November 25, 2021

‘Take care of the pence; for the pounds will take care of themselves’ – The Importance of Cost Control

Author – Ben Eastoe

Originally attributed to Lord Chesterfield in 1747, ‘take care of the pennies, and the pounds will take care of themselves’ is one of those Victorian phrases that sum up the frugal, principled lifestyle admired by many of the era.

Today, especially for the construction and infrastructure sector, it is as relevant as ever, particularly when it comes to cost control. In ‘The Great Construction Squeeze’, we outlined an industry under pressure to be profitable and sustainable, with cost blow-outs at an all-time high and profitability heading in the opposite direction.

Nine out of ten projects experience cost overrun

The vast majority of construction projects completed in twenty countries over the course of a 70-year period—85%, to be exact!—experienced cost overrun. The overall average overrun was 28%. The company that can nail the estimate process and keep a project running on budget will therefore have an enormous advantage over the competition.[1]

Just looking at the raw stats, an average of 28% cost overrun does not provide value for anyone involved. We could arguably build a 4th asset for free if we delivered the first three to budget; imagine that quantified in terms of a free hospital with every three constructed? Therefore perhaps it is time that we all considered the importance of cost control and how we can more effectively manage, report and account for the pence so that the dollars do take care of themselves.

The Purpose of Cost Control

The purpose of cost control is fairly straightforward; it is to gain the maxim profit within a timeframe and budget while delivering an asset or resource at a fair price for the client. On paper, it sounds simple enough, but the reality is that cost control, and management is far more challenging than the theory, and, as we have seen from horror stories across the globe, it’s not always easy to achieve.

Earned Value Management

At Lidiar Group, we are firm believers that the best way to achieve cost success on a project is through Earned Value Management (EVM). EVM is a project management methodology that focuses on and integrates schedule, costs and scope to measure project performance. Based on planned values versus actual values, EVM is a powerful way of managing costs.

It is calculated fairly simply:

Earned Value (EV) = total project budget multiplied by the % of project completion.

And has many benefits, including the ability to:

  • Identify actual progress by benchmarking what happened versus what was planned to happen, comparing actual cost and schedule performance against the planned schedules.
  • Understand completed work and actual costs, providing certainty and guidance on how future activities are likely to perform.
  • Create shared data resources that enable project teams to take actions, predict future outcomes and make highly informed decisions based on data and not gut feel.
  • Foster accountability through the provision of clear reporting against metrics to all stakeholders from client to supply chain

However, EV requires many steps and data points – Earned Value Analysis (EVA) – to ensure the calculation is achievable, realistic and accurate.  

There usually 8 Steps to EVA:

  • Determine the per cent complete of each task.
  • Determine Planned Value (PV).
  • Determine Earned Value (EV).
  • Obtain Actual Cost (AC).
  • Calculate Schedule Variance (SV).
  • Calculate Cost Variance (CV).
  • Calculate Other Status Indicators (SPI, CPI, EAC, ETC, and TCPI)
  • Compile Results.

At Lidiar Group, we have amassed a wealth of experience successfully managing costs for our clients’ projects. We think a few key areas can help support EVM and EVA calculations and ensure that costs remain controlled.

  1. Have a realistic budget from the outset – Fundamentally, it is impossible to deliver a project to an unrealistic budget. Therefore everything must be done at the beginning to plan a budget and schedule that is achievable. This starts at the planning and business case stage, and there are a number of ways to ensure that you have the best possible chance of success:
    • Don’t scrimp on the plan – Ensure that your project is planned to the highest level of detail possible. Where you can, involve contractors early, and involve them in the design process, subcontractor management process and scheduling. Early Contractor Involvement (ECI) can often lead to benefits including:
      1. Earlier project completion – design and scheduling challenges can be minimised, and the contractor can bring onboard a delivery team to support the project from the outset, not just when a tender is awarded.
      2. Value Engineering – Value engineering ensures that the client does not overpay for elements of design and construction. Typically, this can mean that alternative engineering solutions are developed that may realise the same quality without a similar cost when a project develops.
      3. Transparency – In many instances, the contractor will manage sub-contractor tenders in partnership with the client, creating a level of transparency that supports cost control, minimises risk and reduces the possibility of cost blow-outs.
  2. Collaborate – By their nature, many of the contracts under which projects are delivered are adversarial, with the end result being the client pitted against the contractor to resolve cost and time issues. In many cases, this approach ends up in the courts, where only the lawyers win. While there is a strong move in Australia to a more collaborative approach to contracting, particularly with the rise of contract suites such as NEC4, there is still room for improvement, resulting in a fairer and more balanced approach for all parties.
  3. Build high-performing teams – When teams operate in silos, there is a greater risk of costs spiralling out of control due to poor communication and a lack of information sharing. On a major project, high performing teams share resources, information, knowledge and data more readily, without fear of creating adversarial relationships.
  4. Set-up systems for success – Construction data and management is undergoing a revolution, and systems exist to manage every aspect of a project from tender to delivery. In addition, more and more integrations are available that allow disparate systems to share information and package data into usable formats for project teams. A classic example is the revolution in site records management. Traditionally paper dockets track construction input from subcontractors. The dockets were processed to the construction admin team, who logged the data electronically. From there, it went to a spreadsheet controlled by the project director or site engineer who approved or rejected the various inputs before submitting the report to a finance team for reconciliation and reporting. The time lag was significant, with a paper docket taking weeks to go from the subcontractor to the monthly reporting that covered critical costs and time. Consequently, everyone involved in the project was relying on cost information that could be six weeks out of date. By that time, the ability to manage costs and to understand performance was severely limited. In addition, it meant that payments to subcontractors were slow, increasing risks throughout the supply chain from failure due to cash flow.
  5. Monitor in real-time, all the time – There are numerous systems available that allow monitoring, recording, and tracking of site activities in real-time. From having an overview of onsite teams to material delivery, the benefits of real-time monitoring are significant. Schedules can be adjusted to maximise the availability of people and resources, plant and equipment can be tracked and allocated to tasks when they are required, rather than having expensive resources sitting idle – and costing money – when they can be used to complete tasks.

We understand there is a difference between the simplicity of a calculation and the compilation of the data required to succeed. However, we’d argue that taking the time to fundamentally address costs and ensure that every project has robust, accurate and realistic cost control systems in place should be a non-negotiable part of any project. Yes, there is likely to be more upfront costs and adjustments to relationships and ways of working, but given the failures shown from history and the challenges of present-day project profitability, we would argue that it is an investment in success rather than a cost.

[1] https://www.propelleraero.com/blog/10-construction-project-cost-overrun-statistics-you-need-to-hear/