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JWDD004-15 JWDD004-Halpin-v6 July 28, 2005 16:57
Chapter 15
Cost Control
Digital Hardhat System
The Need
The cost and time required to travel between construction sites limits the
ability of personnel to quickly respond to problems at remote sites and to
communicate issues between all necessary decision makers. Also, it is
difficult to organize and transmit multimedia project information (digital
pictures, video, electronic documents, and audio recordings) so that others
can access current project information in an intuitive and timely manner.
The Digital Hardhat (DHH) technology enables dispersed users to capture
and communicate multimedia field data to collaboratively solve problems,
and collect and share information. The DHH is a pen-based personal
computer with special Multimedia Facility Reporting System software that
allows the field representative to save multimedia information into a
project-specific database, which is then accessible to others through the
World Wide Web. The mobile unit and a hardhat
The Technology
The Digital Hardhat (DHH) is a pen-based personal computer (PC) running a Windows
operating system, which is used to collect multimedia information such as text, sound,
video, and images. This pen-based computer can also be used to communicate between
the construction site and other locations using various connection methods including a
wireless network connection, which enables personnel to roam around the site and video
teleconference live with others to solve problems collaboratively. In addition, special
software called Multimedia Facility Reporting (MFR) System allows the field
representative to save multimedia information into a project-specific database accessible
through the internet. The project information collected through the system will help
Digital Hardhat Using a whiteboard Multimedia Information on MFR
251
252 Chapter 15 Cost Control
document site conditions, progress, and problems in an organized manner so the
information can be retrieved easily as needed by any project participant. In the application
of this system, immediate reductions in travel cost will be the most obvious benefit;
however, costs associated with more quickly resolving issues, reducing construction
claims, and fewer time delays will be the ultimate benefit of this technology.
15.1 COST CONTROL AS A MANAGEMENT TOOL
The early detection of actual or potential cost overruns in field construction activities is
vital to management. It provides the opportunity to initiate remedial action and increases
the chance of eliminating such overruns or minimizing their impact. Since cost overruns
increase project costs and diminish profits, it is easy to see why both project management
and upper-level management must become sensitive to the costs of all project activities.
An important byproduct of an effective cost reporting system is the information that
it can generate for management on the general cost performance of field construction activities.
This information can be brought to bear on problems of great interest to project
management. The determination of current project status, effectiveness of work progress,
and preparation of progress payment requests require data generated by both project planning
and cost control reporting systems. Project cost control data are important not only
to project management in decision-making processes but also to the companyÕs estimating
and planning departments because these data provide feedback information essential for
effective estimates and bids on new projects. Thus a project control system should both
serve current project management efforts and provide the field performance database for
estimating future projects.
15.2 PROJECT COST CONTROL SYSTEMS
The design, implementation, and maintenance of a project cost control system can be considered
a multistep process. The five steps, shown schematically in Figure 15.1, form
the basis for establishing and maintaining a cost control system. The following questions
regarding each step in the implementation of the cost control system must be
addressed.
1. Chart of Cost Accounts. What will be the basis adopted for developing estimated
project expenditures, and how will this basis be related to the firmÕs general accounts
and accounting functions? What will be the level of detail adopted in defining
the project cost accounts, and how will they interface with other financial
accounts?
2. Project Cost Plan. How will the cost accounts be utilized to allow comparisons
between the project estimate and cost plan with actual costs as recorded in the field?
Howwill the project budget estimate be related to the construction plan and schedule
in the formation of a project cost control framework?
3. Cost Data Collection. How will cost data be collected and integrated into the cost
reporting system?
4. Project Cost Reporting. What project cost reports are relevant and required by
project management in its cost management of the project?
5. Cost Engineering. What cost engineering procedures should project management
implement in its efforts to minimize costs?
These are basic questions that management must address in setting up the cost control
system. The structure of cost accounts will be discussed in this chapter.
15.4 Cost Coding Systems 253
Figure 15.1 Steps in cost control.
15.3 COST ACCOUNTS
The first step in establishing a cost control system for a construction job is the definition
of project-level cost centers. The primary function of the cost account section of a chart of
accounts is to divide the total project into significant control units, each consisting of a given
type of work that can be measured in the field (see Fig. 15.2). Once job cost accounts are
established, each account is then assigned an identifying code known as a cost code. Once
segregated by associated cost centers, all the elements of expense (direct labor, indirect
labor, materials, supplies, equipment costs, etc.) constituting work units can be properly
recorded by cost code.
The design, structure, and development of a cost coding system and its associated set
of expense accounts have a significant impact on the cost management of a company or
project. The job cost accounting system is essentially an accounting information system.
Therefore, management is free to establish its own chart of accounts in any way that helps
it in reaching specific financial and cost control objectives, whether these objectives are
related to general company performance, to the control of a specific project, or to specific
contract requirements.
15.4 COST CODING SYSTEMS
A variety of cost coding systems exist in practice, and standard charts of accounts are
published by organizations such as the American Road Builders Association, Associated
General Contractors, and the Construction Specifications Institute. In many industries, cost
codes have a company-wide accounting focus emphasizing expense generation based on a
departmental breakdown of the firm. In some construction firms, cost systems have a structured
sequence corresponding to the order of appearance of the various trades or types of
254 Chapter 15 Cost Control
Figure 15.2 List of typical project expense (cost) accounts.
15.5 Project Cost Code Structure 255
Table 15.1 Classification of Accounts: Major Divisions
in Uniform Construction Index
Cost Centers
0 Conditions of the contract
1 General requirements
2 Site work
3 Concrete
4 Masonry
5 Metals
6 Carpentry
7 Moisture prevention
8 Doors, windows, and glass
9 Finishes
10 Specialties
11 Equipment
12 Furnishings
13 Special construction
14 Conveying system
15 Mechanical
16 Electrical
construction processes typical of the companyÕs construction activity. In most construction
companies, detailed project cost accounts such as those shown in Figure 15.2 are used. This
method recognizes the fact that construction work is project oriented and that to achieve the
cost management goal of maximizing profit, projects must be accounted for individually.
One project may be a winner while another is losing money. Such situations may be masked
in the accounting system unless job cost accounts are maintained on a project-by-project
basis. Therefore, both billings (revenue) and cost (work in progress) accounts are typically
maintained for each project. The actual account descriptions or designations vary in accordance
with the type of construction and the technologies and placement processes peculiar
to that construction. Building contractors, for instance, are very interested in accounts that
describe the cost aspects of forming and casting structural concrete as used in building
frames. Heavy construction contractors, on the other hand, are interested in earthworkrelated
accounts such as grading, ditching, clearing and grubbing, and machine excavation.
Standard cost accounts published by the American Road Builders Association emphasize
these accounts, while the Uniform Construction Index (UCI), published by the Construction
Specifications Institute, emphasizes building-oriented accounts. A breakdown of the major
classifications within the UCI cost account system is shown in Table 15.1. A portion of the
second level of detail for classifications 0 to 3 is shown in Figure 15.3.
15.5 PROJECT COST CODE STRUCTURE
The UCI Master Format code as used by the R. S. Means Building Construction Cost Data
identifies three levels of detail. At the highest level the major work classification as given
in Table 15.1 is defined. Also at this level major subdivisions within the work category
are established. For instance, 30-level accounts pertain to concrete while 031 accounts are
accounts specifically dealing with concrete forming. In a similar manner, 032 accounts are
reserved for cost activity associated with concrete reinforcement.
At the next level down, a designation of the physical component or subelement of the
construction is established. This is done by adding three digits to the work classification
two-digit code. For instance, the three-digit code for footings is 158. Therefore, the code
031158 indicates an account dealing with concrete forming costs for footings.
At the third and lowest level, digits specifying a more precise definition of the physical
subelement are used. For instance an account code of 0311585000 can indicate that this
account records costs for forming concrete footings of a particular type (see Fig. 15.4). At this
level the refinement of definition is very great, and the account can be made very sensitive
to the peculiarities of the construction technology to be used. Further refinement could
differentiate between forming different types of footings with different types of material.
256 Chapter 15 Cost Control
Figure 15.3 Detailed codes for classification within Uniform Construction Index.
15.5 Project Cost Code Structure 257
Figure 15.4 UCI cost (line item) structure in the master format code.
At this level, the cost engineer and construction manager have a great deal of flexibility in
reflecting unique aspects of the placement technology that lead to cost fluctuations and thus
must be considered in defining cost centers.
Large and complex projects in industrial and energy-related construction may require
cost codes that reflect additional information, such as the project designation, the year in
which the project was started, and the type of project. Long and complex codes in excess
of 10 digits can result. An example of such a code is shown in Figure 15.5. This code,
consisting of 13 digits, specifically defines the following items:
1. Year in which project was started (2004)
2. Project control number (15)
3. Project type (5 for power station)
4. Area code (16 for boiler house)
5. Functional division (2, indicating foundation area)
6. General work classification (0210, indicating site clearing)
7. Distribution code (6, indicating construction equipment)
Figure 15.5 Classification of accounts: typical data structure for a computerized cost code.
258 Chapter 15 Cost Control
The distribution code establishes what type of resource is being costed to the work process
(i.e., clearing), the physical subelement (i.e., foundations) in what area of which project.
Typical distribution codes might he as follows:
1. Labor
2. Permanent materials
3. Temporary materials
4. Installed equipment
5. Expendables
6. Construction equipment
7. Supply
8. Subcontract
9. Indirect
Clearly, a high concentration of information can be achieved by proper design of the cost
code. Such codes are also ideally suited for data retrieval, sorting, and assembly of reports
on the basis of selected parameters (e.g., all construction equipment costs for concrete
forming on project 10 started in a given year). The desire to cram too much information
into cost codes, however, can make them so large and unwieldy that they are confusing to
upper-level management.
15.6 COST ACCOUNTS FOR INTEGRATED PROJECT MANAGEMENT
In large and complex projects, it is advantageous to break the project into common building
blocks for control both of cost and time. The concept of a common unit within the project
that integrates both scheduling and cost control has led to the development of the work
breakdown approach. The basic common denominator in this scheme is the work package,
which is a subelement of the project on which both the cost and time data are collected
for project status reporting. The collection of time and cost data based on work packages
has led to the term integrated project management. That is, the status reporting function
has been integrated at the level of the work package. The set of work packages in a project
constitutes its work breakdown structure (WBS).
The work breakdown structure and work packages for control of a project can be
defined by developing a matrix similar to the one shown in Figure 15.6. The columns of
this matrix are defined by breaking the down project into physical subcomponents. Thus
we have a hierarchy of levels that begins with the project as a whole and, at the lowest level,
subdivides the project into physical end items such as foundations and areas. As shown
in Figure 15.6, the project is subdivided into systems. The individual systems are further
divided into disciplines (e.g., civil, mechanical, electrical). The lowest level of the hierarchy
indicates physical end items (foundation 1, etc.). Work packages at this lowest level of the
hierarchy are called control accounts.
The rows of the matrix are defined by technology and responsibility. At the lowest level
of this hierarchy, the responsibilities are shown in terms of tasks, such as concrete, framing,
and earthwork. These tasks imply various craft specialties and technologies. Typical work
packages then are defined as concrete tasks on foundation 1 and earthwork on foundations
1 and 2.
This approach can be expanded to a three-dimensional matrix by considering the resources
to be used on each work package (see Fig. 15.7). Using this three-dimensional
breakdown, we can develop definition in terms of physical subelement, task, and responsibility,
as well as resource commitment. A cost code structure to reflect this matrix structure
is given in Figure 15.8. This 15-digit code defines units for collecting information in terms
15.6 Cost Accounts for Integrated Project Management 259
Figure 15.6 Project control matrix.
of work package and resource type. Resource usage in terms of monetary units, quantities,
man-hours, and equipment-hours for a foundation in the boiler building would be collected
under work package code 121002. If this work relates to placement and vibration of concrete
by using a direct chute, the code is expanded to include the alphanumeric code DF441.
The resource code for the concrete is 2121. Therefore, the complete code for concrete in
the boiler building foundations placed by using a chute would be 121002-DF441-2121.
Figure 15.7 Three-dimensional visualization of work-package-oriented cost accounts.
260 Chapter 15 Cost Control
Figure 15.8 Basic cost code structure.
This code allows collection of cost data at a very fine level. Scheduling of this work is also
referenced to the work package code as shown in Figure 15.9. The schedule activities are
shown in this figure as subtasks related to the work package.
15.7 EARNED VALUE METHOD
One widely accepted way of calculating progress on complex projects using a work or
account based breakdownsystem is the Òearned valueÓ approach. This system of determining
project progress addresses both schedule status (e.g., on schedule, behind schedule, etc.)
and cost status (e.g., over budget, etc.). This method of tracking cost and schedule was
originally implemented by the Department of Defense in the late 1970s to help better
Figure 15.9 Project control matrix with scheduling of subtasks.
15.7 Earned Value Method 261
control complex projects. The system was called the Cost and Schedule Control Systems
Criteria or C/SCSC. This method of monitoring contracts proved to be so effective that
other government agencies (e.g., Department of Energy, etc.) adopted C/SCSC as a means
of maintaining oversight on complex projects such as nuclear and conventional power plants.
Private owners such as power companies implemented similar systems since reporting to
various government authorities encouraged or required the use of C/SCSC and earned value
concepts. Ultimately, owners of complex industrial projects began to use the system as
well.
The idea of earned value is based upon a rigorous development of percent complete of
the budgeted costs associated with individual work packages or line items. Each work package
has an initial budget or estimate which is defined as the Budgeted Cost at Completion
or BCAC. As work proceeds on an individual work package or account, assessment of the
percent complete is made at various study dates. The initial schedule establishes an expected
level of work completion as of the study date. The level of expected production is often
shown as an S-Curve plotting the cost or units of production (e.g., units produced, work
hours expended, etc.) against time. This cost/production curve is referred to as the baseline.
At any given time (study date), the units of cost/production indicated by the baseline are
called the Budgeted Cost of Work Scheduled (BCWS).
The tracking system requires that field reports provide information about the Actual
Cost of Work Performed (ACWP) and the Actual Quantity of Work Performed (AQWP).
The Òearned valueÓ is the Budgeted Cost of Work Performed (BCWP). The relative values
for a given work package or account at a given point in time (see Fig. 15.10) provide
information about the status in terms of cost and schedule variance. The six parameters
which form the foundation of the Òearned valueÓ concept are:
BCWS: Budgeted Cost of Work Scheduled = ...
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