Cost, Budget & Finance in Construction Management

Cost, Budget & Finance in Construction Management

Construction Budget

Project managers must always be thinking about money. From estimating budgets before the project even starts to hiring and paying contractors, financial management is one of the most important parts of a successful project.
Here are the things you should know: 

Construction Pricing and Contracting

There are a number of different options when paying contractors and outlining price in contracts. In the competitive bidding process, contractors submit their bid to work on the project. These bids are either submitted on a lump sum or unit price basis (whatever the owner specifies). A lump sum bid refers to the total price of work by the contractor, and unit price bidding is used in projects where the amount of labor and materials are uncertain. Instead of inviting competitive bidding, some private owners choose to award contracts to one or more selected contractors with negotiated contracts, which provides for more flexibility in pricing. Negotiated contracts usually require reimbursement of direct project costs plus the contractor’s fee determined by one of these methods: cost plus fixed percentage, cost plus fixed fee, cost plus variable fee, target estimate, or guaranteed maximum price or cost.

Cost Estimation and Budgeting

A cost estimation is prepared in order to submit a bid for a construction project and is used to establish a budget for the project once it is won. Cost estimates are sometimes prepared by a professional estimator, like a building estimator or a chief estimator. Even though the project manager may not be the sole person responsible for cost estimation, it is still necessary that he or she become familiar with the process to understand the scope of the project. The cost estimation process includes determining the cost estimates from building, unit prices and lump-sum estimates, job sites and general overhead, bidding procedures, and labor costs.

Cost Control Monitoring

As the project begins, project managers need to quickly create a process to monitor project costs. The sooner the cost control monitoring phase beings, the faster project managers will be able to identify trouble spots. For example, if an item is significantly more expensive than the estimate, the project manager should identify the reason for the difference and see if that cost increase affects anything else in the budget.

Capital Improvement Plan (CIP)

A Capital Improvement Plan (or Program) is a four- to ten-year plan that identifies capital projects and equipment purchases, provides a scheduling, and identifies options for financing the plan. The plan links a government entity, a strategic plan, and the entity’s annual budget. A CIP includes a listing of all projects or equipment to be purchased, the projects ranked in order of preference, the plan for financing the projects, schedules for the construction phase of the project, justification of the project, and explanation of the expenses.

Project Accounting

The project manager and/or the agency’s accounting department will have to develop the project budget for the fiscal year, record and report expenditures, review and pay contractor invoices, and manage cash flow. From materials to labor, there are many costs in construction projects. Costs are either direct (like labor, material, subcontracting, and land) or indirect (like indirect labor, supervision, tools, equipment, supplies, insurance, and support costs). The project team and the accounting department may need to work closely together in order to manage contractor invoices. The project team reviews invoices to make sure the work has been properly completed, then the accounting department ensures that the invoices are contractually eligible and that the prices are consistent with the contract. 

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