September 2024
Cost control is about more than tracking and managing the expenses going out. It’s optimizing the benefits coming in—including enhanced profitability, improved cash flow, and data for insights into better project predictability and risk management. That’s a big part of what makes cost control essential for successful project delivery.
We all know that maintaining effective cost control is easier said than done, often jeopardized by familiar pain points. Among them are:
- Inaccurate, incomplete estimates that set the project up for failure from the start
- Unaccounted-for risks without a backup plan that catch the project team off guard, leaving them scrambling to minimize the financial damage
- Fragmented, outdated data that can’t be tracked accurately and leveraged for informed decisions
- Scope creep that materializes as excessive changes
Despite the common challenges in cost control, these three proactive strategies can help you realize its benefits: In-depth planning, meticulous performance tracking and effective change management—all of which stand out as effective ways to unlock and optimize the advantages of cost control.
Comprehensive Project Planning
Effective cost control begins with a meticulous plan. This plan should be rooted in real-world data from past projects and industry benchmarks and adjusted for current local costs and conditions. Past projects can be a wellspring of information about what to anticipate in terms of costs, timelines, risk factors and their impact on scope.
To evaluate past project performance so it can inform the development of the current plan, consider these questions:
- Was the initial budget accurate?
- How did cost control measures perform?
- What did KPIs indicate throughout the project?
- Were resources allocated appropriately?
- Were any expenses or risks overlooked?
- How accurate were forecasts?
- Did internal or external risk factors disrupt cash flow?
- How well did contingency plans mitigate any impact on profitability?
This process lays the groundwork for defining and forecasting potential risks, creating risk-mitigating contingency plans and identifying cost-saving opportunities (e.g., value engineering, resource allocation). It also starts the process of justifying expenses and eliminating those that are deemed unnecessary.
This upfront work creates a reality-based blueprint for maintaining full financial control throughout construction that helps protect profitability and balance cash flow.
Rigorous Performance Measurement
Keeping more money in your company’s pocket and having the confidence that financial obligations are being met depend on how well the factors that affect them are being monitored and managed.
You should know if everything is on track to make the forecasted profit, if there are liquidity issues and whether project data is telling the whole story. Ascertaining all this with any certainty can be challenging, given the dynamic nature of construction projects and their susceptibility to cost overruns.
That certainty comes from using a tried-and-true progress and performance tracking method like earned value management (EVM). EVM metrics are expressed as simple numeric values that show how costs are behaving now and how they’re forecasted to behave further along in the project.
So, for example, to determine your project’s spending efficiency and predict future costs and profitability, check the cost performance index (CPI) value. To determine if the project is on track for a cost overrun that can impact profitability, monitor the cost variance (CV). To gauge whether current or potential delays could jeopardize cash flow, pay attention to the schedule performance index (SPI) and schedule variance (SV) values.
Monitoring and fully benefiting from the metrics’ insights is far easier with software dashboards. They’re a difference maker for maximizing cost control. Dashboards track EVM data in real time for constant visibility into project performance. They take the mystery out of the numbers by condensing them into familiar graphic formats, making them simple to understand at a glance.
Visual context offers real-time advantages. Issues can be spotted as they occur, turning EVM monitoring into a warning system to intervene before anything worsens that could escalate costs. And decisions on cost-saving measures are faster, more understandable and backed by data-driven insights from continual monitoring.
Sometimes, those decisions require more detail, or further analysis is needed to understand better what’s behind anomalies, trends and patterns. By leveraging the same real-time EVM metrics used in the dashboards, regular project reports reflect more accurate, current information for data-driven insights. They show how well requirements are being met while providing a deeper understanding of project progress and performance against baselines. By analyzing this report data, strategic decisions around risk mitigation, resource allocation and other critical aspects of cost control can be made from a more informed place.
Effective Change Management
The challenge with introducing any project change is that it’s not always confined to just the change itself. The impact tends to spread into other areas: design, other teams, worksites, schedules, contract scope and, of course, associated costs and forecasts.
In a project’s early stages, clearly outlining the scope and responsibilities can significantly reduce the incidence of unnecessary changes once construction is underway. However, it’s understood that scope creep and external factors will very likely impact budgets and timelines, making changes inevitable.
The goal is to prevent them from contributing to cost overruns. That puts the focus squarely on how changes are addressed. By establishing a structured process to identify, request and control individual project changes, costs can be controlled while still maintaining liquidity and profit margin.
It’s when changes stand to make a measurable impact on the project that change orders are necessary to document the process and ensure proper sign-off. Formalizing them requires nailing down a defined workflow—from documenting the initial request to the review and approval.
From a cost control perspective, a thorough cost-benefit analysis will assess the viability and financial impact of each proposed change before it’s implemented. Some points to consider, whether for general changes or actual change orders:
- Is the proposed change necessary?
- What is the net effect on budget, timelines and scope?
- What is the knock-on effect on other tasks, resources and departments?
- How might it impact the client relationship?
- What are the costs? What are the savings?
- How does it change the forecasts for project outcomes, cash flow and profitability?
- Do the benefits edge out the costs?
- What are the financial repercussions of not making the change?
Leveraging construction management software can transform this involved process into a more efficient, cost-effective one. By automating workflows, centralizing data and facilitating collaboration, this software helps accelerate submissions, reviews and approvals and opens up data transparency for better-aligned decision-making. The overarching result? Greater cost control that helps preserve financial resources.
Reaping the Benefits of Cost Control Strategies
The more effective cost control measures are, the more likely anticipated project outcomes—and business outcomes—will be met.
By implementing planning, performance tracking and change management measures, construction companies stand a better chance of achieving on-time, on-budget goals and enhancing their ability to scale their growth.
Having the right processes in place and adopting the right technology to support them are crucial to unlocking the full potential of cost control.
Contruent can help. With Contruent Enterprise cost management software, you gain control over budget and costs so your clients and your bottom-line benefit. Reach out to us to learn how we can help you, or request a demo today.