August 2024
The pressure to deliver value to clients—especially while navigating project dynamics and economic challenges—demands a more strategic, proactive approach to cost control.
It requires a holistic view of the project lifecycle, from initial planning to project completion and beyond. By effectively managing costs at every stage, construction companies can improve profitability, enhance competitiveness and strengthen client relationships.
Employing a multifaceted strategy is essential. By implementing and integrating a range of tactics, capital construction companies can enhance project performance while delivering value to clients. These tactics include:
- Detailed planning and estimating
- Continuous cost monitoring
- Value engineering
- Procurement and contract management
- Change management
- Stakeholder collaboration
These aren’t meant to be reactive fixes but rather a proactive approach that embeds cost awareness and control throughout the entire project lifecycle.
Detailed Planning and Estimating: Building a Solid Foundation
Every capital project starts with the ambitious goal of on-time, on-budget completion. Too frequently, reality falls short. Inadequate planning and estimating errors are often to blame. Without a solid blueprint, successful execution becomes a struggle, and managing the project and its costs becomes unnecessarily more challenging.
It comes down to meticulous planning and estimating. This is more than just a cost control strategy; it’s a critical step in the project’s overall success. It requires getting deep into the particulars:
- Defining the requirements the project must meet to be considered successful and complete.
- Determining the deliverables and their due dates.
- Outlining the specifications for the scope of work, materials, installation methods and quality standards.
- Identifying the potential risks (and associated contingency plans) and cost drivers to factor into the estimate helps keep change orders to a minimum.
A realistic picture of the project’s scope is established through detailed planning and estimating. This definitive foundation allows for creating a well-defined budget and facilitates the implementation of other cost-control strategies that maximize project value.
For all that planning to be of benefit, capital projects need more estimating precision and cost control capabilities than spreadsheets can provide. Estimating software offers the necessary tools to assess project scope and costs accurately. By centralizing estimates, automating calculations and providing real-time data, this software enhances data quality and enables data-driven decision-making, resulting in more refined budgets and effective cost control.
Continuous Cost Monitoring with EVM: Enabling Early Intervention
Imagine managing a capital project without staying on top of spending. The smallest of cost discrepancies might be deemed innocuous, so it’s brushed off. But by the time it becomes more apparent and too big to dismiss, it’s too late: what was once a tiny cost blip has morphed into a significant issue that threatens to put an unanticipated ding in the budget.
Keeping a constant eye on the project cost radar prevents this from happening or at least worsening. Earned value management (EVM) can do the monitoring for you and goes further to safeguard project value.
To truly optimize this best practice, a good cost management software solution is a must for tracking and measuring actual project data. It uses real-time cost and schedule data inputs to calculate the “how well” (efficiency) and “how much” (variance) EVM metrics behind project performance and progress. Think of EVM as an extra set of eyes, regularly tracking actual costs against the planned budget. When it detects anomalies, discrepancies and concerning trends, it sends a notification to the appropriate parties. This built-in warning system becomes a catalyst for proactive evaluation and corrective measures that can divert a costly crisis.
Using EVM as a cost control strategy extends beyond providing real-time visibility into project health. It also acts as a valuable forecasting tool to create risk-adjusted plans. By incorporating data from past projects and industry benchmarks—and altering variables to model a variety of possible risk scenarios—it forecasts the financial impact of those scenarios and the most appropriate contingency plans that minimize that impact on project value.
Value Engineering: Optimizing Costs, Preserving Quality
Optimizing costs and maintaining quality doesn’t have to be mutually exclusive. They coexist in value engineering.
Value engineering proves that achieving cost efficiency doesn’t have to come at the expense of quality and function. It’s an ongoing process that seeks ways to eliminate unnecessary or wasteful project costs while meeting functionality and design requirements and preserving performance standards. But it’s not just about cost reduction; it also explores how to improve or add essential functionality at the same cost.
In the initial design phase, the value engineering process involves stakeholders reviewing the specifications and considering alternative options. This might include exploring different materials (e.g., substituting a specific type of wood with a comparable yet more cost-effective option), experimenting with design options (through building information modeling (BIM) or re-evaluating construction methods (e.g., prefabricating specific components off-site to save on labor costs). These alternative solutions, offering the same functionality but at a lower price, can be incorporated into the estimate.
During construction, value engineering becomes a real-time optimization process, continuously seeking ways to maintain the balance between cost and functionality. This becomes particularly relevant when unexpected situations arise, like material backlogs or the need for rework due to design discrepancies. Other materials or construction methods can be explored to minimize delays and maintain project value.
Now, let’s look at the operational phase. Those earlier cost- and quality-conscious choices for materials and systems, identified through value engineering, have long-term application. They can translate into lower costs for maintenance, repairs, replacement, utilities and energy usage across the lifecycle. With operational expenses typically making up a sizable portion of lifecycle costs, this can be of significant value for project owners.
Procurement and Contract Management: Ensuring the Best Value
According to McKinsey, procurement accounts for a substantial 40-70% of construction company spending. Operating in an environment of slim margins and market volatility underscores procurement’s critical role in cost control. Strategic, rather than transactional, procurement is essential.
Effective procurement goes beyond securing the lowest price. It’s about acquiring and optimizing the balance among required quality, functionality, availability and cost. Leveraging bulk purchasing and competitive bidding are short-term methods that introduce opportunities for cost savings that protect project value. However, developing collaborative supplier relationships as a long-term strategy can deliver on that value throughout construction.
This is why supplier selection matters in the procurement process. Cultivating partnerships with suppliers can lead to more favorable contract terms, improved responsiveness and greater flexibility when issues arise. By treating suppliers more like partners, communication and collaboration are prioritized, leading to shared risk, reward and responsibility.
This still requires diligent contract management, which is essential to protect project value. Clearly defined contracts with performance monitoring (through earned value management metrics, for example) and risk allocation clauses reduce the chance of cost overruns, while formalizing a dispute resolution process that avoids costly damages claims.
Construction companies can utilize specialized software solutions to simplify procurement and contract management processes. These tools offer features such as supplier management, contract lifecycle management and bid and spend analyses that streamline these detail-heavy practices.
Change Management: Evaluating Change Impact on Cost Control
Changes are inevitable. They’re not always bad but they often come with an unplanned cost to established timelines and budgets. The extent of that cost impact depends on how those changes are managed. When uncontrolled, changes can lead to significant cost overruns, schedule delays and reduced project profitability.
Prevention is critical to minimizing unnecessary change orders. Thorough upfront planning, including design verification, risk assessment and contingency planning, can significantly reduce the need for costly changes later in the project.
However, project dynamics can change, especially over the course of a lengthy project. Unexpected challenges like regulatory shifts, design modifications or scheduling conflicts may arise. Proactive control over these changes is essential to maintain profitability.
What’s needed is a robust change management process to evaluate the cost, schedule and impact of changes before approval. Establishing an agreed-upon, standard set of procedures for everyone at the project’s outset ensures the proper steps will be taken and the right people will be involved. It serves as a roadmap for defining the change, analyzing its financial impact and deciding how to implement it with the least impact on cost and schedule.
It’s an involved process. But leveraging change management software, particularly for large-scale capital projects, transforms it into a strategic advantage. By automating the tracking, calculation and management of change-related costs, facilitating real-time team communication and connecting change orders to budgets and schedules for better impact analysis, changes can be reviewed from a data-driven perspective and, therefore, be approved faster.
Stakeholder Collaboration: Improving Project Value Together
Early stakeholder involvement from all project teams and contractors is critical to ensuring a project stays on budget and on time. That, in turn, leads to more value and ROI. Research from McKinsey bears this out: collaborative contracts alone improve cost and schedule performance by 15–18% on average.
Collaboration isn’t so much a singular strategy as a process incorporated into other cost control strategies. For example:
- In the planning stage, input from stakeholders across multiple disciplines informs a more inclusive, real-world estimate, the basis for cost control measures.
- Real-time data sharing and visibility into project performance through EVM enable prompt collaborative decision-making and problem-solving.
- Value engineering benefits from different perspectives when exploring different and even innovative approaches to optimizing cost and quality.
- Bringing multiple departments and disciplines to the procurement table can better inform suggestions and decisions around supplier options, leading to more accurate bids and budgets. Developing relationships with suppliers can result in cost savings and reduced likelihood of budget-jeopardizing disputes.
- Change is rarely a self-contained event; with stakeholder involvement built into the change management process, their collaborative expertise can be leveraged to assess the real cost implications and arrive at the least disruptive solutions.
Cost Control Starts and Ends with Strategy
Cost control is one of the main cornerstones of successful capital project delivery. By strategically integrating planning, estimating, monitoring, value engineering, procurement, contract management and change management, construction companies can significantly enhance project profitability and client satisfaction. Such a holistic approach, coupled with the strategic use of technology, empowers organizations to confidently make data-driven decisions, mitigate risks and deliver value for the client.
Which cost control strategies have you embraced? Which ones would you like to see your company implement? We’re happy to discuss those strategies and how our technology solutions can support them. Contact us to find out how our solutions can improve project value or request a demo today.