Effective budget control is a critical component of project management for construction companies. Despite their best efforts, many companies still face challenges in implementing effective budget control measures, resulting in cost overruns and delays. One of the first roadblocks is the lack of alignment between estimation and operations teams.
In its simplest forms, budget control is the process of comparing the earned value with actual cost for a list of agreed upon cost centers and analyzing the root cause of cost variances. The purpose of the analysis is for project managers to take the right action that will help mitigate cost overruns and maximize profitability.
This blog aims to provide practical steps for overcoming common challenges and for implementing successful budget control in construction projects.
Enable alignment across key departments
One of the primary challenges in implementing effective budget control is the lack of alignment and inconsistencies in reporting among the three teams involved: estimation, finance, and cost control. Different departments are responsible for different parts of the process. Clear communication channels are essential to aligning on how budget control objectives will be accomplished, the responsibilities of each of the teams involved, and implementing an effective workflow across the teams.
Establish a consistent cost center baseline for budget control
Another related challenge is the lack of consistent cost codes or cost centers across the departments, making it difficult to have a common baseline for comparing the earned value and actual cost. To address this challenge, a clear cost coding system must be established and consistently used for budget control. It is important that the level of granularity of cost centers is realistic and aligned with the company’s available resources and capacity to capture actual costs. Utilizing specialized estimation and budget control software can further facilitate the implementation of the selected coding system, and enable a smooth handover and reporting across the teams.
Leverage the estimate when creating the project budget
While it is important to recognize the purpose and assumptions behind an estimate, it can be a valuable baseline when creating the project budget. As more information about the project becomes available, appropriate changes must be applied to the estimate to more closely reflect the project. Additionally, the project budget may need to be adjusted to account for changes in scope and management decisions. However, a final and agreed-upon budget must be used as the baseline for budget control.
Track with regular and consistent closing dates
Delays in obtaining actual cost reports and differences in closing dates can pose challenges in budget control. Establishing clear protocols and timelines for all teams to follow can help ensure proper tracking and reporting of earned value, actual cost, and cost variance. More frequent tracking and monitoring of earned value and actual costs enables a more timely implementation of corrective action to mitigate cost overruns.
Account for re-allocations and adjustments
Changes in construction methods may require the reallocation of costs to different cost centers, making it challenging to accurately compare budget versus actual costs. For example, when a project activity was assumed to be self-performed work during budgeting, but was later subcontracted. It is necessary to reallocate costs to the right cost center to ensure a proper comparison. Additionally, accounting for corrections such as liabilities and material on site requires applying adjustments to the actual cost values to reflect these variables.
Analyze results to take corrective actions or explore possibilities
The key purpose of budget control is to detect the root cause of variances in order to mitigate cost overruns and to maximize opportunities for profitability. The calculation of key budget control metrics and the investigation of variances helps project managers determine the appropriate actions. Additionally, insights can be provided back to the estimation teams to enable improved accuracy, competitiveness, and profitability for future projects.
Finally, many companies attempt to do too much at once to address cost overruns. Budget control can be a complex, multi-dimensional topic. However, simply by starting with the few steps outlined in this article, you will be well on your journey towards successful budget control that you can evolve and advance over time.