One of the biggest challenges faced by project organizations is cost overrun, as statistics show that the larger the project, the higher the probability for overrun. There are often a number of reasons factoring in to this, although the majority of project budgets that experience overrun are due to poor planning, combined with a lack of visibility in cost and budget management. The following are 7 tips to help immediately improve project budgeting and the cost management process in order to avoid such a situation.
1) Lack of proper planning when the project starts
It’s common for projects start back to back, which often leads to project managers not properly preparing and planning for upcoming projects. For large projects in particular, the estimated costs could easily have been put together months or even years prior to the budget ending up on the project manager’s table, and the actual costs of some tasks may have changed. The project manager should take 1-2 weeks to process the budget and set realistic costs for accounts. This helps to anticipate potential budget threats early on, thus avoiding unwanted surprises down the road. Once analysis and planning is complete, the management team members and project manager should then go through the analysis together and set the goal for the project costs, including deciding on the bonus for the project manager when delivering has been completed as planned.
2) The budget is only partially managed
For a number of organizations that we have been fortunate to talk to here at Planyard, the budget is only being partially managed. Sometimes there are only the list of articles and sum of expenses. Needless to say, costs are impossible to accurately track when there are not even adequate links to the initial expenses list of materials, units and quantities that has been put together by the designer. Initial forecasting information that has been carried out by the estimator is often missing, yet the end price is being put together based on this estimate. Such a lack of information makes it difficult or even impossible to see who is actually responsible for any errors on an accounting level – for example, if the designer has put together poor material estimates, the estimator does a poor job on estimating, or the project manager has negotiated a poor deal. Additionally, if budgets are only partially managed, relevant cost information for estimators becomes severely limited in terms of access.
3) Not using cost codes leads to lack of visibility and limited access to business intelligence
It’s surprisingly common for project budgets to be coded differently throughout the same company. However, these cost codes should be seen as a common language to describe the projects, making each one trackable for stakeholders including the management team, auditors, estimators, project managers, and project engineers. Using the same cost codes companywide is the key to accessing and using business intelligence in order to analyze article costs on a company level across multiple projects, access and use historical data such as contracted costs, evaluate the performance of team members, etc. Of course, this makes, in the end, forecasting your construction project's profitability possible as well.
4) Jobs in budget are not divided into clear chronological phases
In a number of instances, we have seen that project managers do not have well-structured budgets. There is simply a list of articles and their various costs. Such a budget does not provide a clear overview of how the project if progressing, if the initial stages of the job produced additional income or experienced overrun, or if later phases of the project must find other ways for planning and savings. Any given budget should be structured in clear chronological phases. For example, all costs related to ground works should be under one category, foundation works under the next, etc. This means that when the foundation work phase ends and next stage of work begins, you’ll have a clear understanding of how the cost targets for the phase were met overall.
5) Only tracking the income vs. expenses
In a number of organizations, the management team only follows whether or not the current project income exceeds the expenses. In such a case, the main goal for the project manager is to find possible ways for the income to grow higher than the expenses at every stage of the project. The strategy is to delay paying the subcontractor in every possible way and find ways to negotiate higher payments from the original customer. The problem here with only tracking income vs. expenses is that during the later phases of work, when the project is coming to the end and everything seems to be fine with the profit statement, the delayed costs start coming in. The result is that the apparent profit can easily turn into an unexpected loss within the very final project stages.
6) No real-time control over costs on detail level
Budgets that are managed on spreadsheets and in different cost codes with no tracking of set goals, and which are stored in separate folders in computers or over file sharing platforms, do not allow project costs to be controlled on an account level in real time. Being able to control job costs on an account level across projects allows project managers to immediately spot errors when they occur and take appropriate action. Being able to follow job costs in real time allows the assigning of project phases to fellow project managers. For example, if one project manager is away from work or cannot be reached for any reason, it’s still easy to track and understand previous actions in the project and follow up on them. In addition, management has full control over all projects and can spot errors when they occur in the budgets. Estimators can likewise access cost data across projects when budgets are managed properly, with estimated units and costs compared with expenses.
7) Budget tracking and project cost management process is time-consuming
It’s surprising how much time project managers spend on project cost and budget management. When asking project managers about this topic, we have found that particularly on large scale projects, project managers can spend up to 25% of their time on finance management. This simply means that key project organization team members are wasting their time on dull tasks.
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