Thread Content
Problems and Countermeasures in Project Cost Management Author: He Chunlei Abstract: As competition in the construction industry becomes increasingly fierce, project cost management has become a highly challenging issue for construction companies. Currently, construction companies generally face four problems in the cost management of engineering projects: a weak cost awareness, loose systematic structures, outdated management methods, and the lack of quantification of indicators. In this regard, the author believes that the following countermeasures should be adopted: one premise, which is to adhere to economic efficiency assessment as a basis; two key points, namely strengthening leadership and ensuring strict implementation; three systems, including an internal pricing system, an assessment and evaluation system, and a quantitative indicator system; and four measures, such as optimizing resource allocation, improving construction plans, exercising centralized control over key materials, and controlling the volume of work. Keywords: Project cost management, existing problems, main countermeasures blog.mypm.net With the development of the market economy, competition in the construction industry has become increasingly fierce. In order to increase their chances of winning bids, construction companies keep lowering their bid prices, which results in increasingly narrow profit margins for these companies. If project management is delayed and cost control is lax, it is easy to end up in a situation where losses increase as work progresses. Therefore, project cost management is a highly challenging issue for construction companies. Below, the author will briefly discuss the common problems in project cost management of construction enterprises and the countermeasures taken to address them, in the hope of being useful. ypm.net I. Existing Problems (A) Weak cost awareness Transferred from the Project Managers Alliance. Constrained by traditional cost management concepts, some construction company leaders lack a strong sense of cost management and do not pay enough attention to it. Some are constantly constrained by the notion that costs cannot be reduced any further, which weakens their determination to implement cost management; they give up at the first sign of difficulties ； Some believe that cost management is the responsibility of project managers and planning finance staff ； Some believe that controlling costs can be achieved solely through administrative measures ； Some people talk a lot but take little action in practice; inspections are mere formalities, analyses are presented objectively, assessments are just for show, and rewards and punishments are not implemented. Others lack a sense of thrift, and there is a serious tendency to show off, indulge in extravagance, and engage in competition ； Some prioritize outcomes over preparations; in particular, some managers focus only on short-term benefits without considering their source or the process involved. Project Managers Alliance (II) Loose connections within the system Articles by the Project Managers Alliance Cost management is a systematic process that requires the coordinated effort of various components; cost forecasting, planning, process control, solution optimization, activity analysis, financial accounting, performance evaluation, and so on all require the establishment of a comprehensive operational system. Any relaxation in any aspect can potentially lead to significant changes in cost management metrics. During their operations, some construction companies often have situations where many people focus on certain aspects while other aspects are neglected; it is common to see cases where one or several aspects are either relaxed or ignored. As a result, outdated practices fail to be improved, and good practices are not consistently followed – there are periods of intensity and periods of laxity. ning.mypm.net (III) Outdated management methods; insufficient management training. In carrying out cost management activities, many organizations stick to traditional approaches, resulting in outdated management practices. Some manage based on experience, clinging stubbornly to outdated and backward ideas and practices, and fail to adopt good practices in a timely manner ； Some, when learning from the experiences of advanced units, fail to relate them to reality and apply them mechanically, resulting in poor outcomes ； Some have established certain management systems, but they are not properly organized and operated; lacking the necessary preventive controls and monitoring measures, which ultimately results in the existence of various \"black holes\" and \"dead zones\"” ； Some focus more on taking on responsibilities rather than on proper management, using delegation in place of actual management, which to some extent hinders the effective progress of cost management in engineering projects. Manager Alliance (IV) Indicators are not quantified Articles from the Manager Alliance At present, some construction companies have not established a scientific set of quantitative indicators; in some cases, these indicators are determined arbitrarily, resulting in unreasonable values ； Some use a simple extraction ratio method, resulting in inaccurate quantification. First, there is no clear idea of how much of the project should be completed, how much savings should be achieved, or how much additional revenue should be generated ； Second, there are no quantitative standards for rewarding or punishing projects based on their profitability, resulting in a lack of basis or insufficient grounds for conducting evaluations and implementing rewards. There is a lack of a specific \"reference point\" to determine how much should be rewarded for savings and how much should be penalized for losses. This can lead to situations where profitable projects end up wasting more resources than loss-making ones; as a result, those who should be punished are not punished while those who should be rewarded are not rewarded, thereby dampening enthusiasm in all areas. traini.mypm.net II. Main Countermeasures Through years of practice, the author believes that to effectively manage project costs, it is essential to focus on \"one prerequisite\", two key elements, \"three systems\", and four measures. Project Managers Alliance (1) A premise: “A premise” means adhering to economic efficiency assessment as a basis. After the project is awarded and a contract is signed, the company’s cost management department along with relevant personnel from the project team shall conduct an economic benefit assessment of the project and establish target profit indicators for it. The principle for evaluating economic benefits is to take the winning bid contract price as the basis, and rely on industry standards and internal corporate standards. Using a method that combines factors such as the market and project site conditions, differences in quantity and price, as well as forward and backward calculations, it takes into account various elements such as the complexity of the project, change orders and claims, market risks, improvements in management efficiency, and other exceptional factors in order to make an accurate assessment. 1. Calculation indicators. First, determine the target cost reasonably. Based on information such as bid prices, construction drawings, budget quotas, and data from on-site inspections, an itemized assessment is carried out taking into account the direct costs at the work level (labor costs, material costs, machinery usage costs, on-site management costs), the indirect management costs of the project team (overhead costs), the management costs imposed by higher-level authorities (funds, payments to be made, etc.), and taxes. By determining the physical quantities consumed in each unit project, sub-project, and construction process, the lowest comprehensive unit price and total target cost that are acceptable in the market are calculated ； Second, reasonably determine the capital flow. Based on the contract terms and specifications, and adhering to the principles of living within one’s means, cutting costs, ensuring achievement of goals, and maintaining construction activities, a scientific and rational plan for funds inflows and outflows or a cash flow statement should be prepared. Articles from the Project Managers Alliance 2. Break down indicators. Based on the assessment indicators, elements such as project duration, quality, safety, profit, funds to be handed over, site management, and team management are broken down according to the construction progress. On the basis of these broken-down indicators, a target responsibility system and an indicator contracting system are established, featuring clear objectives, quantified indicators, assigned responsibilities, and effective evaluation and implementation. The relevant indicators are broken down vertically to specialized teams, work groups, and individual workers, and horizontally to various sub-projects and process steps; they are further detailed at the quarterly and monthly levels, and translated into job responsibilities to ensure that everyone has specific targets to meet. (II) Two key points 1. Leadership attention is the key to carrying out cost management work. Supervisory leaders at all levels and the chief accountant must take personal charge and lead by example; they should not merely talk about it or write it down on paper. Instead, they need to raise awareness, update their concepts, actively promote these initiatives, provide proper guidance, and offer all necessary resources. (1) Establish a cost concept for system integration. Construction companies must completely abandon the outdated notion that \"costs are solely the responsibility of project managers and financial planners, while schedule, safety, and quality have nothing to do with finance.\" Instead, they should adopt an integrated system approach that takes into account funds, costs, schedule, safety, quality, and environmental protection. It is necessary to properly manage the relationships between funds and costs on the one hand, and quality, safety, scale, plans, forecasts, and decisions on the other. Every aspect, every moment, and every step in the cost control process must be handled with utmost attention. Project manager community (2) Foster a cost-conscious mindset. As management decision-makers, it is necessary to enhance the mindset regarding cost management and adopt a management philosophy that allows one to \"keep the watermelon while also picking up the sesame seeds.\" While opening up sources of funding is certainly more important than cutting costs, failing to manage finances properly or operate effectively will result in expenses exceeding income, which in turn leads to rising costs and declining efficiency. “\"Savings\" are very important for any engineering project. One should not focus only on the major aspects while neglecting the small details. In engineering projects, a sense of thrift that emphasizes \"not skipping tasks just because they involve minor benefits, nor undertaking them merely due to slight costs\" is essential. This does not mean being concerned only with every penny; it relates to the idea that \"one’s basic needs such as food, clothing, and shelter must be taken care of.\" A dike a thousand miles long can collapse because of an ant hole; it has been proven that many projects fail due to excessive spending. Losses are not caused over night, nor are they brought about by an expense related to entertainment; rather, they result from the mindset, attitudes, behaviors, and habits that assume such an expense will not affect costs. 2. Ensuring strict implementation is the key. Nothing can be accomplished without rules. Establishing and improving a comprehensive cost management system is a necessary condition for carrying out cost management tasks, while strengthening the enforcement of such systems provides a solid guarantee for implementing project cost management. bbs.mypm.net (1) Establish and improve various cost management systems. As soon as a project is launched, a set of cost management methods and systems must be established in accordance with the responsibility cost budget targets set by the company. During the implementation process, adjustments and improvements should be made continuously based on actual conditions, with refinement through practice, to ensure that the system is scientific and sound without any flaws, thereby truly playing a role in regulating project cost management and ultimately achieving an improvement in the level of cost management for construction projects. www.mypm.net (2) Full-process control. Strengthening process control means enhancing the regulatory mechanisms that rely on systems to manage people and tasks, ensuring that every step is closely monitored, everyone is accountable, and various levels of oversight are in place. The goal is to eliminate weak links, keep key aspects under control, focus on critical points, and overcome difficult challenges. This ensures that there are plans in advance, control during the process, and evaluations afterward, thereby guaranteeing that execution is consistent throughout the entire process and that everything remains under control. blog.mypm.net Community (III) Three Systems 1. Establish an internal pricing system. After the start of a construction project, the company’s cost management department establishes scientific internal pricing based on construction standards, the design-based construction plan, as well as the prices of materials, labor, and machinery determined through surveys or bidding. These prices serve as the basis for calculating, measuring, and evaluating responsibility costs. Articles from the Managers Alliance 2. Establish a quantitative indicator system. From the establishment of cost targets to the evaluation of goal achievement, the entire process requires a complete, scientific, and reasonable quantitative indicator system as a foundation. To increase net profits from change claims, it is necessary to quantify indicators such as cost savings from bidding for materials, equipment, and labor, cost savings resulting from the optimization of construction plans, cost savings through reducing the volume of work, and cost savings from shortening the construction period, in order to achieve a tailored approach to addressing these issues. 3. Establish an assessment and evaluation system. Assessment and evaluation are the \"soul\" of responsibility cost management. Through assessment and evaluation, those who have made contributions to cost management are given appropriate rewards ； Those who engage in fraud or neglect their duties, thereby causing economic losses, shall be punished accordingly depending on the extent of the losses. Ensure that everyone at every level is able to consciously control costs, and effectively boost the enthusiasm of all staff for participating in cost control. Project Managers Alliance (IV) Four Measures w.mypm.net 1. Optimize resource allocation. The main aspect of project management is the allocation and management of project resources, which primarily include production factors such as human resources (labor), physical resources (materials, machinery), and financial resources (funds). The quality of the project resource allocation directly affects the smooth progress of the project work and influences its cost level. The allocation of project resources should follow the principles of timely and appropriate amounts, adaptation to local conditions, proper proportions, and optimal combination, so as to meet the needs of construction and production while avoiding waste due to excess. First, project leadership teams and key personnel should be selected in accordance with the principles of high standards and strict requirements. When selecting project staff, it is necessary to align everyone’s understanding and clarify the responsibilities throughout the entire project duration; the company’s general manager and the project manager should sign a responsibility agreement. Second, select a qualified construction team. The internal team should be staffed with competent and efficient managers and technicians, while external labor teams should be selected through open bidding; they must possess certain construction capabilities and experience, and the number of such employees hired should be appropriate. At the same time, prior to commencement of work, it is necessary to conduct appropriate safety education and relevant training for the labor workers, taking into account the specific construction requirements of the project. Third, appropriate mechanical equipment, vehicles, and construction tools should be allocated to ensure that the construction machinery not only facilitates the smooth progress of construction work but also avoids being in excess. 2. Optimize the construction plan. Adhering to the principle that \"plans guide costs, and costs constrain plans,\" and based on the need to ensure project quality, safety, and timely completion as well as to improve labor productivity and machinery utilization, it is necessary to conduct a thorough assessment of the resources available on site. It is also important to fully understand and comprehend the terms of the contract signed with the client, to develop scientific construction organization plans, to optimize the organizational design at each stage, and to leverage the predictive control role of plans in cost management. Achieve technical advancement, economic Rationality, and balanced integration across all stages ； Ensure efficient processes, feasible operations, optimal solutions, and minimum costs. 3. Centralized control of main materials. Given that the construction industry involves large quantities of key materials whose prices are subject to significant fluctuations due to market conditions, all materials and equipment required for a project, except those provided by the client, should have detailed procurement procedures established jointly by the company’s cost management department and the project team, so as to organize their procurement and supply. First, for the procurement of main materials, it should be kept within 80% of the quantity list of materials specified in the construction drawings approved by the project’s chief engineer and derived from the analysis and calculations based on the detailed survey data. Secondly, the procurement of materials and equipment must be carried out through open bidding, with suppliers selected based on competitive evaluation. While ensuring quality, the option with the lowest price, the best timing for procurement, and the most efficient transportation method should be chosen; whenever possible, direct delivery from the manufacturer to the site should be utilized to reduce intermediate steps and associated handling costs. Third, the auxiliary materials are purchased by the project department itself, and their prices are strictly controlled to remain within the budgeted amount. The materials department must, based on the material consumption amounts specified in the responsibility cost budget, establish control ledgers for material consumption by category and type. It shall also implement a system of limited material issuance, using the construction drawings and the quantity lists prepared from relevant measurement data. 4. Control of engineering quantities. First, establish a system where the chief engineer in charge of the workload is responsible. The chief engineer of the project is responsible for overseeing various aspects such as the verification of the volume of work, the volume of work assigned to subcontractors, the maintenance of records related to the volume of work, and the settlement of costs associated with it. He ensures that the list of quantities required for the work is accurately determined, and strictly prevents any violations such as overestimating quantities or making purchases in excess of what is necessary. Second, before commencement of work, the project’s chief engineer must go to the site to organize a review of the drawings and conduct a final survey of the route, in order to confirm the quantities required for the work. During the review process, if the quantity listed is less than the actual amount required for construction, it is necessary to communicate promptly with the owner and the design institute in order to initiate change claim procedures as early as possible. Third, the quantity of subcontracted work is determined based on the construction drawings and on-site measurements; once approved by the project’s chief engineer, it serves as the basis for preparing the detailed cost budget ； The difference between the quantity of subcontracted work and the actual amount of work completed represents a savings in responsibility costs; due to poor management, any excess amount constitutes an overexpenditure of responsibility costs, and those responsible must be held accountable. Fourth, establish a ledger for managing the quantity of work; record the amounts after each pricing cycle, and ensure that the quantity of work assessed and priced by the construction team remains strictly within the approved amount. Fifth, when various units hire external teams, labor bidding must be carried out. All external labor used for projects must first sign a contract before starting work; payment should be based on the actual amount of work completed, calculated according to the comprehensive unit price specified in the contract. It is essential to follow the principle of pricing first and then making payments, and issues such as overpricing and excessive payments must be strictly avoided. The new economic environment faced by modern construction companies, along with the development trends in the construction market, have given new meaning to project cost management, thereby deepening the concept and scope of such management. It is evident that the quality of project cost management not only directly affects a company’s economic performance but also has an impact on its survival and development. Therefore, construction projects must aim to maximize profits by focusing on costs as the key factor, and pursuing growth through low-cost strategies; only in this way can construction companies enhance their competitive strength. Project Manager Blog