Cost planning in construction is necessary since building a house is a very expensive thing to do and any mistakes can be very costly to the client. It is very important to know how to plan and to ensure that the building is suitable as far as the resources are concerned. All factors should be considered to ensure maximum value for your money. It is also important to note that a building should not cost more than what the client has budgeted for.<\/p>\n
There are different methods of cost planning during construction which the client should be able to use for purposes of ensuring the budget is not overrun. These methods involve approximate estimation of the client\u2019s budget. One method involves looking at similar structures erected within the resent time frame since costs<\/a> do not differ very much within the same location. A developer should always consult on the prevalent costs before commencing building works.<\/p>\n The method of cost planning during construction we call comparative method involves taking similar structures done in recent past in the neighbour hood and making several adjustments. The adjustments involve size of the new building the client is undertaking. Other items to be considered include services like water, sewers or septic tanks, roads and also variations in prices of materials.<\/p>\n In recent years various methods of cost planning have been evolved but to date there is no universal system which can be satisfactorily applied to every type of project. There are two main methods used for effective cost planning, they are Elemental cost planning system and the Comparative system.<\/p>\n Profit, is the difference between a\u00a0firm\u2019s\u00a0total\u00a0revenue\u00a0and its\u00a0opportunity costs. In\u00a0classical economics\u00a0profit is the return to the employer of capital stock, in any productive pursuit involving labour. These two definitions are actually the same.<\/p>\n In both instances economic profit is the return to an\u00a0entrepreneur\u00a0or a group of entrepreneurs. Economic profit is thus contrasted with economic\u00a0interest\u00a0which is the return to an\u00a0owner\u00a0of capital stock or money or bonds. In finance or accounting,\u00a0profit\u00a0is the increase in\u00a0wealth\u00a0that an\u00a0investor\u00a0realizes from making an investment, taking into consideration all costs associated with that investment including the opportunity cost\u00a0associated with other investments.\u00a0[1<\/a>]<\/span>\u00a0<\/p>\n A\u00a0budget\u00a0is generally a list of all planned expenses and revenues. It is a plan for saving and spending.\u00a0A budget is an important concept in microeconomics, which uses a\u00a0budget line\u00a0to illustrate the trade-offs between two or more\u00a0goods. In other terms, a budget is an organizational plan stated in monetary terms.<\/p>\n In summary, the purpose of budgeting is used to; provide a forecast of revenues and expenditures i.e. construct a model of how our business might perform financially speaking if certain strategies, events and plans are carried out. Enable the actual financial operation of the business to be measured against the forecast.<\/p>\n A Return on Capital is a measure\u00a0of how effectively) a\u00a0company\u00a0uses\u00a0the\u00a0money (borrowed or owned invested in its\u00a0operations.\u00a0Return on Invested Capital\u00a0is equal to the following:<\/p>\n A net operating income after taxes\u00a0\/ [total\u00a0assets\u00a0minus\u00a0cash\u00a0and\u00a0investments\u00a0(except in\u00a0strategic alliances) minus non-interest-bearing liabilities]. If the\u00a0Return\u00a0on\u00a0Invested Capital\u00a0of a company exceeds its\u00a0WACC, then the company created\u00a0value. If the Return on Invested Capital\u00a0is less than the WACC, then the company destroyed value.<\/p>\n Here is the formula needed to work out the return on capital:<\/p>\n PAT .<\/p>\n ROC = BV of debt + BV of equity \u2013 Cash<\/p>\n Cost Value Reconciliation (CVR) brings together the established totals for cost and value to illustrate the profitability of a company. Its intention is to ensure that the profits shown in company accounts are accurate and realistically display the current financial position. In this respect, the purpose of CVR is twofold. Firstly, there is the requirement to provide statutory accounts, which is a legal obligation to provide certain financial information (Perceval, 1997), in addition to the Standard Statement of Accounting Practice number 9 (SSAP9), (ICAEW, 1998) which set out accounting recommendations and requirements for the construction industry. Secondly, and perhaps more importantly, is the provision of information which can have a direct bearing on the management of the operations within a company, at all levels (Perceval, 1997). This is of course dependent upon the information being properly and accurately provided and interpreted. Therefore, the information must be in a format that will enable management decisions to be made, taking influence from the figures displayed.\u00a0[2<\/a>]<\/span>\u00a0<\/p>\n It is an organized approach to providing the necessary functions at the lowest cost from the beginning the concept of value engineering was seen to be cost validation exercise, which did not affect the quality of the product. The straight omission of an enhancement or finish would not be considered value engineering. This led to the second definition; It is an organized approach to the identification and elimination of unnecessary cost Unnecessary cost is Cost which provides neither use, nor life, nor quality, nor appearance, nor customer features.<\/p>\n Cost Control\u00a0is an obvious objective in Construction Management and Construction Scheduling. It should be recognized that no amount of paperwork achieves this construction cost control. The actual control is achieved through the ultimate decision of the manager that something should be done differently and the translation of that decision into practice. The paperwork provides guidance on what control actions should be taken and therefore it is rather a cost information system.<\/p>\n The elements of a cost control system are:<\/p>\nProfit<\/h3>\n
Budget<\/h3>\n
Return on Capital (ROC)<\/h3>\n
Cost Value Reconciliation<\/h3>\n
Cost Value Engineering<\/h3>\n
Task 2 – Cost Control Systems<\/h2>\n