Many construction projects have failed and many more have not even started, due to inadequate control of their budgets and costs. Proper financial management of the project can make a huge difference.
Given that construction projects are done with money, correct financial planning and its corresponding cost control are essential when it comes to building. It should start from a global budget that, even if it is very general, should contemplate all the items involved, from preliminary studies and legal and administrative costs, to equipment and the delivery of the finished and operating construction.
This general budget will have to be adjusted and refined as the planning stages are completed, until it ends up with rather fixed amounts that will eventually be reflected in the contracts of the respective suppliers. It goes without saying that without adequate planning, a reliable budget cannot be assembled; therefore, it is of vital importance to take the necessary time and not skimp on resources when executing such planning.
In terms of costs, one of the most important components during this stage is the precision of the scopes; understood as the determination of both the quantity and quality of the components of the product to be built and in what period of time. The clearer the Client’s objectives in this respect -from the start-, the better the definition of these scopes will be and therefore the greater the control that will be exercised over the budget. For example: “We are going to build a cinema projection room with 75 leather seats, wooden wainscoting, carpeted and with a modular gypsum board ceiling; which must be ready in 1 month”. It is a scope that can easily be priced, with the certainty that it will not suffer significant variations. In contrast, it would be difficult to put a price on “a comfortable room to sit and watch the cinema, but make it fast”. There we could expect considerable shocks when building.
Another way in which budgets can suffer substantial impacts is when there is a great dependence on inputs quoted in other currencies; however, there are defense mechanisms against this disadvantage that can be implemented and which we will discuss in another article. See article: “5 ways to protect yourself against exchange rate volatility”.
Now, there are many ways to manage a construction project: it can be done “At a Lump Sum”, “By Administration”, “At Unit Prices”, etc.; or the combination of one or more of these modalities, each with its characteristics, its advantages and disadvantages. And although any of them can be used with good results, the one that in our experience confers a more adequate cost control, is the “At Unit Prices” modality, as it allows to keep a strict control of the expenses and the items to which the money outflows should be applied, maintaining the control of the global budget through the detailed accounting of each of the concepts that make up the individual budget of each of the work contracts. As the saying goes: ““Take care of the cents and the pesos will take care of themselves”.”.
A good Construction Management, whether internal or external, knows precisely the amounts spent and to be spent on each of the concepts of the construction project at a given moment, as it has a precise accounting system with which it can report to the Client the financial status of the construction, at the moment and with the detail required. It also monitors that the physical progress corresponds with the financial progress or in its case knows precisely and timely the size of the deviation, and not only warns the Client immediately about the possible consequences, but is also ready to advise on the actions to take, to ensure the success of your project.