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Project costs are measured and analyzed in many ways throughout a project, from planning and design to bidding, construction, turnover, and beyond. Cost-benefit, and life-cycle cost are a few examples of how a projects cost effectiveness can be evaluated
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Estimating
Estimating is the first phase of the construction cycle and followed by construction accounting and cost control. Accounts that must be set up to coincide with the estimate are, in turn, used for costing. Estimating, construction accounting and cost control thus form a continuous cycle. The foundation of a cost control system, therefore, is the bid estimate. Success in accurately assessing project performance during the execution of the work is largely dependent on integrity of the estimate. Estimating is defined as the technical process of predicting costs of construction. Estimate is prepared by referring to data on past projects of a similar nature and references containing data not available in company files. Estimate is a quick method for pricing a project based on incomplete data. Estimating is the fundamental process of the construction industry that answers the question How much is the project expected to cost? The financial commitment to a construction project is very large, and inaccurate project estimates can have a detrimental effect on all parties.
Budgeting
A budget is managements tool for planning, reporting, controlling costs and for cash forecasting. It is used to forecast the rate of expenditure and the anticipated income for the final aim of profit estimating. A budget is a detailed plan, expressed in quantitative terms, that specifies how an organization will acquire and use resources during a particular period of time. The procedures used to develop a budget constitute a budgeting system. Budgeting systems have five primary purposes: planning, facilitating communication and coordination, allocating resources, managing financial and operational performance, and evaluating performance and providing incentives.
All construction cost shall fall into four main groups: 1 direct labour, material and sub-contract costs 2 cost of plant and equipment required to perform the work, which include the depreciation and taxes of these assets 3 costs incurred in operating and maintaining plant and equipment, which will include operating labour, fuel, lubricants, repair, labour and parts, maintenance, supplies, etc.
4 Indirect costs of administrative and technical personnel required to oversee and supervise the job, together with other similar expenses of an overall or general character.
Indirect cost: cannot be diretly attributed to any specific task of the project.
- General overhead (advertising, profit, taxes, insurance, etc.) -Job overhead (salary, office expenses, etc)
Schuette and Liska (1994) classify the costs into direct or indirect costs more simply.
Direct cost: are attributable to a specific task of the project. - material - labour - plant and equipment - sub-contract costs
Effective Cost Management The basis for effective cost management is to understand cost structure and to analyze the costs flowing through that structure. It is a strategic processes that focuses on the customer and on profitability. The six steps to effective cost management are:
1. understand what causes the cost and revenue structure of the business 2. understand and reduce interfunctional complexity 3. provide the tools to manage costs 4. involve employees in decisions 5. increase effectiveness and continuously improve costs 6. measure decisions against the strategic business plan
Factors that cause inaccuracy of cost estimating as follows: - Insufficient time for estimating - Poor tender document - Insufficient tender document analysis - Lack of understanding of project requirements - Poor communication between project team - Low participation in estimating by site team - Lack review of cost estimate by management - Poor comprehension of site requirements - Poor feedback on accuracy of previous estimates - Pressure from management - Removal of estimate padding by management - Poor project cost feedback - Lack of diligence by estimators - Lack of adequate guidelines for estimating - Inaccurate production data used in estimating - Lack of historical data on past estimate - Poor analysis of cost data for cost estimate - Estimators lacks of data procession techniques - Frequent requests for changing of estimate
After the study, Akintoye (1998) concludes that the main factors relevant to cost estimating practice are: - complexity of the project - scale and scope of construction - market condition - method of construction - site constraints - clients financial position - buildability - location of project Tsang (1998) identifies 10 factors that affect the performance of the estimate. They are:1. type of project 2. size of project 3. number of bidder 4. construction period 5. market conditions 6. geographical location 7. level of information 8. ability of estimator 9. form of contract 10. procurement method