Understanding Cost Management in Construction

Aug 4, 2024

Building Economics Lecture Notes

Introduction

  • Topic: Cost Management and Concepts
  • Key Concepts:
    • Cost
    • Price
    • Profit
    • Value
    • Feasibility
    • Viability
    • Profitability

Part 1: Cost Management

  • Cost Management Definition:
    • Process involving:
      • Planning
      • Detailing
      • Directing
      • Cost Control
      • Evaluation
  • Importance of Cost Management:
    • Essential in planning, designing, and constructing projects
    • Increasing costs require ongoing management

Cost Management Phases

  1. Pre-contract
  2. Post-contract
  3. Occupancy
  • Continuous check and balance mechanism necessary across all phases

Part 2: Cost, Price, and Value

  • Cost:
    • Expenditure on labor, materials, and management in a project
  • Price:
    • Amount charged for work done, including profit margin
  • Profit:
    • Difference between price and cost

Client vs Contractor Perspective

  • Client Perspective:
    • Building cost is the contractor’s price
  • Contractor Perspective:
    • Income is derived from the price charged

Tender Price Index (TPI) and Building Cost Index (BCI)

  • Building costs provide basis for TPI and BCI

Definitions of Key Terms

  • Value:
    • Subjective measure related to supply and demand
    • Economic value as a measure in monetary terms
  • Feasibility:
    • Assessment of project profitability
    • Strengths and weaknesses of a project are analyzed
  • Viability:
    • Likelihood of long-term survival of a project
    • Investigates sustainability and business growth
  • Profitability:
    • Condition of yielding financial profit
    • Measured by income vs expenses

Summary of Key Concepts

  • Cost Management: Process of planning, detailing, directing, and evaluating construction costs
  • Feasibility: Focus on project profitability
  • Viability: Long-term survival and sustainability
  • Profitability: Financial profit condition after costs are assessed

Conclusion

  • The session focused on the interplay of cost management, pricing, and value in construction projects, emphasizing the importance of understanding these concepts in order to maximize project outcomes.