Cost management and Control of Construction Project

Transcription

1 Bachelor of Architectural Technology and Construction Management Cost management and Control of Construction Project YICHENG SHEN CONSULTANT: Benny Leon Olsen DATE: VIA UNIVERSITY COLLEGE Horsens Campus, DENMARK

2 YICHENG SHEN 2014 TITLE PAGE DISSERTATION TITLE: Cost management and control of construction project CONSULTANT: Benny Leon Olsen AUTHOR: Yicheng Shen DATE/SIGNATURE: 26/03/2014 STUDENT IDENTITY NUMBER: NUMBER OF COPIES: 2 NUMBER OF PAGES (2400 characters): 28 NUMBER OF CHARACTERS: 57,767 FRONT: Calibri 12 GENERAL INFORMATION: All rights reserved no part of this publication may be reproduced without the prior permission of the author. NOTE: This dissertation was completed as part of a Bachelor of Architectural Technology and Construction Management degree course no responsibility is taken for any advice, instruction or conclusion given within

3 YICHENG SHEN 2014 Preface This report is a part of 7 th semester syllabus. Cost management and control of construction project is the subject of my dissertation. I am going to indicate what is the construction cost control and management, and how is the current situation of cost control in China, and indicate the real case in this dissertation. Acknowledgement I would like to thank my consultant Benny Leon Olsen for his invaluable advice and support as my consultant throughout the making of this dissertation. I would like to acknowledge the professor Wenyuan Li of school of Urban and Rural Construction of Chengdu University in China for his patience and assistant he gave to me to make this dissertation. Abstract It is undeniable that construction industry has reached at a higher level in China after reforming and opening to the outside world, but for a long time, construction cost control of the engineering of project has not been paid enough attention. With the development of system reform of construction project management in China, the organization structure and production patterns have changed because of the competitive marketplace. The strategic focus of development turns to internal management to boost enterprises competitiveness. The very first key to the cost management is controlling the construction cost. If enterprises ignore this work, they will lose long term profits, and cannot adapt to the demands of development. The level of construction cost management is a vital key to the development of enterprises, and the construction industries are not only labor intensive businesses anymore. The success of foreign construction enterprises which are gradually bigger and stronger is a good example to show the importance of choosing a right managerial system in a project. Improving construction methods, controlling cost effectively, allocating resources equitably and aiming at maximum profit are vital to enterprises development.

4 YICHENG SHEN 2014 This dissertation is going to indicate the key point of construction management cost control of project construction. Key Words: Construction cost management, Chinese construction industry, Construction cost control, Planed economy, Market economy,

5 List of content 1. Introduction Problem Formulation Background of report Delimitation Research Question Research Methodology Background Information Introduction of construction cost management in China The pressure facing Chinese construction enterprises today What is the construction cost control theory and managerial approach Basic conception of project cost management Characteristics of construction cost management Basic theory of construction cost management Conception of construction cost control The composition of construction cost Content of construction cost control Current construction cost management model and theories in China What is the status quo and existing issues of current construction cost control management The status quo of construction cost management in China Development trend of construction cost management in China The inspiration taken by advanced foreign enterprises How to make cost control in the process of implementation effectively Before constructing and during constructing Feedback information and cost control after constructing Operation of the project construction cost Responsibility cost analysis The responsibility cost of a construction project The responsibility cost of departments The responsibility cost of construction teams

6 4.5 Earned value analysis Additional factors of effective cost control Example to show how to use earned value to analyze How is the real case controlled and analyzed Introduction of real case The measurement of cost control What revelation I have learned while I am working on this dissertation Conclusion of this dissertation The shortage of this dissertation List of illustrations Reference

7 1. Introduction 1.1 Problem Formulation In order to adapt to external environment of market economy condition, the importance of adjusting management styles and organization structure of building construction enterprises becomes more and more significant. Taking economic benefits as working center and improving the operating and managing methods are the top priorities facing to construction enterprises today. The aim of operating production is to use technology in construction to get equitable allocation of resources and a better construction plan, to complete the standard qualitative project and get legal profits and make contribution to whole society. Up to now, construction enterprises in China are still standing in a primary and extensive step in the field of construction cost management, and managers control the cost just according to their experience so that construction cost management system lacks of technique, competitiveness and limitation. The concrete aspects as flow: 1.) The standardized system management of construction cost control has not been formed, and its importance is not entirely understood by management layers of both project and enterprise. 2.) The responsibility of construction cost management is unclear and there is no apparent distinction between both every trade and every division component project. 3.) The methods of planning of construction cost management are not technological and lacking of convinced data and references, and management is always missing link out of line. 4.) The construction cost always stays out of control. Because project managers subjective understanding of cost control, they always do not make a cost plan before starting up, which is possible to lead to extra cost. What s more, they get one sidedness aim and out date control methods of cost control which cannot adapt the development of economy market. 1.2 Background of report Based on the theoretical knowledge I have learned in class, the experience from doing a project and practical internship, I have noticed that most contractor company they win the tender with a lower price. As for the client, he wants to have lower cost but qualified project. However, there is a problem facing the construction enterprise is that how to make a qualified project with a lower cost budget and also get the profits. It is easy to see that control the construction cost is the key for an enterprise to get profits as much as possible. 3

8 This dissertation is going to talk about what is construction cost management, describe the construction cost control and analyze the realistic case to show the economic profits it brings. 1.3 Delimitation The content of this report is limited to the construction cost of an engineering project. I am about to focus on the way of contractor. Describe the cost management situation in China in recent 20 decades, and also real cases which take place in China recent years. But the way how to make cost management effectively is not limited, because the way is favorable for all construction enterprises. 1.4 Research Question In this dissertation, I am going to answer and give conclusion of these following questions: What is the construction cost control theory and management mode? What is the status quo and existing issues of current construction cost control management? How to make cost control in the process of implementation? What economic profits have been taken in a realistic case with effective methods What revelation I have learned while I am working on this dissertation? 1.5 Research Methodology Specific research methods are as following: Start thinking about how to what aspects are included in construction management based my personal understanding. Then have an interview with my consultant to get advice to make sure the clue of my dissertation. To approve my ideas and understanding, also I had an internet interview with the professor from Chengdu University in China get relevant information about the construction cost in China. Then I am going to collect information based on lot of relevant domestic and overseas references and the information from the internet according to problem statement and research question. I tried to find some associated dissertation or report written by a professional one, and then got the writing inspiration from those documents. Study the relevant literatures I collected. But it actually was a problem for me to find a book which describes how construction control and management runs in 4

9 China here. So I choose to find the information from the internet, it could be a construction company website, Baidu Encyclopedia (a famous program we use in China), the lectures in PPT file from my home university, and an answer from my friend who is working on the site as a project manager (work in the Second Building Engineering Company of Chengdu Construction Group), etc. Study the real cases. As for this part, I just did it through my personal understanding. I tried to talk to my professor in China as much as possible, but he was busy at a project and the different time zone made it difficult. So finally I did it by myself in case of delaying dissertation. Make a conclusion and answer the research questions. 1.6 Background Information Introduction of construction cost management in China China is a country which has the most construction projects and also is the largest investment market in engineering constructing in the world. Traditional construction cost management method was brought in form the former Soviet Union based on unified quota of the country. The managerial approach of construction cost was characterized in the planned economy. With the development of society, the market turns to market economy now, which means the old method of construction cost cannot adapt to requirements of current market. Therefore, Chinese construction enterprises have implemented reformed system of construction cost management gradually in recent 20 years. But there is still much spare capacity and strong competition in market due to the pace of economy developing in China is slower and the similar level scale of company, the similar mode of operating and methods of management that enterprises have. So strengthening the construction cost management is the demands of development of enterprises and requirements of adapting current market economy The pressure facing Chinese construction enterprises today (1) The pressure taken by the development of the economy market competition The engineering construction industry is an industry which has high growth rate but lower level of raising economic benefits. From late 1990s to now, there is a decrease trend of achieving profits of construction enterprise. The main reasons for causing this situation are as follow: The saturated market takes a strong competition to companies, especially for construction enterprises, the big profits which are under planned economy 5

10 condition have been sunken by market economy condition, actual profits is reducing. Market environment is coming close to a well regulated and rationalized environment. The project which can take windfall profits has been gone, the risk of getting profits is higher than before. An orderly market competition makes low tech enterprises especially the enterprises that have lower level managerial approaches cannot get enough profits. These enterprises have extensive managerial methods to run their business, because of the extensive management, they always get higher cost, which means the cost cannot be much less than the profits that they got. (2) The pressure taken by joining WTO On the one hand, the construction will be more regulated and the process of being regulated is being faster while the market is being more active. On the other hand, the enterprises having intensive labor characteristic and low economic efficiency cannot get the international competitiveness in the worldwide. After joining WTO, the reallocation of productive resources will make the cost of human resources become higher rapidly, even China now has the cheap labor, but it will be averaged at last. Therefore, how to operate intensive management efficiently to raise the competitiveness is a new challenge for enterprises. These above states show that enterprises must change the original extensive management to intensive management, and they have to make well rounded managerial methods to operate their business. However, the enterprises in China have intensive labor characteristic which refers to the cheaper labor force. Based on this condition, enterprises may get advantage of cost, but for a long term consideration, they will lose lot of profits because the intensive workers lack of technology of construction they cannot bring long term benefits to companies. 2. What is the construction cost control theory and managerial approach? 2.1 Basic conception of project cost management The management is a system of series of activities for organizing, allocating, adjusting and constraining the consumption of materials and manpower. Considering the one time characteristic that construction project has, it is required that the management of construction project need to be well rounded, technical and procedural. 6

11 The construction cost management is to correct the variance of cost which is going to happen or has already incurred, and control the total expense under the budget to ensure to achieve the target cost by using technical and effective management methods. It is very important to make a reasonable estimated cost (the cost which means the targeted and planned cost of an investor) before starting a project. It is the precondition of construction cost control. In a project, the construction cost is a core part of the entire project. This is the reason why this dissertation is going to talk about the construction cost management. Generally we have seven type managerial models: DBB (Design Bid Build), CM (Construction Management), DBM (Design Build Model), BOT (Build Operate Transfer), PMC (Project Management Contractor), EPC (Engineering Procurement Construction) and Partnering. 2.2 Characteristics of construction cost management The scope of characteristics lies in: (1) Dynamic the construction cost is dynamic throughout the constructing. There is a long period between kickoff phase and start up stage, and lots of factors which may exert extra money to a project taking place during this period. The cost of constructing is not a curtained number, and the fee only can be calculated at end. Figure 1.Dynamic cycle of construction cost control This dynamic process generally should be done once or twice a month. The process of is as following: 1. Systematically put all production factors like manpower, materials and financial into operation of the project; 2. Check and follow some influence factors during the construction like bad weather and delay of handing in working drawings, etc. 3. Make an assessment to evaluate the situation of construction process; 4. Compare the target cost with actual cost and make an analysis; 5. Check whether there is a variance between planned cost and actual cost, and measurements have to be taken to deal with the occurred variance. It is important to pay more attention on steps 3 5 to run this program.. (2) Multiple layered the engineering construction is consisted of partitioned project 7

12 and sub divisional work. (3) Dependency quality control, schedule control and cost control cannot be separated. Mangers have to manage all of these aspects at the same time comprehensively. Figure 2.The influence that each project phase takes to cost 2.3 Basic theory of construction cost control Conception of construction cost control The construction cost is the fee which takes place during whole engineering construction, which means that construction enterprise regards construction project as a accounting objective, inclusive consumption of materials, component and fittings, amortization charge and rental expense of machines, the salaries and bonuses given to workers and all expenditures of construction organization. The construction cost of a project is a main cost of a project The composition of construction cost There are two aspects consisting of construction cost: (1) Direct cost a price of all kinds of resource fees that can be completely attributed to the production of a project, such as specific direct materials, direct labor and direct expenses which are related to the production of a project. (2) Indirect cost a price that is not directly attributed to a construction. Indirect costs may not be fixed or variable, such as administration fee, personnel and security costs, etc. These are costs which are not directly related to production. 8

13 2.3.3 Content of construction cost control (1) Materials cost control. The materials cost control is in accordance with the principle of a separation between quantity and price the quantity of material consumption control and material price control. The quantity of material consumption control. It is to make materials wisely used and saved to avoid reworking. The price of material control. The material price that is consisted of buying price, transportation price and normal wastage price. (2) The cost of labor control. How many workers work on the site is calculated by the contractor, and it is based on working drawings and the contracts (which are made by a project manager and contractor). (3) The price of machine control. The cost of machine is decided by the quantity of machines and the rent of machine. There are 3 main aspects as following: Making well rounded plan of machine s working process and strengthening machines management to avoid vacancy of working caused by unconscionable plan; Paying great attention to maintenance of machines to avoid vacancy of working caused by inappropriate utilization. Making good coordination work between machine operators and assistant workers as much as possible to increase the quantity of production. (4) The cost of management The cost of management on the site takes a certain part of construction cost, and it is difficult to predict and control before constructing. There are 4 following main measures we can take during construction: Making sure how much is the proportion that managerial cost (taking place on the site) takes in planned construction cost and then ensuring the total expenditure of managerial cost that project department has. Making budget estimation plan of managerial cost of project management department and other managerial departments, and these departments should use this plan as the principle of construction management. 9

14 Ensuring each department s responsibility, making standard expense of managerial cost and limiting the scope of managerial cost. Making and strictly enforcing the examination and approval process of construction cost which takes place in engineering project manager department *Current construction cost management model and theories in China According to the mew cost control theory, cost engineers are professional persons who undertake cost estimate, cost control, marketing planning and scientific management. Fields undertaken by cost engineers include such aspects as project management, project planning, progress management and profitability and analysis and so on of a project construction and its production process. Cost engineers offer service for control over life cycle expenditure, property facilities and production and manufacture of a construction project with their management technique with an overall cost. (1) Direct regulation and control of the government The development of quota has come into being developed and standing a mature stage gradually after foundation of the People's Republic of China in planned economy market. After the centralized management model of investment system has been used for a long time in China, the government is not only a maker of macro policy, but a participant of a micro project construction. Therefore, a unified quota with dense color of planned economy is able to provide powerful methods and means for the government to carry out macro investment regulation and control and micro construction project management. Basic materials for calculation of construction cost usually include construction cost quota, construction cost expense quota, cost index, basic unit price, quantities calculation rule and relevant economic rules and policies issued by competent department of the government (2) Two construction models in China presently The 2 models are valuation model according to quota and valuation according to bill of quantities. Valuation model according to quota Valuation model according to quota is an effective model adopted during the transition period from planned economy to market economy. Determination of construction cost through valuation model according to quota prevents overrated valuation and standards and prices pressed down to some extent, because budgetary quota standardizes rate of consumption and a variety of documents 10

15 stipulate manpower, materials, unit price of machines and all sorts of service fee norms, which reflects normativity, unitarity and rationality of construction cost. However, it has an inhibited effect upon market competition, and is not favorable for a construction enterprise to improve its technique, strengthen its management and enhance its labor efficiency and market competition. Valuation model according to bill of quantities Valuation model according to bill quantities is a construction cost determination model proposed recently. In this model, the government merely unifies project code, project name, unit of measurement and measurement rule of quantities. Each construction enterprise has its self determination to quote a price according to its own situation in a tender offer, and price of building products is formed thereby in the process of bidding. *2.3.4 Quote from the study of HuiLi: Study on Construction cost of Construction Project. 3 What is the status quo and existing issues of current construction cost control management? 3.1 The status quo of construction cost management in China There are lots of engineering project waiting for being constructed. In order to expand the business scale rapidly, construction enterprises have adopted extensive management model, but in fact this managerial method cannot adapt to the economy market. Reducing the expense of construction cost and enhancing economic performance are the fundamental goals of construction enterprises. After Chinese economic reform, the enterprise technology strength has been higher. Many enterprises have integrated traditional management with modern advanced management, which makes them go up to a higher level. However, today s China is still in initial stage and metaphase. The level of construction enterprises management is not as high as it would like to be, because enterprises just chase value of production unilaterally but effectiveness. Especially in the condition of economy market, the cost management level of some construction enterprises is far behind, even there is no link between cost control and accounting, so it leads to a long period but low quality project. By far, the four common problems existing in construction cost management are as follow: (1) The awareness of construction cost of project manager is weak As for most engineering project, there is no detailed planning of construction cost 11

16 planned before starting up and mobilizing, and less attention being paid on reducing cost in construction management design. Project managers pay more attention on how much profit brought by a project but expenditure of construction cost. Even some project managers arrange the project just according to their experience but not technical theories. There is no a formative rules and regulation to supervise this behavior, thereby the basis of project managers work is not steady and solid. For example, they don t make plan of standard expense of cost or don t make the limitation of labor force so that causes the loss, however no one can find a specific reason why the loss happen, so the solution cannot be found out. Up to now, for some projects, even there is no plan and no prediction of construction cost. It is too late to make an calculation at the end of construction or a relative late constructing phase. (2) Some projects lack of necessary construction cost management links. The management methods are not normative and technical, which reflects that there is no enough connection between construction planning and execution. For some projects, the construction cost control is not in accordance with the planning of construction cost, or the quality of planning is not as high as it would be. The construction cost is a comprehensive index to a project s management. Each working department should work together but not be separated, and all departments should be aware of their responsibilities so that the working links will work. (3) Engineering accident and risk are always existed On the one hand, the engineering accident is an obstacle to construction cost management to some extent. That the quality out of control means the level of management of enterprises is low, and it will cause the expense, manpower, project s quality and construction progress are all out of control, so fewer profits can be brought. On the other hand, the challenges and risk facing to a project are produced by the unexpected factors, including strong competition of construction market, shortage of resources, and raising materials price, etc. The competitiveness of enterprises has been weakened by these risk and unexpected factors, and even has restricted the economy development of enterprises. (4) Too much data but less useful information. With the development of data base, there is a lot of business statistics accumulated but few can be useful for enterprises to make a decision. In conclusion, how construction cost management adapts to the reformation and 12

17 development of a construction industry is a primary problem facing to enterprises currently. To win in the strong market competition, only by making a deeply reformed and technical managerial system that the construction enterprises can survive from serious economy situation and then make a long term development. 3.2 Development trend of construction cost management in China China has gained a competitive advantage of labor resource in a close paragraph of time, but reallocation of construction resource will raise the manpower cost rapidly after joining WTO. Therefore, construction enterprises have to change the traditional extensive management model to precision intensive management model, to change the pagoda shape organization structure to flat organization structure in order to strengthen the links between each department. Enhancing administrative staff especially the middle and senior managers to learn the modern management and cultivate their awareness of competition is an initial way which can boost enterprises economic development. It is necessary to set up an analytical cost management system based on data base and data mining technology. The improvement of techniques can make enterprises stay in an advanced position. From 1990s, strategic cost management has been a core weapon for an enterprise to get access to competitive advantage. The wide application of strategic cost management in practical is a challenge to traditional management system. Therefore enterprises have to reform traditional management system according to requirements of strategic cost management to maintain enterprises competitiveness. The strategic cost management is a production produced by the changing market environment, is a reformation of traditional management system to adapt to the economy market. 3.3 The inspiration taken by advanced foreign enterprises As far as history is concerned, value engineering has been used for a long time in China. It has taken a solid foundation to cost benefit analysis but has not been systematically combined with cost estimating. Considering the history and reality of cost management in China, it is necessary to think about two aspects facing enterprises, one is under the changing process of management, the strong competition to construction enterprises is being formed gradually; another one is whether the cost management model exactly works and how to implement cost control methods effectively. Considering the first question, managers should have these ideas: 1.The construction cost control management is a process approach and the construction cost management is a real time managerial method over all construction processes. 2. All the staff of construction enterprise should be enrolled in cost management. 13

18 Considering the second question, enterprises need to improve execution ability by adjusting managing process and organization structure. 4 How to make cost control in the process of implementation effectively? 4.1 Before constructing and during constructing (1) Ensuring the consumption of materials management, making the cost of materials takes approximately 60% of construction cost and reducing the unnecessary economic expenditure. (2) Strengthening the management of machines. Making machines choice reasonably and making machines give a full play to construction. Before construction, it is necessary to fully understand the function of machines. During the construction, managers have to set machines working in each construction section reasonably in order to increase the capacity utilization of machines on the site, and the cost of machines can be reduced by this way. Make periodic maintenance inspection of machines and move away the machines which are out of use on the site immediately. If it is possible that managers could rent out the machines which are out of use temporarily. It is also a feasible way to get benefits. (3) Strengthening the management of labor and reducing the consumption of labor. How to choose contractor and working teams is the very first key to labor management of construction. The manpower price and whether workers can carry out a high quality project these two aspects exert influence to construction cost. Therefore, the first step is to choose a good team, and then to make clearly described contracts according to working drawings, construction estimation and construction organization plan. During the construction, the number of workers who is working on the site and the work quota should be controlled strictly, and the attendance rate should be checked regularly. Project manager should notice and solve the unreasonable arrangement of labor force, and supervise and inspect how is going on the site. What is more, sporadic manpower should be limited in a certain number to reduce this none profitable expense as minimum as possible. 4.2 Feedback information and cost control after constructing The final accounting of construction project is the vital key for enterprises to know whether they have achieved profits or not. Getting payment from a client at last is the fruit of labor that enterprises deserve. Therefore, enterprises have to do the four following aspects as well: (1) Collecting and organizing construction information, summarizing and classifying all information into different files to ensure the reliability and completeness of the 14

19 information. The adequate information has much influence on final accounting. In the final accounting stage, project department will hand in the relevant documents about final accounting to budget department, the budget department will analyze and compare these documents with the bidding list price, actual materials consumption and labor fee to ensure the correctness of final accounting of project. There should be a professional cost engineer making a final report to the client within a legal time in case of delay of getting payment from the client. (2) Strengthening the management of trade debt. Cost engineer should make final accounting immediately after completion of the project to specify the debtor creditor relationship. The leader of the project should contact with the client to ask for payment back as soon as possible. If the payment cannot be given in time, the construction enterprise should make a contract with the client. The date that when construction enterprise can receive the payment and responsibility for breach of contract should be declared clearly in this contract. The construction enterprise should take legal solution to solve the case. (3) Doing analysis and summary of the project. The project department should making a detailed final accounting document, the budget department is responsible for approving and checking the final accounting, the financial department is responsible for verifying the construction cost and making rewards and punishment to associated personnel. 4.3 Operation of the project construction cost During the constructing, the department of project management should use MBO (management by objective) to control the construction cost which is going to happen. The figure 1 shows the contractor relationship, the following paragraph is going to talk about the roles of supplier and project contractor in a construction project. Figure 3.General contractor mode 15

20 (1) Control of materials purchase check The materials of construction include the main materials which directly constitute a physical project and the materials which are useful and helpful to formulate a project. Generally, the expense of materials purchase takes more than 40% of construction cost. Supply of materials The control of supply channels of materials should follow the principle of good quality, low buying price and short transportation distance. Check the materials coming to site, always examine the materials in each purchasing links. The quantity of materials supplied by client is calculated by cost engineer according to working drawings. These materials should be divided into several parts based on construction progress and gradually taken to the site. But in fact, there will be some changes happening during construction stage, and the work amount and construction cost is going to be changed as well, therefore, the quantity of materials should be adjusted according to the final settlement at last. As for the construction enterprise, it needs to control how the purchase and supply goes on the construction progress. The management department should make a plan of materials purchase and supply in order to meet the demands of deferent construction stages. But sometimes there will be a delay or lack of materials actually. In case of this situation happen, the supply time and the number of materials supplying should be written down to the plan, compare the actual purchasing materials with the planned purchasing materials through the plan to check whether purchase and supply goes well on the construction progress, and what influence has been taken on construction progress because of shortage of materials supply. Control of materials price On the one hand, the purchasing price of materials is mainly controlled by purchasing department. The purchasing price is mainly determined by the market, but as for internal control, the purchasing department should make pre consideration of material suppliers and make a list of qualified suppliers. Purchasing department should make comparison shopping and then choose the suppliers from the list. On the other hand, the transportation fee must be controlled. A reasonable transportation organization should be made, which should follow the principle of proximity in order to reduce the cost (the cost refers to the cost of transportation and the cost of materials wastage). The extra expenditure caused by change of designated place should be paid by supplier(s). When the materials are taken to the site, inspection personnel should check the materials quality with the quality assurance immediately to take out the broken 16

21 materials. Control of materials consumption With the precondition of quality assurance, wisely use and save materials as much as possible through the quota management and metrological management. As for the materials consumption quota, it refers to the standard quantity of wise consumption of materials (which is to complete the project) with the condition of an organized and technical production process. Based on the principle of materials consumption quota, the materials should be restrictedly given (within the quota number). If there is an extra consumption of materials, the reason why this situation happens should be found out before handing out this part of materials. Figure Responsibility cost analysis The process of construction cost control is to compare, analyze, predict, correct and final check. The analysis is the core. Theories of construction cost analysis aims at analyzing the cost which has happened already and finding out the reason why it happens and how the extra expenditure happens, in order to improve management and to increase economic benefit. Responsibility cost management is to divide the project estimation into different responsible parts to form a responsibility budget (which is according to the requirements of economic responsibility system in each responsible layers of internal 17

22 project organization). Responsibility cost defines the purpose of all kinds of economic responsibilities of project cost clearly. This management method is a scientific approach to strengthen construction management. It is required that responsibility centers of enterprise should be set up, and the relevant responsible economic activities should be planned and controlled. The responsibility center should be divided into cost center, profit center and investment center according to the fields of control and scope of responsibility. In the construction organization, department of project management, construction brigade and teams and groups consist of cost center, economic department is also included in cost center. How to divide the responsibility cost is based on project responsibility center The responsibility cost of a construction project The responsibility cost of construction project refers to target cost, which means the specified cost mentioned in the economic contract signed by the project department and the client minus the total amount of taxation expense and profitability index: Target cost=contract price delivering price to enterprise taxation expense profitability index of project Only by using target cost as the responsibility cost to control and manage the construction cost can achieve the profits The responsibility cost of departments As for technique department, the construction scheme made by this department should be an advanced and practical one. The construction cost estimated by this scheme should not be more than target cost. As for material department, the personnel should control the purchasing price of materials used for the project no more than target unit materials price. The quantity of supplying should not be more than quantity of target quantity. As for machinery equipment department, the personnel should control the machine s expense within the target cost of machine. As for quality and security department, the personnel should make inspection work go well on the site to ensure that the project is qualified at once when it hands over in case of reworking, and also the inspection is to avoid safety accidents happening (if the accidents happen, the cost of production will be higher). As for the finance department, its responsibility is to control the indirect cost within planned cost, and it is responsible for making planned expenditure for indirect cost The responsibility cost of construction team 18

23 The construction team is the basic responsibility main body of responsibility cost management. The team is responsible for the direct labor cost, direct materials cost and direct machines cost, and also the indirect running fee for the construction team. The cost should be controlled in advance Value engineering, it is to bestow suitable value on a project with lower cost. The relationship between value, function and cost is V=F/C. 4.5 *Earned value analysis Earned value management is a comprehensive and effective method for cost control. Three quantities form the basis for cost performance measurement using Earned Value Management. They are Budgeted Cost of Work Scheduled (BCWS) or Planned Value (PV), Budgeted Cost of Work Performed (BCWP) or Earned Value (EV) and Actual Cost of Work Performed (ACWP) or Actual Cost (AC). The above quantities are defined below. Budgeted Cost of Work Scheduled (BCWS) or Planned Value (PV) The sum of budgets for all work packages scheduled to be accomplished within a given time period. Budgeted Cost of Work Performed (BCWP) or Earned Value (EV) The sum of budgets for completed work packages and completed portions of open work packages. Actual Cost of Work Performed (ACWP) or Actual Cost (AC) The actual cost incurred in accomplishing the work performed within a given time period. For equitable comparison, ACWP is only recorded for the work performed to date against tasks for which a BCWP is also reported. From these three quantities we can know 2 variances between them: Cost Variance (CV) The difference between the planned cost of work performed (BCWP) and actual cost incurred for the work (ACWP) This is the actual dollar value by which a project is either overrunning or underrunning its estimated cost. CV = BCWP ACWP. CV > 0, it is said that Schedule Variance (SV) The difference between the work actually performed (BCWP) and the work scheduled (BCWS). The schedule variance is calculated in terms of the difference in dollar value between measured the amount of work that should have been completed in a given time period and the work actually completed. SV = BCWP BCWS. SV > 0, it is said the project is ahead of schedule; SV < 0, it is said that the project is behind schedule. 19

24 When using the earned value analysis to control the cost and the schedule, the above three quantities have to be monitored periodically. At first, the detailed budgeted cost of the project and the total budgeted cost (TBC) for each work package should be made. Next step is to assign each total budgeted cost (TBC) to whole construction period. The planned costs of each construction stage are decided by the schedule of each work package. Last step is to calculate the budgeted cost of work scheduled (BCWS) through the calculation of accumulated budgeted cost of whole project. Figure 5 There are other two variates to reflect the index of construction progress. Cost Performance Index (CPI). The ratio of cost of work performed (BCWP) to actual cost (ACWP). CPI of 1.0 implies that the actual cost matches to the estimated cost. CPI greater than 1.0 indicates work is accomplished for less cost than what was planned or budgeted. CPI less than 1.0 indicates the project is facing cost overrun. For example, BCWP=2500 million DKK,ACWP=5000 million DKK, CPI=50%,it means cost each 1 DKK just get 0.5DKK profit back. Schedule Performance Index (SPI). The ratio of work accomplished (BCWP) versus work planned (BCWS), for a specific time period. SPI indicates the rate at which the project is progressing. For example, BCWP=700 million DKK, BCWS=1000 million DKK, SPI=70%,the project which values for 1DKK, of 70% of this project is completed. When CPI < 1 or gradually decreasing, CV < 0 and CV gradually increasing, the measurement should be made immediately to correct the variance, and more attention should be paid on those work packages which have minus CV. The product of CPI * SPI is a critical exponent, if the product of a project is located in a certain region, that means the project progress is going well. If the number is under 0.6, the project should have overall check; if it is between , the investigate should be taken immediately; if it is between , the engineers should be responsible 20

25 for checking; if it is between , the situation is normal; if it is between , just checking when personnel have free time; if it is above 1.3, the investigate should be taken immediately. From these above quantities we can determine our total program budget as well as make a determination of schedule and cost performance and provide an estimated cost of the project at its completion. Additional terms are defined to record cost and schedule performance and program budget: Performance Measurement Baseline (PMB) The sum of all work packages Budgeted Cost of Work Scheduled (BCWS) for each time period, calculated for the total program duration. The PMB forms the time phased budget plan against which project performance is measured. Budget At Completion (BAC) The sum of all the budgets allocated to a program. In addition to the PMB, there generally is an amount of management reserve, which is a portion of the total program budget not allocated to specific work packages and withheld for management control processes. The BAC consists of the PMB plus all management reserve. Estimate At Completion (EAC) It is a forecast of most likely total project costs based on project performance and risk quantification. At the start of the project BAC and EAC will be equal. EAC will vary from BAC only when actual costs (ACWP) vary from the planned costs (BCWP). Most common forecasting techniques are some variations of: 1. EAC = Actuals to date plus a new estimate for all remaining work. This approach is most often used when past performance shows that the original estimating assumptions were fundamentally flawed, or they are no longer relevant to a change in conditions. 2. EAC = Actuals to date plus remaining budget. This approach is most often used when current variances are seen as atypical and the project management team expectations are that similar variances will not occur in the future. 3. EAC = Actuals to date plus the remaining budget modified by a performance factor, often the cumulative cost performance index (CPI). This approach is most often used when current variances are seen as typical of future variances. 4. EAC = Budget At Completion (BAC) modified by a performance factor, cumulative cost performance index (CPI). This approach is most often used when no variances from BAC have occurred. 21

26 Figure 6 Figure 7 Benefits of EVMS Following are some of the benefits of EVMS, described by Fleming and Koppleman as the legacy of using the criteria on government contracts for three decades (1996, p.22). Note that they do not separate benefits of earned value data from the benefits of the criteria, perhaps because the reliability of data depends on the disciplined application of the management practices described by the criteria. 1) It is a single management control system that provides reliable data. 2) It integrates work, schedule and cost using a work breakdown structure (WBS). 3) The associated database of completed projects is useful for comparative analysis. 4) The cumulative cost performance index (CPI) provides an early warning signal. 5) The schedule performance index (SPI) provides an early warning signal. 6) The CPI is a predictor for the final cost of the project. 7) It uses an index based method to forecast the final cost of the project. 8) The to complete performance index allows evaluation of the forecasted final cost. 9) The periodic (e.g. weekly or monthly) CPI is a benchmark. 10) The management by exception principle can reduce information overload. 22

27 *4.5 Quote from the study of Suketu Nagrecha: An introduction to Earned Value Analysis 4.6 Additional factors of effective cost control There are two additional factors of effective cost control, they are schedule management and quality management separately. As for schedule management, first is to make activity duration estimating, the second is to optimize construction schedule, and last is to optimize the cost (include direct and indirect cost). It aims at completing all working activities of a project. As for quality control management, according to the document published by China GB/T19000 Quality management system standards, it aims at setting up quality policy and quality aim. So make a good job of these two additional factors, it will be more effective to control a cost. 4.7 Example to show how to use this way to analyze. The total construction cost of a project is 3,120,000CNY, the duration is 150 days. There are 60 days of work have been done, the planned value is 1,200,000CNY, the earned value is 1,000,000CNY, the actual cost is 1,160,000CNY. To sum up, SV = BCWP BCWS = 1,100,000 1,200,000 = 100,000 CV = BCWP ACWP = 1,160,000 1,100,000 = 60,000 SPI = BCWP / BCWS = 1,100,000 / 1,200,000 = 0.92 < 1 CPI = BCWP / ACWP = 1,100,000 / 1,160,000 = 0.95 < 1 According to the calculation, we can get the graph: Figure 8. From the above calculation and the graph, we can know, CV < 1, SV < 1, the cost of this project is over spending, the progress falls behind the planned time schedule, so we 23