Capital projects don’t come with blank checks. Hence, the need for budgets.
And yet, too many projects — even the most successful ones — wind up becoming money pits. Contractors and owners often watch as their projects’ budgets gradually creep, and often soar, past the limits established and agreed to during the planning stage.
Though intentions are good at the start, why is it such a challenge to adhere to those budgets?
One culprit may be the methods used to track them. Spreadsheets have long been the go-to technique to monitor cost and its impact on the budget, even given their inherent shortcomings. But now with more effective construction budget tracking techniques out there, the contrast in accuracy and cost management has become plainly stark.
If you’re looking to have more control over your capital project budgets, here are three areas to consider that can lend a way into greater accuracy and successful tracking. They can be used individually but work most effectively when they join forces.
Estimating for greater accuracy
Creating a construction budget starts with what may be considered an oxymoron: an accurate estimate. Because of the enduring tendency to blow budgets by projects’ end, owners are favoring accuracy over the aspirational, yet unrealistic budgets and schedules reflected in many estimates.
One of the best barometers of what the ultimate price tag could be for a capital project is to revisit past projects with similar scope. Such historical data surfaces the costs for labor, equipment, materials, overhead and indirect-expense line items, as well as cost trends and budget-impacting risk factors.
Using this data as a springboard, stakeholders can then collaborate on refining the soon-to-be budget numbers by considering potential differences in current costs versus historical costs. For example, how has material pricing changed since that project was completed? How have local wage rates evolved? While acknowledging that changes are inevitable, to what degree did scope changes affect the budget and is there a way to head those off here? Are there current or anticipated situations or events — think weather, labor shortage, material availability, unfolding economic conditions, updated building requirements — that are likely to affect costs?
This estimating exercise helps remove any unintended tendency toward optimism bias that has skewed too many budgets. And it lends a degree of data-driven cost certainty to high-stakes projects, making construction budget tracking far easier.
Managing construction budget accuracy with metrics
Where a purposeful, proactive estimating process establishes a reality-based budget before the project begins, that same estimate continues the quest for accuracy, serving as a basis for ongoing construction budget tracking throughout the execution phase. That’s where earned value management (EVM) comes in.
EVM is a technique that integrates project scope, cost, and schedule to provide an accurate measurement of project performance. This method involves tracking three key metrics that are sourced from the estimate: planned value (PV), actual cost (AC) and earned value (EV). Its effectiveness as a tool to track the budget relies heavily on the accuracy of the estimate. Because these metrics are sensitive to internal and external factors that can impact a project, EVM provides the proof of whether an aspect of the project is faring better, worse or on target with what was established in the estimate. By comparing these metrics, cost overruns or delays can be identified early on, allowing corrective action to be taken immediately to keep the project, and the budget, from veering off course.
EVM isn’t just about showing real-time status of costs and schedules; it can be used to forecast how different risk factors can affect project performance, providing valuable insights into potential future costs and schedule impacts. This helps contractors and project managers make decisions — about costs, schedules and resources — based on data rather than guesswork.
Overall, EVM can be a powerful method for construction budget tracking, providing greater control and visibility into project performance, which can help to ensure that projects are completed within budget.
Controlling costs and budgets with cost management software
The technology used to manage budgets is just as important as the processes explored above. Recognizing this, contractors are turning to construction cost management software designed specifically for the industry.
By digitizing the above processes, contractors can create and update budgets, track expenses, forecast costs, and identify potential cost overruns. Ultimately, the software delivers the much-needed data reliability, cost analysis and cost certainty that simply aren’t possible with the generic business software that, despite its decades-long prevalence, has been unreliable in keeping construction budgets in check.
Cloud-based cost management software provides a centralized location for storing and accessing project information that is used to help contractors stay within budget, including estimates, invoices, contracts, change orders and EVM performance metrics. Far from being simply virtual storage, it also produces timely, vital information they can use throughout the project — generating reports and dashboards that provide cost-related insights into project performance and lead to better informed decisions about where to allocate resources and how to adjust the budget accordingly.
Automating the way contractors track and manage project costs vastly improves how process inefficiencies, change order cost implications and cost overruns are identified and addressed.
Tracking the budget provides an accurate record of where money is being allocated, allowing for better decision-making and more efficient use of resources. Additionally, by tracking from the initial planning stages to the final completion of the project, risks and potential delays can be identified and addressed early on, resulting in greater efficiency and fewer delays.
Want to learn more about construction budget tracking techniques and how they can minimize risks and maximize return on investment? Schedule a convenient consultation and we’ll be happy to discuss options with you.
