RIB Software Enterprise Sales Manager, Quimby Bunce, says cost management in construction is typically conducted retrospectively. “The nature of construction means the costing process is often characterised by a time delay. However, tracking actual costs versus original budgeted costs (determined during the estimation stage) becomes somewhat of an art.
It’s not unusual for costs to overrun as much as 80% on construction projects. However, the current variability of labour and material costs, especially on long-running projects, has resulted in cost overruns of up to 200%. This isn’t sustainable at a time when the industry is increasingly under pressure to deliver on time and to budget.
“Often, project managers only realise that costs are overrunning some time after the fact. This makes it difficult to implement mitigation measures timeously. This is particularly true of long-term projects, which are especially vulnerable to the unpredictability of variable costs,” says Bunce.
The discipline of cost control
There is a global economic downturn on the cards. This is exacerbated by inflation, a weakening currency, a shortage of skilled labour, and the escalating cost of materials. This means the discipline of cost control is more important than ever for the construction industry.
Bunce says while the backlog of construction projects in South Africa – particularly large infrastructure and heavy industrial projects – has brought some relief to the industry, the shortage of skilled labour and the increased price of commodities have driven up input costs.
The industry cannot control macroeconomic issues and the escalating cost of materials and skilled labour. It can, however, leverage real-time data to bring a greater degree of predictability to the uncertainty.
“Because of the great variance in the cost of materials at the beginning of a project compared to the middle of the project, cost control measures need to start benefiting from access to real-time data. In addition, this data needs to be located centrally so that it can be analysed and acted on quickly.
“In addition, it will allow construction companies to forecast what costs will look like at the end of the project. This means they can start doing simulations to determine if they need to change suppliers of particular materials or start manufacturing materials on site,” adds Bunce.
The ability, during long-term projects, to be able to accurately and in real-time measure actual expenditure against the forecast expenditure and determine at a fairly granular level where costs are being incurred, and what mitigation measures can be taken, can help protect the razor-thin margins (around 5%) the industry is known for.
Bunce says traditional construction software has largely been a tools-for-trades game. “Industry players use preferred software packages to execute their specific disciplines – be it estimation, tracking expenses or budgeting. Because of this, the cost information related to a particular project ends up being siloed across several different systems.
“There has to be a focus on sharing information across all disciplines. This is why standardising and unifying processes, and making sure all data is saved to a central database should be a critical starting point for the industry. It allows for greater collaboration and ensures everyone involved works from the same source of truth.”
The idea of having to digitise construction to get things done quickly, and to link processes, people and data, is often questioned. “Many are under the illusion that it is the professionals within the industry who are going to be responsible for deciding whether they need to change and what needs to change,” notes Bunce.
“The truth is: if you look at industries that have transformed, the pressure comes from outside. It’s not the industries themselves that decide to reform, it is the pressures from adjacent industries and customers. In the United States and Europe, regulation is driving that change and South Africa will soon have to follow suit.”
“In the public sector space, we’re already seeing projects being awarded at fixed costs. However, in South Africa, fixed and firm price contracts, particularly where the contract period is more than 12 months, are the exception rather than the rule. Customers are no longer open to the traditional time and budget overruns. They are expecting the construction industry to act more like other industries they interact with. Industries that are more diligent when it comes to costing projects,” he adds.
Bunce says all indications are that the country is entering into economic decline. “Apart from global impacts, loadshedding has a substantial impact on productivity, resulting in unpredictable supply chain and costs, as well as the ability of contractors to complete works on time.
“Understanding the resources, the source of the resources and the cost as they change in an escalator environment, as well as the time to complete the works, it is essential for contractors to predict the outcome cost of their projects. Through effective cost control, they’ll be taking positive steps towards protecting margin and future-proofing their organisations,” he concludes.