Cost Control System for Contractors

Wed, 22 Apr 2009 13:24:38 -0700

Cost Control is a function of prime importance to the satisfactory execution of any project and vital to project management efforts. Standard systems and procedures provide effective means of controlling project costs throughout all phases of work by executing continual comparisons of performance relative to budget and by taking rapid corrective action in the event of forecasts or adverse trends when every effort is made to eliminate potential overrun situations

Cost Control system

The cost control system starts operation on award of contract and remains in operation throughout the life of a project until completion of final close out reports.

The cost control system covers three distinct areas corresponding to engineering, procurement and construction phases of the project.

I) Cost control during the Engineering Phase

During the engineering phase, cost control is exercised in respect of engineering man-hours, major equipment design and bulk material quantities.

Engineering man-hours

Man-hour budgets for all engineering activities are prepared at an early stage and issued to the various engineering groups as part of the total Home office budget. The budgets are prepared from estimates data originally submitted by the various departments within the company, updated as necessary to reflect any changes of scope that may have taken place. The expenditure of man-hours is closely monitored against these budgets by means of weekly time sheets and detailed man-hour activity schedules. The process provides an accurate record of man-hours spent and work achieved against budget and schedule, and allows progress and productivity measurements to be assessed and man-hour forecasts to be made. Adjustments are made as necessary for budget changes resulting from contract variations.

Major equipment Design Control

Control over equipment cost during the design stage is effected by comparing actual design data to budget. All deviations in size, capacity, material, etc., from design data contained in the design budget, and likely to effect the final costs, are reported immediately.

Bulk material Quantities Control:

Approximate estimate or preliminary material take off is made based on plot plans and other preliminary data. This estimate serves to identify key materials and long term delivery items.

More detailed estimates are made during design phase to ensure that quantities of designed items do not go far beyond budgeted quantities.

II) Cost Control During the procurement phase:

Cost control during the procurement phase is achieved by effecting detailed comparisons between bid received and control budget, and by ensuring provision of project management authorization prior to purchase. The control throughout this phase is effected over three main procurement areas; major equipment, bulk materials and subcontractors.

III) Cost Control During the Construction Phase:

Control over construction performance in the field is achieved through a system of progress and productivity measurements. Each work item is allocated a budget for both man-hours and quantities against which subsequent performance in the field is measured. Quantity budgets are based on latest known quantities as issued during design phase.

Productivity is measured on the basis of a comparison between budget man-hours earned and actual spent. Physical completion is derived from actual quantities installed relative to the total budget quantities.

Progress and productivity reports are prepared for all projects in the field on a weekly basis.

Control over subcontractors during the construction phase is achieved by accurate measurement of physical progress against schedule, together with close monitoring of contract scope and careful review of invoices submitted for payment. On all subcontracts the scope of work reflects the latest design quantities and agreed changes. All claims and extra work and day-works are reviewed before authority o proceed is given and before budgets or forecasts are adjusted.

Financial crisis: A Multi Level impact on construction

Tue, 21 Apr 2009 14:27:50 -0700

The financial crisis, is expected to have a Multi-level impact on construction and manufacturing, probably on other sectors as well with varying degree. This impact will require a long time in order to be overcome, if ever it is to be overcome. Considering the financial crisis as a processing unit, the output from it will be quite different from the input, that is to say the shape of the economy will not be the same, even if the overall size could be retained.

Let us first look at the Levels of impact, which are summarized below

Level 1: Scarcity of funds
Scarcity or shortage of funds will lead the construction industry, represented by contractors and Employers, to reduce the work force, in an attempt to minimize the loss. The resulting unemployment means less purchasing abilities and more recession in all markets.

Level 2: Slowing down of the industry
Slowing down of the industry resulting from less work force, and less funds, will take the construction industry to a situation of less profits -if any at all- and consequently less funds for the future projects.

Level3: Fragmentation of big companies
If a company will survive the first two levels of the crisis, it will have to spend more in recruiting back workforce that will be in need then of training and will after the crisis seek more secure employment conditions. This level is not quite obvious where it will lead to, though fragmentation of big companies is quite possible as an alternative to previous trend of acquisition by big companies to smaller ones. The bigger the company is the greater the profit is, and the greater the loss is, also. Companies, having no other choice, will continue to reduce their sizes during the recession time, and the final size can be dramatically a fraction of what it was a few years ago.

It is expected that companies will retain the smaller size it would reach to through Levels 1 and 2 for some time, or at least not too far from that size up or down. Fragmentation would be a safer way to allow for risk sharing of probable future losses. Other smaller companies will have to be formulated or derived from existing big companies, to accommodate the workforce and the after crisis development needs. Fragmentation will not necessarily mean loss of full power but definitely of some of the probable profits such that at times of recession bigger losses are avoided. High rise buildings are more exposes to the force of the wind than smaller buildings.

Anti-globalization current seems to have found its way through the financial crisis channels. That is not to say this would be an end shape of the economy, but for now, it is the foreseen outcome of the financial crisis in the near future. The currents of acquisition and fragmentation will probably have many rounds before a long lasting shape of the economy would be formulated.

Anyway, coming back to the impact on the construction industry, somewhere between Levels 1 and 2 briefed above, disputes are foreseen to increase between Employers and Contractors, and with the extremely high costs associated with arbitration, and the time to be taken in such process, it can be seen that an additional financial burden shall be borne by either party, thus making the the crisis of exponential effect on Contractors and Employers.

Employers, are not able to pay to the Contractors their periodical payments at the specified times, leaving Contractors unable to finance the job, and delays become inevitable.

Contractors seeking to reduce their costs would reduce the workforce, and slow performance by the Contractor- let aside scarcity of funds discussed above- would be another delaying factor for the project.

In a unique strategic vision of the financial crisis and its impact on Contractors and Employers, misronet has Launched CM-Reporter version 4 Software, to help settlement of construction disputes arising out of delays. This software is cheap in price, but is quite high in its value to both Contractors and Employers. The share of responsibility for the delay is calculated for both Contractor and Employer thus eliminating probable disputes electronically. This, definitely, will not solve the financial crisis but will help reduce one of its foreseen side effects.

e-STM8 Construction

Cost Control System for Contractors

Financial crisis: A Multi Level impact on construction