COST CONTROL OF PROJECTS

Cost control aims at ensuring that resources are used to best advantage.

A client may define cost control as keeping the costs of a project within budget.

Rising prices, high interest rates and restrictions on use of capital have caused employers to demand that professional advisers should accept cost as an element in design as well as accurately forecast overall costs.

This involves close collaboration between the architect and quantity surveyor and other professionals.

COSTS TO BE CONTROLLED

The following is a list of costs to be controlled:

1. Materials

2. Labour

3. Overheads

The labour and materials associated with a project can be controlled in several ways.

Careful planning and programming of the project will help to control these elements.

One method that can be employed is ‘just in time management’

This ensures that both labour and materials are available just at the right time.

For this to happen an accurate programme should be used to calculate the labour requirement at all times throughout a project.

The materials required at any time during a project can be ascertained from drawings, specifications and B of Q’s and purchased or pre-ordered in time for installation.

The draw back of this method is that there is little room for error and if it is misjudged then tradesmen could be sitting around with no materials to install.

One of the advantages of ‘just in time management’ is that materials do not have to be stored for long periods, if at all, therefore reducing risk of loss and theft.

PROFIT

The profit for a particular contract may be calculated as the total sum of money remaining from income after paying for the cost of the work done including general overheads.

Profit = Income - Project Cost - Overheads

PROFIT MARGIN

This can be expressed as a percentage of the cost of the work done.

Profit Margin = Profit / Project Cost x 100%

The Project Cost or the cost of the work done may or may not include overheads –

this should be made clear when giving a figure for profit margin.

In practice the profit margin may be from 2% to 5% for many projects.

Example 1

Calculate the profit and profit margin for a project given the following information.

DATA:

Monthly Incomes totalled = £155,000

Total Materials cost = £48,500

Total Labour cost = £74,200

Total Company overheads = £7,800

Total Site overheads = £16,250

ANSWER

Total overheads = £7,800 + £16,250 = £24,050

Project Cost = £48,500 + £74,200 = £122,700

Profit = Income - Project Cost - Overheads

Profit = £155,000 - £122,700 - £24,050

Profit = £8,250

Profit Margin = Profit / Project Cost x 100%

Profit Margin = £8,250 / £122,700 x 100%

= 6.72 % say 6.7 %

Example 2

Calculate the profit and profit margin for a project given the following information.

DATA:

Project duration = 12 months

Total Materials cost = £134,800

Total Labour cost = £275,200

Total Company overheads = £44,900

Total Site overheads = £87,250

Monthly Incomes:

Month Mar Apr May Jun Jul Aug

Income £12,400 £34,000 £45,000 £47,700 £75,400 £56,200

Month Sept Oct Nov Dec Jan Feb

Income £37,800 £67,500 £62,800 £89,700 £27,500 £23,200

TOTAL INCOME = £579,200

Total overheads = £44,900 + £87,250 = £132,150

Profit = Income - Project Cost - Overheads

= £579,200 - £410,000 - £132,150

= £37,050

Profit Margin = Profit / Project Cost x 100%

Profit Margin = £37,050 / £410,000 x 100%

= 9.04 % say 9 %

PROJECT OVERHEADS

This is the cost of administering a project and providing general plant, site staff, facilities and site based services.

Overheads include:

1. Staff - most costly item of overheads.

2. Transport - ferry men to site.

3. Overtime - abnormal overtime.

4. Training - Health and safety, first aid, COSH, specialist systems.

5. Welfare - protective clothing.

6. Accommodation - A sub-contractor may be charged by the main contractor for site offices, toilets, canteen and stores.

7. Site transport - plant to and from site, trucks, dumpers, etc.

8. Large plant - buying, hiring, fuel.

9. Small plant - tools, drills, compressor.

10. Scaffolding - buy or hire.

11. Temporary services - all incoming services.

12. Services charges - electricity, telephone, water, gas.

13. Defects liability cost - probable cost is related to labour and materials value.

14. Hand over and cleaning - quotation from cleaning company may be possible.

15. Security - lock-ups, store, security company.

16. Signage - sign boards, notices, and advertising.

17. Cleaning site - periodic removal of rubbish.

18. Entertainment - promotions, parties.

19. Sundry items - testing apparatus and materials.

On a large construction project a distinction is usually made between site overheads and company overheads.

The contractor may be reimbursed for his site overheads by means of the contract preliminaries or sometimes by sums added to the rates in a Bill of Quantities.

Company overheads can be calculated separately, and are a budgeted amount calculated on the anticipated year’s expenditure on staff, offices, equipment, stationary and the like.

Typical overheads are 5% to 7.5% of project cost.

Typical site overheads are 10% to 20% of project cost.

Sometimes company overheads are calculated as a percentage of annual turnover for accounting procedures.

PLANT

Estimating for the plant element depends on whether the contractor owns or has to hire the required machinery.

OWNED PLANT

An hourly rate for the machinery should be calculated based on the following:

1. Depreciation

2. Lost interest on the initial cost or interest charges to borrow capital.

3. Cost of repairs & maintenance.

This will give a total annual cost for owning the machine.

An hourly rate can be arrived at by dividing this annual cost by the number of hours the machine is operating. This can be obtained from the plant records.

HIRED PLANT

A true hire charge should be worked out based on the total time that the plant is hired against the time it is actually employed on productive work.

Example 3

1.(a) Calculate whether it is cheaper to hire or buy a pipe threading machine for steel pipes.

1.(b) Calculate the hourly rate for buying and hiring the machine.

DATA:
Length of contract = 18 months or 72 working weeks

Cost of machine new = £6500.00

Depreciation = 50% per annum.

Repairs / maintenance = £480.00 per annum.

Hire charge per week = £85.00

Interest rate = 5%

Plant records show productive machine usage to be 10 hours per 40 hour working

week on average.

ANSWER 1.(a)

Buying

Capital Expenditure = £6500.00

Depreciation = £4875.00 ( 50% + 25% = 75% x £6500 )

Residual value = £1625.00

Repairs = £ 720.00 ( £480 x 1.5 years )

Lost interest on capital outlay = £ 325.00 ( 5% x £6500 = £325 )

Final cost = Depreciation + Repairs + Interest

Final cost = £ 4875.00 + £720.00 + £325.00

Final cost = £ 5920.00

Hiring

£85 per week x 72 weeks = £6120.00

Therefore it is cheaper to purchase the machine @ £6500.00 since it will have a residual value at the end of the project.

ANSWER 1.(b)

The annual hours of machine usage are: (10/40) x (72/1.5) = 480 hours per annum.

Buying the machine costs: £5920 / 480 = £12.33 per hour (actual hours worked)

Hiring the machine costs: £6120 / 480 = £12.75 per hour (actual hours worked).

Example 4

Calculate whether it is cheaper to hire or buy a mini excavator given the following information.

DATA:
Length of contract = 25 weeks

Cost of machine new = £18,000.00

Depreciation = 20% in the first 10 weeks then 0.5% per week.

Repairs / maintenance = £400.00 per service, 1 service required.

Hire charge per week = £200.00

Interest rate = 5% per annum

ANSWER

Buying

Capital Expenditure = £18,000.00

Depreciation = £ 4950.00 ( 20% + (15 x 0.5%) = 27.5% x £18,000 )

Residual value = £13,050.00

Repairs = £ 400.00

Lost interest on capital outlay = £ 433.00 ( (25/52) x 5% x £18,000 = £433 )

Final cost = Depreciation + Repairs + Interest

Final cost = £ 4950.00 + £400.00 + £433.00

Final cost = £ 5783.00

Hiring

£200 per week x 25 weeks = £5000.00

Therefore it is cheaper to hire the machine.