Despite the technological, environmental, and managerial changes that have taken place over the last three decades, existing conventional cost management techniques are based largely on principles that have been used since the mid-Twenties. Considering the benefits and scope of modern day techniques, traditional cost account information has become irrelevant and even disadvantageous for managerial tasks. The traditional methods of keeping financial records is too distorted and aggregated to be applied to complex construction planning and control.
When it comes to large, multi-year construction projects such as industrial plants and dams, the project management team has to face some degree of cost and schedule uncertainty. The question is how can project managers handle these uncertainties and implement effective mitigation strategies to control their impact.
A cost management system is mainly considered as a framework for project cost information that consists of various methods, principles, and tools. Its objective is to estimate costs and extract valuable information to facilitate managerial decisions during different phases of a project.
Cost estimating process
The function of cost estimating process is to predict the cost of processes and products involved in the production. An effective cost estimating process demands a deep understanding of contracts, design, and production in order to streamline the consumption of resources through proper modeling. In construction, preparing a budget is typically the first step in the cost estimation process. Budgeting plays a critical role throughout the project. Variability of construction, inherent uncertainty, and cost control process make project cost estimation a complex task.
Since cost estimation is a complex process, it is advisable to hire a project controls company with expertise in cost management.
Cost planning and control
Once the cost is estimated, cost planning and control should be implemented to plan and control the financial performance during the production phase. Cost planning includes activities such as generating a project cash flow and refining the initial cost estimate. From changes in production plans and contracts to financial investments, cost planning can strengthen the overall decision-making process.
Forecasting future costs
Traditional financial accounting only helps you understand what has already happened. The competitive environment demands that there must be procedures in place to forecast future costs. Keeping a record of completion schedules through a series of milestones, thus, becomes important. For instance, the time, labor and material estimates for window installation can have a number of progress milestones. The cost constituents can be determined once the first milestone is completed.
Cost and time can easily get out of control on construction projects. Lack of control is the major underlying factor why projects run over budget and late. If you want to avoid this and make your project a success, integrate effective cost management and scheduling tools into your project management system.
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