CEE 345: Construction Management Week #10 PDF

CEE 345: Construction Management Week #10 Class Timings: 8:30 am‐ 9:20 am ( Sunday, Tuesday, Thursday) Hisham Qureshi 1  Cost Management Cost management is the process of planning and controlling the budg...

CEE 345: Construction Management Week #10 Class Timings: 8:30 am‐ 9:20 am ( Sunday, Tuesday, Thursday) Hisham Qureshi 1  Cost Management Cost management is the process of planning and controlling the budget of a business. If you don't manage costs in your project, risk is the costs will just keep on climbing Hisham Qureshi 2  Items to consider in managing costs Costs are estimated, monitored & Controlled for elements such as:  Labour‐ hours and hourly rates etc  Sub‐contractors  Consultants  Materials  Travel  Equipment and facilities rental  Other items depending on the project Hisham Qureshi 3  1‐Direct costs Direct costs are directly attributed to the work on the project i.e. easily traceable. For example team travel, team wages/hourly rate Cost and costs of material used on the project. Categories 2‐In‐direct costs Indirect costs are overhead items or costs incurred for the benefit of more than one project i.e. “Cost of running the business”. Indirect costs are not easily traceable. These include items such as cleaning supplies, utilities bills, office equipment rental, desktop computers and cell phones, general administrative cost, quality control cost, insurance & depreciation etc. 4 Hisham Qureshi Contract Bid Summary Hisham Qureshi 5  Variable Costs In economics, variable cost and fixed cost are the two main costs a company has when producing goods and services. A company's total cost is composed of its total fixed costs and its total variable costs. A‐Variable Cost A variable cost is a company's cost that is associated with the amount of goods or services it produces. A company's variable cost increases and decreases with the production volume. For example, suppose company ABC produces ceramic mugs for a cost of $2 a mug. If the company produces 500 units, its variable cost will be $1,000. However, if the company does not produce any units, it will not have any variable cost for producing the mugs. Hisham Qureshi 6  Fixed Costs B‐Fixed Cost On the other hand, a fixed cost does not vary with the volume of production. A fixed cost does not change with the amount of goods or services a company produces. It remains the same even if no goods or services are produced. Using the same example above, suppose company ABC has a fixed cost of $10,000 per month for the machine it uses to produce mugs. If the company does not produce any mugs for the month, it would still have to pay $10,000 for the cost of renting the machine. On the other hand, if it produces 1 million mugs, its fixed cost might remains the same. Note:‐ The variable costs change from zero to $2 million in this example. Hisham Qureshi 7  Examples of Variable & Fixed Cost 1‐Variable Cost a. Cost of Material b. Wages i.e. hourly rate c. Commission/Bonuses 2‐Fixed Cost a. General management overheads b. Administration‐cost of doing business c. Rental d. Payroll e. License fee f. Insurance g. Taxation Hisham Qureshi 8 Total Costs= Variable + Fixed Hisham Qureshi 9 Project Cost Management Processes Hisham Qureshi 10  1‐Plan Cost Management Plan cost management establishes the policies, procedures, and documentation for planning, managing, expending and controlling project costs. This process answers the question “How will I go about planning cost for the project ? “ and “How will I effectively manage the project to the cost baseline, control costs, and manage cost variances ? “. In some organizations , plan management process involve determining whether the project will be paid from organization existing funds or will be funded through equity or debt. It may also include decision how to finance project resources i.e. choosing whether to purchase or lease equipment. Hisham Qureshi 11  Cost Management Plan The output of plan cost management process is “Cost Management Plan”. Hisham Qureshi 12  2‐Estimate Cost The process of developing an approximation of the monetary resources needed to complete project activities. This process involves coming up with cost estimates for each activity. Hisham Qureshi 13 Reserves Calculating reserves is an important part of project management planning. Reserves provide you with a cushion against known and unknown risks. Without contingency and management reserves, a Project Manager cannot estimate his project cost and budget. These reserves are an inseparable part of budget and help to manage risks. Hisham Qureshi 14  Contingency Reserves 1. These are identified risks, or “known‐unknown” (known = identified, unknown = risks). For example you are constructing a road and you know bad weather can delay the work. What unknown is how bad the weather will be over the next four months and how much you will loose. 2. Contingency reserve is identified; it is not a random reserve; it is an estimated reserve based on various risk management techniques. 3. This reserve is controlled by the project manager. 4. The project manager has full authority to use it whenever any identified risk occurs. 5. The Project Manager can also delegate this authority to the risk owner, who, in turn, will use this reserve at the time of the risk occurrence. The risk owner can update the project manager at later stages. Hisham Qureshi 15  Management Reserves 1. These are unidentified risks or “unknown‐unknown” (unknown = unidentified, unknown = risks). 2. Management reserve is not an estimated reserve. It is a figure which is defined according to the organization’s policy. For some organizations it is 5% of the total project cost or duration of the project, and for others it may be as high as 10%. 3. Usually, the management reserve is estimated based on the uncertainty of the project. 4. For example, if you are doing a project in which your organization has expertise, the management reserve will be less. In this case there will be less uncertainty. However, if you’re doing a new kind of project where your organization has less, or no, expertise, the management reserve will be high, because in this case the uncertainty will be more. 5. Management reserve is not controlled by the project manager; it is managed by the management of an organization. Whenever any unidentified risk occurs, the project manager should receive approval from management to use this reserve. Hisham Qureshi 16  Difference between Contingency Reserve and Management Reserve The following Contingency reserve is used to manage identified risks, while are a few management reserve is used to manage unidentified risks. differences between contingency Contingency reserve is an estimated figure. Management reserve and reserve is a percentage of the cost or duration of the project. management reserve: The project manager has authority over the contingency reserve. For management reserve, he need higher management’s permission. Contingency reserve is a part of the performance measurement baseline while management reserve is not. Hisham Qureshi 17  3‐Determine Budget  The project manager calculates the total cost of the project in order to determine the amount of funds the organization needs to have available for the project. The result of the calculation is called budget.  This process involves aggregation of the estimated costs of individual activities or work packages to establish an authorized cost baseline.  In estimating the total cost of the project i.e. budget, a project manager MUST perform risk management analysis and include reserves in that estimate.  Project cost performance is usually measured against the authorized budget Hisham Qureshi 18 Cost Budget Hisham Qureshi 19  Cost Baseline  When you add the contingency reserve to the cost estimate, you get the cost baseline.  Cost Baseline = Cost Estimate + Contingency Reserve  Note that the project’s performance will be measured against the cost baseline.  If you add the management reserve to the cost baseline, you will get the project budget.  Project Budget = Cost Baseline + Management Reserve Hisham Qureshi 20  4‐Control Costs  The process involves monitoring of the status of the project to update the project cost and managing changes to the cost baseline. Hisham Qureshi 21  Actions undertaken to control Cost Which actions the project manager should take to control cost ? Simplest answer will be to follow “Cost Management Plan”. Control means measure, measurements helps to identify if there are any cost variances. Variance between planned and actual values will require corrective actions/preventive actions. Hisham Qureshi 22 QUESTIONS Hisham Qureshi 23