Cost control process

Introduction about cost control

It is very vital to understand the correct meaning of the cost, before moving further about the cost control process. Cost would be based on activities performed in the production or scenarios. (V.Ragasekaran, p.207). This is one of the very useful definitions to analyze in the construction project since it has several activities to be done to get a final product. The basic aim of the cost control is to provide value for money to the respective client not only earning higher profit. It starts with inception stage of the project and continues until agreement of final account. It is very important for construction project because generally all the projects are dealing with huge amount of investment.

Elementary cost control process

According to Nunnally (1998), cost control of a project involves the measuring and collecting the cost record of a project and the work progress. As per the name elementary cost control, it covers analysis of the cost according to the different elements of the building. Generally element of the buildings are sub-structure, super structure, internal finishes, services (mechanical, electrical and plumbing), external finishes, etc.
For the detail explanation the following example is taken. It is stated this example is purely based on the assumption.

Project Name: Sangakara Shopping Mall
Contract Value: LKR 6,000 million (Expected)
Duration: 28 months
Now the elemental cost control process are described in line with the mentioned example.

Cost controlling 

Step one:

This whole process states with anticipated contract sum. In other words it is known as cost limit. In the example it is LKR 6000 Million. Now it is the responsibility of the cost controller to distribute the same as per the elements of the building.


         Element                Cost limit (In LKR million)
• Sub-structure                      900
• Super-structure                  1600
• Internal finishes                 600
• Fittings and furniture         950
• Services                             1350
• External finishes                 700

Step two:

From the above step, it is the time to identify each and every element detail analysis. For example if sub-structure is covering 300,000 m3 of work, cost control team would calculate the cost of the one unit. It is noted in this particular step, specification and drawings should be considered with important.

Step three: 

This step is known as cost monitoring. For an example, as per the step two, cost of the one cubic meter concrete is LKR 20,000.00 It is very vital to check with actual cost. It may be favorable or adverse. If it is adverse, find out the reasons and try to fix the issues. If that also not possible make arrangement to revise the budget. In other way around, if the actual shows as a favorable. It is advised to maintain the same for the whole process.

Step four:

If the whole process will always reviewed and the results shall be communicated to all the project management. Staff for a very effective cost control process.
In conclusion, as per the Austen 1982, the main purpose in cost controlling for a construction project should be active controlling of final costs for owner and not just to record and registering payment. For this achievement, cost reporting is very vital.

Terms related Interim Payment Application - Introduction with sample format

Sample Interim Payment Application

SLR ( Sri Lankan Rupees  )
Download Sample Interim Payment Application PDF

As name suggests, it is a payment for the part works or on account payment to the contractor to facilitate his cash flow in order to avoid bankruptcy. For example, if a contractor awarded for a 200 million worth of project and there is no allowance for interim payment application till completion of project, there will be no cash inflow to the contractor. It make some trouble for the smoothness of his business. To explain the application process, the following sample is attached above, but according to different projects application template will be varied.

In traditional method of construction, Client, Consultant & Contractor are main stakeholders of any project. According to industry technical terms, Client may be known as employer or owner whereas Consultant is known as Engineer. In Quantity Surveying terms, preparation of interim payment application is known as valuation.

Contract sum is defined as amount accepted in letter of acceptance (By Contractor) of acceptance for execution and completion of the works and the remedying of any defects. In simple words, this is sum agreed at contract awarded time. It can be increased or decreased after the real execution. (Scope changes/Variation).

Date of valuation means the date that payment application considered so far. In other words, all the value of works done up to that date are claimed in that payment application. Progress bill number reflects serial number of the application. These applications can be sent every month or after completion of certain value of work, etc. That depends on different project and contracts.

Value of the work done is calculated by multiplication of completed quantities and agreed rate for one unit of work. (Refer BOQ Sample). Material on site (MOS) refers as the value of material not installed at site now, but it can be used for very near future. Contractor can apply for part value of that materials by submitting invoices to engineer. After the execution of work by using same materials, the value given for material on site will be deducted for contractor’s amount.

Price escalation means allowance agreed for the price escalation for major materials (Reinforcement, Cement, etc.).If it is allowed contractor will not suffer for any price escalation, but once again it is different to one contract to another.

Variations can be defined as changes to the original contract. It shall be additions or omissions depends on the changes. Other additions allow to cover any additional costs which are not covered in heading mentioned above. Subtotal 1 is the addition of the highlighted items.

Foreign component & Bank charges are the costs incurred by employer on behalf of contractor. It should be deducted from contractor’s account. Sub-total 2 is calculated by Sub-total 1 minus foreign component and Bank charges.

Retention is the value of sum retained by employer for any future defects on the work done by contractor. It is calculated by a certain percentage of work done for interim payment application. Maximum amount of retention is decided on the contract sum. Generally it is 5% or 7.5% of the contract sum. Value of material on site should be excluded for the calculation of retention.

Advance recovery is calculated by a certain percentage of work done so far till to cover the advance given to the contractor. Amount previously certified is the total amount of money certified before this application is made. Other deductions cover any other additional cost which should be deducted from contractor’s account. Total deductions is addition of retention, advance recovery, previous certified payments & other deductions.

Then finally gross amount is calculated by the difference between sub-total 2 and total deductions. This will be amount given to the contractor as payment for particular application. But all these to be justified by proper back-ups. Otherwise contractor will not be paid the amount as he applied. There is chance for difference between contractor’s applied amount and engineer’s certified amount. 

Written by Gowrinath  © BasicCivilEngineering.com

Basic things you should know about Bill Of Quantity (BOQ)

BILLS OF QUANTITIES (BOQ)

The survival of any business is heavily depend on the success of commercial management. When it comes to commercial management in construction industry, Bill of Quantities (BOQ) is the term which brings attention of every construction professionals and stakeholders.

It is one of the communication tool which connects the parties (Client, consultant & contractor) of construction project. Keith defines, BOQ is a schedule which categories, details and quantifies the materials and other cost items to be used in construction project. It is important to know that, direct costs & indirect costs are to be considered for complete cost of the project which are covered in different parts of the BOQ.

Generally BOQ is in tabular form which contents description, unit, quantity, rate & amount in different columns.

Sample BOQ

Description column provides a brief explanation of what to be done. For example, in the first item, the 32mm diameter CPVC pipes should be laid for cold water services in 20 bar operating pressure. Specification & drawings are other two important items to be analyzed in detail for clear understanding. Here the term engineer means the consultant for the project.

The Importance of BOQ

BOQ shall be used in every phase (pre-contract & post-contract) of the project but need of BOQ differs based on different contract agreements & project. The major usages are listed below.

1. It provides basic idea of the project by giving the quantities to tenderers. 
2. It defines the extent of the work. (But it should be identified in line with drawings & specification as well).
3. It gives estimated or anticipated contract sum. (very important to client)
4. It provides a basis for valuation of variation. (Variation is to be discussed in detail).

The major Parts of BOQ

Parts of BOQ can be varied according to the project size as well the practices. Generally it has measured works, Preliminaries & Provisional sums. The contract sum would be addition of these three items.

Preliminaries

In construction industry, preliminaries is known as the indirect cost for execution of project but these are the costs which is very much vital for the construction activities. The reason for these cost mentioned separately is it is very difficult to distribute these cost amongst with measured works. The examples for preliminaries listed below.

1. Charges for performance bond, advance payment guarantee & Workmen compensation
2. Maintenance of the site clean
3. Requirement of site office, site stores & staff accommodation.
4. Cost towards the project management staff (QS, Project Manager, Engineering professionals)
5. Charges for drawings & safety

From the above mentioned examples, it can be understood these costs cannot be distributed to work item but without these expenses there will be no project.

Measured works

It is the actual or estimated work will be carried out to complete the project. The works have been measured in different units. They are liner meter, square meter, cubic meter, number, item & etc. Value of measured works will be calculated by multiplication of quantities and rate.

Provisional sums

It is the sum which is allocated for the undersigned works at the tender time. It will be adjusted after the execution of the project.

In summary BOQ is very much important for the commercial management purposes. It should be understood by every construction professional to deliver a quality and expected product to client. In other words to provide value for money.


Written by Gowrinath  © BasicCivilEngineering.com