what is Cost control in Project management? what is cost control in FIDIC?

Project Cost control

Table of Contents





Abstract:

Cost control is an essential aspect of project management, which involves monitoring and managing project costs to ensure that they remain within the allocated budget. In FIDIC contracts, cost control refers to the management of costs associated with the execution of a construction project, as outlined in the contract documents. The FIDIC contract requires the contractor to maintain an up-to-date record of all costs incurred during the project and submit regular reports to the engineer for review and approval. The engineer is responsible for reviewing and approving the contractor’s reports and ensuring that all costs are reasonable and within the scope of the contract. Effective cost control in FIDIC contracts requires close collaboration between the contractor, engineer, and other stakeholders, and adherence to the contract terms and procedures.

Introduction

Almost all projects should be directed to the desired output at the end of the project. The project team leader and most importantly the project manager must be able to cost control. However, several techniques can be used for this purpose. In addition to the project objectives that the project manager must oversee, controlling the various costs of the project is also very important. If the project manager fails to control project costs, project management will not be effective because it essentially determines whether your organization is profitable or unprofitable.

Project costs are divided into 4 categories:

1. Direct Cost: These costs are directly related to the work of the project.
The source of this type of cost is known, and you know which activity is running. For example; Execution of team trips, team members’ salaries, and…
2. Indirect Cost: These are overhead costs or a series of additional costs that ultimately lead to the organization’s greater profit.
Office fees, secretary fees, taxes, product quality costs, and’s that cannot be said for any of the specific activities.
3. Fixed Cost: Costs that do not change with increasing or changing the volume of work and product production. For example, the cost of office rent, equipment, and …
4. Variable Cost: Costs that are variable in proportion to the change in product volume or workload. For example, the cost of raw materials, resources, and wages.

Note: When estimating costs, you need to know whether you only need direct costs or indirect costs.
To estimate the cost, we need to review the project schedule to determine what resources each activity requires.

Take this course: MSP- Costs in Microsoft project

Cost control techniques

The following are some valuable and essential techniques used to control project costs:

1 – Project budget planning

You need to have the right planning for your project budget first. This budget is for all expenses incurred during the project cycle. Budget planning, therefore, involves a lot of research and critical decision-making. Considering the project budget and making decisions based on it at all times is key to the profitability of the project.

2 – Tracking costs

It is also important to keep track of all actual costs during the project. Here it is better to prepare a budget that is based on time. This will help you to follow the project budget in each phase. Actual expenditures should be pursued according to the periodic objectives set out in the budget. These goals can be defined monthly or weekly, or annually if the project is long. This method is easier than setting a final budget for the whole project. If any new work is done, you should estimate it and see if it can be adjusted with the final amount in the budget.

3 – Effective time management

Another effective method is time management. Although this method is applied in different areas of management, it is very significant to control the cost of the project. This is because the cost of your project can increase if you can not complete the project on time. The longer the project, the higher the cost, which practically means that it exceeds the projected budget. The project manager should keep his team informed of project delivery time to ensure that work is completed on time.

4 – Project change control

Project change control is another vital technique. Change control systems are critical to potential changes that may occur during the project period. Because any change in the scope of the project has a significant impact on project delivery time, changes can increase project costs because the effort required to complete the project on time is increased.

5 – Use of acquired value

Similarly, it is very useful to use value-added techniques to identify the value of work that has been done so far. The value-added technique is useful for large projects and helps you make any quick changes that are necessary for the success of the project.

Other steps to control the cost of the project

It is recommended to constantly check the budget as well as the financial information process. Reporting on project costs at regular intervals will also help track project progress. This will ensure that the cost of the project is controlled as planned. The sooner a problem is found, the easier and faster it can be solved. This will help you to avoid financial issues in the project.
All documents must also be submitted to the audit regularly so that they can inform you of the cost risks.

Cost control in the implementation of under FIDIC Conditions of Contract

Formerly, the “project cost” was not considered as important by the owner, but nowadays, the owner should pay more attention to the “project cost” since most of the construction projects were contracted and implemented by another party, the Contractor.
The financial institutions -in this case, the Multilateral Development Banks who funded the projects and have to strictly
control the loan, endorsed the use of FIDIC Conditions of Contract for Construction MDB Harmonized Edition.
To serve the construction community, FIDIC established the General Conditions of Contract first edition in 1957, which was then developed into various types of general conditions of contract i.e., Red and Pink book (for projects designed by the owner), Yellow
and Silver book (for projects designed by the contractor).
Variations cannot be avoided because a construction contract is a dynamic contract and there are many uncertainties during the construction period, which is usually long (Adriaanse, 2007). No variation clauses mean no legal base for the employer to pay the
contractor.
Similarly, no dispute board and arbitration clauses mean that all disputes no matter how small and insignificant they are, should go to the court, and if there are non-contractual claims, then it would be very difficult to control the legal cost.
That is why legal consciousness is mandatory in handling cost management.

Cost Definition in FIDIC

The definition of “cost” in the current suite of FIDIC contracts is the same in every contract. The definition provides that:

“‘Cost’ means all expenditure reasonably incurred (or to be incurred) by the Contractor, whether on or off the Site, including overhead and similar charges, but does not include profit.”

Cost control in project management refers to the process of monitoring, analyzing, and managing project costs to ensure that they remain within the allocated budget. It involves identifying and tracking costs associated with the project, analyzing them to identify areas of cost overruns or cost savings, and taking corrective actions to bring the project back on track.

In FIDIC contracts, cost control refers to the management of costs associated with the execution of a construction project, as outlined in the contract documents. The FIDIC contract requires that the contractor prepare and maintain an up-to-date record of all costs incurred during the execution of the project, and submit regular reports to the engineer for review and approval. The engineer is responsible for reviewing and approving the contractor’s reports and ensuring that all costs are reasonable and within the scope of the contract. The FIDIC contract also includes provisions for the management of cost variations, which may arise due to changes in project scope, specifications, or other factors. The contractor must submit a variation request to the engineer, who will review and approve or reject it based on the terms of the contract. Effective cost control in FIDIC contracts requires close collaboration between the contractor, engineer, and other stakeholders, and adherence to the contract terms and procedures.

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Development of the definition from previous forms

The definition of cost in the current suite of FIDIC contracts has remained relatively unchanged since the publishing of the fourth edition of the Red Book in 1987, which was the first time the definition expressly excluded profit. The fourth edition provides that:

“‘Cost’ means all expenditure properly incurred or to be incurred, whether on or off the Site, including overhead and other charges properly allocable thereto, but does not include any allowance for profit.”

The differences between the definition in the fourth edition of the Red Book and the current suite of contracts are minimal but include:

  • That expenditure must be “properly incurred” under the fourth edition, whereas under the current suite, it must be “reasonably incurred”
  • That cost is defined as “including overhead and other charges properly allocable thereto” under the fourth edition, whereas under the current suite, it is defined as “including overhead and similar charges”.

The final step towards the definition in the current suite occurred when FIDIC published the new Orange Book in 1995, in which the only difference was that expenditure must be “properly incurred” rather than “reasonably incurred”.

Conclusion:

In conclusion, cost control is a crucial aspect of project management, which involves monitoring and managing project costs to ensure that they remain within the allocated budget. In FIDIC contracts, cost control refers to the management of costs associated with the execution of a construction project, as outlined in the contract documents. Effective cost control in FIDIC contracts requires close collaboration between the contractor, engineer, and other stakeholders, and adherence to the contract terms and procedures. By effectively managing costs, project managers and contractors can ensure that projects are completed on time, within budget, and to the highest standards of quality, ultimately contributing to the success of the project.

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The Kavian Scientific Research Association (KSRA) is a nonprofit research organization to provide research / educational services in December 2013. The members of the community had formed a virtual group on the Viber social network. The core of the Kavian Scientific Association was formed with these members as founders. These individuals, led by Professor Siavosh Kaviani, decided to launch a scientific / research association with an emphasis on education.

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Professor Siavosh Kaviani was born in 1961 in Tehran. He had a professorship. He holds a Ph.D. in Software Engineering from the QL University of Software Development Methodology and an honorary Ph.D. from the University of Chelsea.

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More than 15 years of relevant practical and professional in Europe, the SADC region & the U. K. with management, administration, planning, coordinating, quality assurance & control technical/environmental studies, surveys, designs, Preparation of specifications, and contract administration of European Development Funds (EDF), World Bank, DANIDA, BADEA, AfDB funded projects and FIDIC Conditions of contract. , specifications, tender documentation, construction supervision, and contract administration and resolution of construction disputes, financial control, training, maintenance management, Construction Dispute Adjudication, Arbitration, and Mediation.

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