In the construction industry, managing costs effectively is crucial for success.
With projects often fraught with unforeseen challenges and fluctuating costs, effective cost management is the way to project success.
At the heart of this lies cost control, a vital practice that involves vigilantly monitoring expenses and implementing strategies to keep them in check.
Without diligent cost control, construction companies risk facing budget overruns, delays, and ultimately, compromised project outcomes.
Today, we’ll explore five concrete reasons why cost control must be a top priority in your construction company for every project, regardless of its size or scope.
Let’s dive in.
In this article...
Ensures Financial Stability
Effective cost control ensures that your construction projects remain financially viable and profitable for your contracting firm.
By managing expenses efficiently, you can maintain healthy profit margins and financial stability.
If that’s not the case, project expenses can start eating into your bottom line.
And when your bottom line is affected, this leads to significant problems:
- Difficulty in meeting financial obligations like paying suppliers and subcontractors on time.
- Decreased or negative profit margins due to excessive spending or budget overruns.
- Negative impact on your company’s reputation for failing to deliver projects within budget or experiencing financial difficulties.
- Potential for contract disputes or litigation from clients, subcontractors, or other stakeholders due to financial issues.
However, with efficient cost control, these become a thing of the past.
Let’s explain why.
For starters, efficient cost control can increase your profits by helping you identify opportunities for reducing costs—of course, without impacting the quality of the finished product.
If, on the other hand, you don’t control costs, you will likely suffer cost overruns.
In the construction industry, where risks are inherent, costs spiraling out of control are nothing new.
And then, it’s usually you as a contractor who has to cover budget overruns.
That is—if there were no change orders involved.
But if you control costs throughout the project’s lifecycle and compare the budget with actual costs, you increase the likelihood of finishing projects with a profit or with even more profit if you find chances to reduce costs.
This, in turn, helps you manage your own finances.
Profit creates a cushion of funds that can be used during tough times, like when unexpected expenses pop up or when there’s a slowdown in business.
And even if you do face some financial problems, if you are good at cost control, you will handle them more smoothly.
You will be able to adjust your budgets, cut unnecessary expenses, and find solutions without causing significant disruptions to your operations—because this is precisely what cost control is.
Enables Budget Adherence
Furthermore, cost control helps you adhere to budgets.
When you rigorously monitor project expenditures and manage costs on the go, you establish a system that prevents overspending and financial discrepancies.
This becomes especially crucial when considering the industry’s disheartening statistic: in the span of three years, only 31% of construction projects stayed within 10% of their budget.
The remaining projects experienced varying degrees of budget overruns, with some exceeding their planned budget by a staggering 80%.
But why do so many projects struggle with budget adherence, and fail in the end?
According to Gerald Long, Manager Advisory at KPMG in the US, poor scope management and inadequate communication are often to blame.
However, both of these can be improved with better cost control.
How, you might ask?
Effective cost control mechanisms protect from factors that often lead to budget deviations.
Chief among these is scope creep, the gradual expansion of a project’s scope beyond its initial parameters.
This expansion brings new tasks, resources, and—costs—which, if not carefully managed, can push the project beyond its budgetary constraints.
Consider the scenario of a client requesting additional rooms midway through construction.
Without robust cost control measures, accommodating such changes can trigger significant cost overruns.
However, when you track project expenses and compare them with budgets, you can effectively navigate this situation.
Upon receiving the request for additional rooms, you can quickly assess what the financial implications of the scope change would be.
By evaluating the associated costs, including materials, labor, and potential delays, and comparing them with your budget, you can determine how feasible the client’s request is.
Elizabeth Muskat, Global Head of Facilities Management, Architecture, Design, and Construction at BNY Mellon, emphasizes the importance of presenting this information to the client:
“The cost control/budget management team should present the scope increases with budget impacts to the client. The client can decide if the added cost is worth funding before the drawings are completed.”
Also, cost control enables you to explore alternative solutions, such as value engineering or revising the project schedule, to minimize the impact on costs while still meeting the client’s needs.
Ultimately, with efficient cost control, you can make informed decisions and maintain budget adherence throughout the project’s lifecycle.
Helps with Risk Mitigation
Cost control is essential for mitigating various risks associated with construction projects.
These risks can be categorized into several key areas:
- Market-related risks, such as material price fluctuations and fluctuations in subcontractor availability or rates.
- Logistical risks, including delays in material delivery and unforeseen site conditions.
- Regulatory risks arising from changes in regulatory requirements.
- Design risks, such as design errors or discrepancies.
- External risks like weather-related delays.
How does cost control help mitigate these risks?
When you identify and address possible risks before they escalate into cost overruns, you can both ensure the project’s financial stability and avoid potential disputes with clients, subcontractors, and suppliers.
For example, in the event of delays in material delivery or unforeseen site conditions, proactive cost control measures allow you to reallocate resources or revise project schedules to mitigate the impact on project costs and timelines.
Similarly, when facing material price fluctuations, a robust cost control system enables timely adjustments to procurement strategies or material choices to minimize cost impacts.
Let’s take lumber prices as an example.
In early 2021, this material price skyrocketed by 280%!
The spike in lumber prices had significant implications for construction projects, leading to higher material costs and budgetary challenges for contractors and developers.
However, with effective cost-control measures in place, construction firms were better equipped to navigate the volatile lumber market.
Many adjusted their budgets, renegotiated contracts, or sought alternative materials to mitigate the impact of rising lumber prices on project costs.
Additionally, proactive monitoring of lumber prices allowed construction firms to anticipate cost fluctuations and incorporate contingencies into project budgets accordingly.
As you can see, effective cost-control practices contribute to better risk management by enhancing your financial transparency and helping you make better decisions.
A prime example of a company that prioritizes cost control is AECOM, a multinational infrastructure consulting firm.
Through such cost control measures, AECOM consistently delivers complex construction projects on schedule and within budget.
One notable project currently underway is the future home of the LA Clippers, the Intuit Dome in Inglewood, with a budget of $1.8 billion.
Set to open for the 2024-2025 NBA season, efficient cost control is key to ensuring the project’s timely completion and adherence to budgetary constraints.
Contributes to Project Success
Project success hinges on completing work on time, within budget, and with the highest possible quality.
Cost control is an essential contributor to achieving these objectives.
In turn, successful projects bring many benefits to your company, as you surely know.
When projects are completed on budget, contractors have effectively managed their costs, ensuring they haven’t exceeded the allocated funds.
As we mentioned earlier, this generates leftover profits from the project and ensures the company’s financial stability.
With these profits, contractors can reinvest in their business, perhaps by purchasing new equipment or expanding operations.
On top of that, completing projects within budget allows you to pursue new opportunities, such as bidding on larger or more complex projects.
The project’s success largely depends on the cost control processes and the tools you use to manage your construction costs efficiently.
Since a large amount of money is allocated to materials and equipment in construction projects, you need a way to manage all those assets.
By leveraging tools like our asset tracking software, GoCodes, construction companies streamline cost control and management processes and enhance control over project expenditures.
With real-time tracking and monitoring capabilities, such tools enable precise management of project resources (including tools, equipment, and materials), reducing waste, downtime, and other inefficiencies.
As a result, projects are delivered within budgets, meeting deadlines and quality standards.
And last but not least, the success of your construction projects will largely depend on whether you commit to responsible practices and sustainability.
And, as Markus Pöllä, project development manager at multinational construction and development company Skanska, explains, it is precisely cost control that ensures they finish construction projects with zero waste.
To conclude, effective cost control not only ensures financial stability and project success but also promotes sustainability and responsible practices, making it a critical aspect of construction project management.
Enhances Your Company’s Reputation
And all of the above contributes to building a positive reputation for your construction company.
A track record of successful projects, reliability, professionalism, and financial responsibility makes you more credible and leads to increased business opportunities.
When a construction company consistently adheres to budgets, completes projects on time, and meets client requirements, it establishes itself as a trustworthy and dependable partner.
And clients are more likely to place their trust in a company with a proven history of delivering projects within budgetary constraints and fulfilling their expectations.
What’s more, they do it repeatedly.
Take a look at the review Jen Harrison Construction from Bramhall, UK, received.
It underscores what we are talking about.
Their clients were so satisfied with the first project’s success that they decided to work with the construction company again, leading to four new large projects.
Such positive reviews and referrals from satisfied clients further enhance your reputation and position your firm as a trusted partner in the industry.
This gives construction firms excelling in cost control a competitive edge over those that do not.
And it also empowers them to attract clients and win contracts by offering competitive pricing while demonstrating cost-efficiency.
In essence, cost control is not just about managing finances.
It’s also about safeguarding your company’s reputation and ensuring stakeholders and clients can trust you.
By prioritizing cost control, you demonstrate your commitment to delivering value, reliability, and excellence, ultimately strengthening your reputation in the competitive construction market.
Conclusion
And this wraps up our five reasons why you should prioritize cost control in your construction projects, no matter how small or big they are.
The importance of cost control goes way beyond just ensuring you finish projects within budget.
Yes, this is crucial—but it brings many more benefits along.
From more profit and better financial stability to successful projects, sustainability, and a positive reputation.
When you take all of them into account, it’s clear that cost control should be a fundamental aspect of your everyday project management practices.
It will ensure that your construction company remains competitive, profitable, and esteemed within the industry.
