.292 1.621

Central Federal
District 4.585 8.410 0.241 1.733

Northwestern
Federal District 4.520 7.956 0.488 1.803

Southern Federal
District 0.711 8.898 0.034 0.451

North Caucasian
Federal District 24.566 7.169 0.667 1.160

Volga Federal
District 1.902 9.524 0.187 2.196

Ural Federal
District 3.023 16.745 0.182 1.707

Siberian Federal
District 2.512 12.497 0.164 1.341

Far Eastern
Federal District 5.236 10.652 1.369 2.413

Crimean Federal
District 0.000 2.266 0.087 0.000

Reducing this backlog will require significant investments from the federal and regional budgets
in the coming years and will lead to serious changes in the regional structure of the volumes of
social facilities commissioning.
In three years, the volume of construction works in the Central Federal District has decreased
by 29.3%, while in the country as a whole in 2015, the dynamics of executed construction
volumes was positive (+2.1%).
The decrease in construction volumes took place in all the District's subjects, with the exception
of the Rostov Region, the Republic of Adygea and the Volgograd Region. Most significantly – by
48.8% - the volume of construction works decreased in the Krasnodar Region, by 37.5% – in
the Astrakhan Region, and by 34.1% - in the Republic of Kalmykia (see Table 2).

Table 2. Volumes of construction works in the subjects

of the Southern Federal District in 2015, mln. rubles

Alternation
 Subjects of the Southern Federal District 2013 2014 2015
+/- %
Southern Federal District 731,522.8 582,210.3 517,692.6 -213,830.2 -29.2%
The Republic of Adygea 9,651.6 10,280.1 11,545.8 1,894.2 19.6%
The Republic of Kalmykia 3,862.8 8,124.0 2,545.0 -1,317.8 -34.1%
The Krasnodar Region 480,663.6 316,186.5 246,143.4 -234,520.2 -48.8%
The Astrakhan Region 52,284.9 42,049.3 32,698.3 -19,586.6 -37.5%
The Volgograd Region 58,597.4 62,336.1 69,578.0 10,980.6 18.7%
The Rostov Region 126,462.5 143,234.3 155,182.1 28,719.6 22.7%

Despite the decrease in the level of construction costs in the Southern Federal District, by the
end of 2015, this indicator significantly exceeds the average Russian value (see Figure 1).

Figure 1. Costs for construction works of the subjects of the Russian

Federation by the end of 2015, kopecks per 1 ruble of the works performed

In the coming years, the federal government plans to significantly change the current situation
by increasing the rate of social facilities commissioning in the most problematic regions in this
respect. First and foremost, this should be facilitated by the implementation of the federal
target program "South of Russia for 2014-2020 years".
At present, there is an established pattern when the requirements for the construction of social
infrastructure are mandatory conditions for the implementation of complex development
projects. At the same time, the construction costs are borne by the developer. Otherwise, for
whatever reasons, its project will not be approved by the local authorities.
On the other hand, the construction of social infrastructure facilities is not profitable for
developers from the economic point of view. The payback period of such facilities is either very
long or nonexistent.
The implementation of such a policy leads to the fact that the costs for the construction of
social facilities ultimately passed on to consumers – home buyers. Despite the fact that the
payment for the construction of social infrastructure costs should be carried out of the
developer's profit, the developer nevertheless indirectly includes these costs in the price per
square meter of commissioned living space.
However, it should be noted that this practice reduces the availability of housing and social
facilities for the population in need of better housing conditions. As a result, the problems of
low housing provision and a high proportion of the population living in dilapidated and
emergency housing remain unresolved in the subjects of the Southern Federal District.

3.2. Public procurement in the segment of infrastructure

construction
One of the factors determining the final result of the project in terms of its economic impact on
the project participants, buyers and the public is the system of public procurement in the
construction sector. The procurement system can be defined as a method of allocating
responsibility for the planning, design and construction of the constructed facility for the project
participants.
In the public sector, where the task of the authorities is to implement projects that are crucial
for the development of the community, the key factors are effective management of public
budget funds, accountability and transparency of decisions.
Technological progress and the consequent complexity of the projects explain the growing
popularity of new procurement systems aimed at improving the efficiency of public projects.
This can be done through:
- recruitment of external specialists to assist at the stages of creation and planning, as well as
coordinating the work of designers and developers;
- entrusting the design and construction to one contractor (design and construction, design and
management). Design and construction stages may overlap. The parallel development process
allows the designer to make changes to the project without interrupting other processes. It is
possible to impose strict financial discipline on the contractor to ensure the completion of the
project in accordance with the budget.
Assignment of additional tasks to the contractor: to plan the project, choose the sources of
financing and fund the project until it begins to operate (contracts, the owner is the party that
pays for commissioning and maintenance of the facility). The contractor is thus related to the
costs during the entire project.
The introduction of economic incentives for the project participants to improve the long-term
effect of the project in the form of PPP. The public owner provides a concession to the
enterprise that plans, finances, designs, constructs and operates the facility and restores its
expenses from the proceeds of sale of services at the facility.
Regardless of the procurement method, it is necessary to evaluate the project costs to set a
budget and manage costs in order to achieve the best price-quality ratio. Especially if the
constructed object includes not only high initial costs but also significant costs in its future
operation (maintenance, renovation, heating, modernization, etc.).
Cost management in the implementation of public infrastructure projects can be defined as a
system of techniques and methods for planning, implementing, measuring and reporting in
order to increase the productivity of services, their management and related processes through
cost optimization. Cost management is a long-term process aimed at the elimination of all kinds
of activities (and their cost) that do not add value to the final product or services offered to
consumers. The consumer itself is multidimensional. Each of them pursues their own interests
and goals, though two basic parameters – the quality and price of the product – are equally
important to all customers (Slatvitskaya et al., 2016).
In the case of organizations dealing with construction, such as designers, contractors or project
managers, there are three objectives for cost management (Potts, 2008):

to provide the project owner with an object that is characterized by an optimal price and quality
ratio, that is, an object well suited for performing its functions with low operating costs, built in time
and in accordance with the specification;
to balance the costs of the building elements, so that the allocated amounts allow implementing the
 planned activities and ensuring compliance with the standards and functions of a social facility;
to ensure that the project cost does not exceed the budget allocated for the construction of this
social object. Since the budget is based on an earlier estimated cost, these estimates should be
reliable and close to the amount of wages and the total cost of the project.
The third objective is the need for an accurate assessment of the total cost of the project and,
in particular, the cost of construction in the early stages of the project, when the project does
not exist yet. This early assessment is the basis for the feasibility study of the project owner
which will help him make a decision on whether the project should be approved or not.

3.3. The prospects of target costing application in social

infrastructure construction projects
The target costing method could become one of the methods used in cost management in the
construction of infrastructure projects.
As for the method of target costing, it is widely considered in the economic and financial
literature. The work of Feil, P., Yook, K. and Kim, I.W. notes that the target costing (TC) has
appeared in the manufacturing industry in the early 1930s (Feil et al., 2004) and has proved to
be a powerful strategic tool for profit management and planning. According to the authors
Briciu S., Sorinel C., Rof L.M. and Topor, D. (2010), the target costing method was developed in
Japan in the automotive industry in the 1980s and is based on the idea that the selling price of
a product is determined by the market.
The application of the target costing method in Russian companies was considered in the works
of Kurilov K.Y., Kurilova A.A., Redchenko K., Novikova I.V., Sheshukova T.G. and others. At the
same time, in the scientific literature one can find only scanty reports on theoretical and
practical questions of the application of target costing (Pennanen et al., 2010).
The main costing principle is that the calculation of allowable (normative) costs is carried out by
marketing research and forecasting the target price that the buyer is willing to pay for the
products with specific characteristics.
The similarity in the processes of development and production of construction projects makes it
possible to calculate costs the for the construction of public infrastructure projects. According to
data cited in the work of Jacomit, A.M., in Japan, about 15% of construction companies
calculate target cost on the base of production data (Jacomit et al., 2008).
The study and systematization of approaches, reflected in the specialized literature, allows
identifying several logically consistent and interrelated stages in the application of the target
costing method:
Step 1. Target pricing based on the analysis of a competitive market environment.
In this respect, the method is different from other costing tools. This method is based on the
market analysis and product sales and allows putting a price bringing fixed profit to the
company. At this stage, it is necessary to define needs and expectations of the population in
relation to social services facilities and the price they are willing to pay for them.
The target price can be established on the constructed object – this is the amount that the
public owner is willing to pay for it, as a result of its budget, its economic analysis and the
urgency of the project. This amount is the basis for calculating the contractor's target value.
Step 2. Setting the target margin (profit).
Target profit is the ultimate interest of the company, "the real reason" of its involvement in the
business. Target cost consists of distributable cost elements. In the specialized literature on
account management, there are several costs. The cost, which can be attributed to expenses,
may consist of variable production costs (raw materials, piecework wages), unit costs
(depreciation, preparatory works, equipping with measuring and monitoring devices and tools),
other expenses (general production and administrative costs), and investment costs.
Step 3. Valuation of the estimated and target cost. This is a high-technology and special-
purpose stage where a special role is given to engineers and technicians who help to access the
estimated costs. Then the difference between the estimated and target cost is determined.
Target costs expected by the contractor to guarantee the income received at the stage of
signing the contract can be characterized by the formula:
TC = R – M (1)
TC – target cost of the project distributed throughout its life cycle,

R – revenues from the sales of services,

M – profit amount required by the contractor (the desired level of return on capital)
Step 4. Calculation of the estimated cost of production and evaluation activities. At this stage,
the total costs are calculated by summing the direct and indirect costs attributed to production
included in the "target costing" analysis.
Step 5. Calculation of the amount to be reduced/adjusted on the costs basis. At this stage, it is
possible to adjust the cost of the difference between the estimated and the target cost. If this
difference is positive, a review of the estimated cost is required to match the target cost. If the
difference is negative, it means that the target value exceeds the estimated value and the
situation is favorable for the company.
It is expected that the greatest benefits from the application of target costing in the
construction of social projects are associated with the PPP.
The product sold by the contractor (private partner) and the source of its income is not a
building, but the infrastructure service, which actually is a mass product, which must be
supplied for a long period of time. The contractor is responsible for all phases of the project
implementation and is interested in the rational allocation of costs throughout the life of the
project.
The target price of a product (that is, services based on an infrastructure) is regulated by the
price elasticity of demand (if the services are purchased directly by users) and the elements of
the public regulator (setting the maximum price and the minimum level of capacity), in case
the infrastructure facility is crucial for public policy purposes. If the service cannot be paid
directly by users, the public authority cannot pay the contractor through budgetary funds, in
that case the price could be determined by economic analysis of the public buyer.

4. Conclusion
The results of the study lead to the following conclusions:
When using the "target costing" method in social infrastructure construction projects, it is necessary
to fulfill a number of conditions. Thus, to manage target costs, it is required that the management
organization should be responsible for the entire project from its creation to operation and
decommissioning, and at the same time it should be able to manage costs (that is, influence the
decisions of all the project participants) throughout the project life-time.
The public authority which is the owner of the project cannot fulfill this condition unless it has
sufficient experience in implementing similar projects and using experts in the design, construction
and cost management. Thus, it is almost impossible to use target costing in the traditional
construction tenders.
However, a greater potential lies in the management of construction, CM & R and design systems. In
these spheres the design managers or contractors are responsible and professionally prepared to
monitor the project from the early preparation stage to operation of the constructed object. Their
product is a constructed object, which is only a means of achieving the goal of the public
infrastructure project. Nevertheless, the contractor's success depends on the client's satisfaction –
the more functional the object, the better the contractor's chances to win another public contract.
The greatest potential for applying the approach to the target costs for public projects is realized
 within the framework of PPP mechanisms: the product sold by the contractor (private partner) is not
a building, but an infrastructure service. All actions of the contractor are aimed at achieving the real
goal of the public project – provision of high-quality public services.
In conclusion, it should be noted that the first step in applying the target costing method in
social infrastructure construction projects is rather complicated. The contradiction of the market
price associated with the public service inevitably depends on the public policy and cannot often
be unambiguously set by the market research methods and thus should be discussed with the
public authority. The expenditure amount included in the analysis of target costs will also be far
greater in the case of public infrastructure projects compared to the manufacturing practices.
This is due to the fact that additional costs are directly related to the project and its final
product (public social service).

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1. The Institute of Service and Business (branch) Don State Technical University, 346500, Russia, Shakhty, Shevchenko
Street, 147
2. The Institute of Service and Business (branch) Don State Technical University, 346500, Russia, Shakhty, Shevchenko
Street, 147
3. The Institute of Service and Business (branch) Don State Technical University, 346500, Russia, Shakhty, Shevchenko
Street, 147
4. The Institute of Service and Business (branch) Don State Technical University, 346500, Russia, Shakhty, Shevchenko
Street, 147

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