COST

CONTROL
IN A
BUILDING
What is Cost
Management?
• Cost management is a process involved
in the planning, estimation, budgeting
and controlling cost so that budget can
be completed in estimated budget. It is
also considered a form of management
accounting that helps to identify future
expenditures in a business to reduce
budget overages.
Why do we Manage
Cost?

• Chart out team-based and task-based costs.

• Monitor all costs and ensure that they remain aligned
with the forecasted budget.
• Set hourly and task-based rates as necessary, in order to
stay on budget Keep track of actual productivity to
accurately estimate billable hours.
Basic Principles of
Cost Management
• Cash flow analysis determines the estimated annual
costs and benefits for a project and the resulting annual
cash flow Too many projects with high cash flow needs in
the same year may not be able to be supported which
will impact profitability.

• Tangible costs or benefits are those costs or benefits

that an organization can easily measure in rupees.
⚬ A task that was allocated 150,000 but actually costs
100,000 would have a tangible benefit of $50,000 if
the assets allocated are used for other projects.

• Intangible costs or benefits are costs or benefits that

are difficult to measure in monetary terms.
⚬ Costs-resources used to research related areas of a
project but not billed to the project.
⚬ Benefits-goodwill, prestige, general statements of
improved productivity not easily translated in rupees.
Basic Principles of
Cost Management
• Direct costs are costs that can be directly related to
production and services of the project.
⚬ Salaries, cost of hardware and software purchased
specifically for the project.

• Indirect costs are costs that are not directly related to

the products or services of the project, but are indirectly
related to performing the project.
⚬ Cost of electricity, paper towels.

• Sunk cost is money that has been spent in the past;

when deciding what projects to invest in or continue, you
should not include sunk costs.
⚬ To continue funding a failed project because a great
deal of money has already been spent on it is not a
valid way to decide on which projects to fund
⚬ Sunk costs should be forgotten
Basic Principles of
Cost Management
• Learning curve theory states that when many items
are produced (or tasks are performed) repetitively, the
unit cost of those items decreases in a regular pattern as
more units are produced (or more tasks performed).
• Reserves are money included in a cost estimate to
mitigate cost risk by allowing for future situations that
are difficult to predict.
⚬ Contingency reserves allow for future situations
that may be partially planned for (sometimes called
known unknowns) and are included in the project
cost baseline.
￭ Recruiting and training costs for expected
personnel turnover during a project.
• Management reserves allow for future situations that
are unpredictable (sometimes called unknown
unknowns).
⚬ Extended absence of a manager, supplier goes out of
business.
Aims of Cost
Control in
Building/Constructio
n
•To construct at cheapest possible cost
•With out compromising with the quality.
What is Cost
Estimation?

A rough order of magnitude (ROM) estimate provides an estimate of what a project

will cost. Also referred to as a ballpark estimate, a guesstimate, a swag, or a broad
gauge. Done very early in a project, often three or more years prior to project
completion, or even before a project is officially started to help PMs make project
selection decisions.

A cost estimate is the approximation of the cost of a program, project, or operation.

The cost estimate is the product of the cost estimating process. The cost estimate
has a single total value and may have identifiable component values.
Types of
Estimation?

Expert Judgement Comparative or analogous

estimation
This is probably the most common way people
get an estimate. Talk to the men and women If your current project is similar to past
with the best hands-on experience and ones, take the data from previous work
understanding of the project requirements. Just and extrapolate it to provide your
make sure that everyone has the same estimates for the new job. Before
understanding of what needs to be delivered. proceeding, make sure to check whether
And try to find experts who will actually be those projects were successful!
working on the project.
Types of
Estimation?

Bottom-up Top-down

This method uses a detailed work breakdown structure, Using a high-level work breakdown structure
and is best for projects you're committed to. Each task and data from previous projects, you can add
is estimated individually, and then those estimates are estimates for each project work item to
rolled up to give the higher-level numbers. This process determine the overall effort and cost. The top-
makes you think about what's required in order to take down method lacks detailed analysis, which
a step back to see if the big picture still makes sense. makes it best suited for a quick first-pass at a
You'll receive more accurate results than the top-down prospective project to assess its viability.
method, but it's also a greater investment of time.
Cost
Budgeting

Cost budgeting is a tool to estimate the costs or necessary efforts for

projects, work packages or activities in project management. Cost
budgeting includes the estimation of costs, setting a fixed budget, and
managing and controlling the actual costs (compared to the estimated
ones). The costs then have to be allocated to the activities or work
packages in a project. A carefully implemented schedule and resource
plan enables a more precise cost budgeting.
 Master Budget or
Functional Budgets
Summarized Budget or
Finalized Profit plan
• It relates to any function of
Types of the firm such as sales,
• This budget is very useful
production, cash, etc.
Budget Following budgets are
for the top management of
the company because it
prepared in functional
covers all the information
budgets:
in a summarized manner.

• Sales Budget
• Production Budget
• Material Budget
• Manufacturing Budget
• Administrative Cost
Budget
• Plant Utilization Budget
• Capital Expenditure
Budget
• Research and
Development Cost Budget
 Cash Flow Budget Static Budget

• A cash flow budget • A static budget contains

examines the inflows and elements where
Types of outflows of cash in a expenditures remain
Budget business on a day-to-day unchanged with variations
basis. It predicts a to sales levels. Overhead
company's ability to take costs represent one type
in more money than it of static budget, but these
pays out. budgets aren't confined to
traditional overhead
• Cash flow budgets also expenses.
suggest production cycles
and inventory levels so • This condition occurs
that a company's routinely in public and
resources are available for nonprofit sectors, where
activity, not sitting idle on organizations or
warehouse shelves. departments are funded
largely by grants.
 • Cost control is the practice of identifying and reducing business
expenses to increase profits, and it starts with the budgeting process.
A business owner compares actual results to the budget expectations,
Cost and if actual costs are higher than planned, management takes
action.
Controlling • Project cost control includes:
⚬ Monitoring cost performance.
⚬ Ensuring that only appropriate project changes are included in a
revised cost baseline.
⚬ Informing project stakeholders of authorized changes to the
project that will affect costs.
⚬ Performance review meetings can be a powerful tool to help
control project costs.
￭ Knowing you have to report on your progress is an incentive
for people to perform better.
￭ Budgetary control, Standard costing, Inventory control, Ratio
analysis, Variance analysis.
⚬ Performance measurement is another important tool for cost
control.
￭ There are many general accounting approaches for measuring
cost performance but earned value management is a tool
 • Budgetary control is a system of controlling cost which includes the
preparation of budgets, coordinating the departments and establishing
Ways of responsibilities, comparing actual performance with the budgeted and
acting upon results to achieve maximum profitability.
Cost
Manageme • Process Of Budgetary Control

nt 1. The objects are set by preparing budgets.

(Budgetary 2. The business is divided into various responsibility centres for preparing
Control) various budgets.

3. The actual figures are recorded.

4. The budgeted and actual figures are compared for studying the
performance of different cost centres.

5. If actual performance is less than the budgeted norms, a remedial

action is taken immediately.
 • To ensure planning for future by setting up various budgets, the
requirements and expected performance of the enterprise are
anticipated.

Objectives • To operate various cost centres and departments with efficiency and
economy.

• Elimination of wastes and increase in profitability.

• To anticipate capital expenditure for future.

• To centralize the control system.

• Correction of deviations from the established standards.

• Fixation of responsibility of various individuals in the organization.

 • Standard Costing discloses the cost of deviation from standards and
clarifies these as to their causes, so that management is immediately
informed of the sphere of operations in which remedial action is
necessary.
Standard
• Process Of Standard Costing:
Costing
• Ascertainment and use of Standard Costs;

• Recording the actual costs;

• Comparison of actual costs with standard costs in order to find out the
variance.

• Analysis of variance After analyzing the variance, appropriate action

may be taken where necessary.
 • After analyzing the variance, appropriate action may be taken where
necessary.

• It helps to ascertain performance evaluation.

Objectives
• It supplies the ways to utilize properly material, labour and also overhead
which will be economic in character.

• It also helps to motivate the employees of a firm to improve their

performance by setting up a 'standard'.

• It also helps the management to supply necessary data relating to cost

element to submit quotations or to fix up the selling price of a firm.

• It also helps the management to make proper valuations of inventory

(viz., Work-in-progress, and finished products). It acts as a control device
to the management.

• It also helps the management to take various corrective decisions viz.,

fixation of price, make-or-buy decisions etc. which will be more beneficial
to the firm.
 • Ratio analysis is the process of determining and interpreting numerical
relationships based on financial statements. A ratio is a statistical yardstick
that provides a measure of the relationship between two variables or figures.

Ratio • Process of Ratio Analysis

Analysis
• An analyst should decide the objectives of ratio analysis.

• Select the appropriate ratios on the basis of objectives of ratio analysis.

• Calculation of the selected such ratios.

• Comparison of the calculated ratios with the ratios of the same business
concern in the past.

• Comparison of the calculated ratios with the same type of ratios of other
similar business concern.

• Comparison of the calculated ratios with the same type of ratios of the
industry to which the business concern belongs. •
Using
• Spreadsheets are a common tool for resource planning, cost estimating, cost
Software To budgeting, and cost control.
Assist in
Cost • Many companies use more sophisticated and centralized financial applications
software for cost information.
Manageme
nt • Project management software has many cost-related features, especially
enterprise PM software.
⚬ Several companies have developed methods to link data between their
project management software and their main accounting systems.
Using
⚬ It helps the firm to improve its profitability and competitiveness. It helps
Software To the firm in reducing its costs and thus reduce its prices. -It is indispensable
Assist in for achieving greater productivity. If the price of the product is stable and
Cost reasonable, it can maintain higher sales and thusemployment of work
force
Manageme
nt
ADVANTAGES OF
COST
CONTROLLING

• It helps the firm to improve its

profitability and competitiveness.
• It helps the firm in reducing its costs
and thus reduce its prices.
• It is indispensable for achieving
greater productivity.
• If the price of the product is stable
and reasonable, it can maintain
higher sales and thus employment
of work force
DISADVANTAGES
OF COST
CONTROLLING

• Reduces the flexibility and process

improvement in a company.
• Restriction on innovation.
• Requirement of skillful personnel to
set standards.
 • Cost reduction is not concerned • Techniques of cost reduce
with setting targets and
standards. Cost reduction is the • Organization and methods
Features final result in the cost control
of Cost process. • Work study

Controllin • Cost reduction aims at improving • Material handling

g the standards.
• Automation
• It is continuous, dynamic and
innovative in nature, looking • Value analysis
always for measures and
alternative to reduce costs.

• It is a corrective function.

• This is applicable to every activity

of the business.

• It adds thinking and analysis to

action at all levels of
 • The Architect to provide the Owner with a preliminary estimate of
construction costs at the end of the Schematic Design Phase.

Role of an • The Architect to provide the Owner with adjustments to its preliminary
Architect estimate of construction costs at the end of the Design Development

in Cost and Construction Document Phases, respectively.

Control • The Owner shall cooperate with the Architect in making some
adjustments." The problems presented by this phrase include the
following:

• There are no boundaries for the "adjustments" necessary to bring the

Architect's estimate of cost into line with the Owner's budget. That is to
say, this is a totally open-ended obligation;

• The amount of redesign work necessary to adjust the Architect's

estimate is similarly open-ended notwithstanding the potential
mismatch of the Owner's evolving program with the Owner's budgetary
constraints; and

• The Architect is bound to provide redesign services for free

notwithstanding the fact that the estimate of the costs of work may
 • Planning starts even before the starting of project. This phase is
very important. Successfully completion of a pro and success of a
project manager mostly depend on this phase. In this phase a
CPM selects the source of materials, source of necessary
Role of equipment, justify the sub-contractors, choose the project team,
Civil prepare project's budget, calculate project's risk, etc.
Engineer
• Risk management is the most difficult part of project
management. Civil engineer calculates the project risks before
starting the project though, there are many critical risks can
arise during project's life cycle. To mitigate these risks without
hampering the project's progress is another key responsibility of
a construction project manager.

• Suppose building materials price now is lower in the market than

the time of preparing budget. That doesn't mean you can waste
materials as you wish. So, cost management is the procedure of
choosing best quality materials with lowest possible price and
using them with minimum possible wastage.
THANK YOU