How to Conduct a Construction Cost Analysis: Tools and Strategies

Construction projects are very complex, often coupled with challenges to both project scope and cost. Accurate cost tracking and analysis are essential to ensure projects are completed within budget. Conducting routine cost analyses can help stakeholders track their project budget, potentially then aiding in decision-making.

This article will serve as a guide to conducting construction cost analysis. We’ll highlight the best strategies and tools to track project and scope costs. By the end, you should have a much better idea of why you should implement cost analyses on your next project.

The Importance of a Construction Cost Analysis

Construction cost analysis involves monitoring and evaluating project costs throughout the construction lifecycle. Multiple stakeholders can utilize a construction cost analysis, including owners, construction management companies, general contractors, and subcontractors. These analyses can help stakeholders:

• Identify cost overruns
• Closely track the money spent on construction materials vs. labor
• Make informed decisions
• Manage and control expenses
• Forecast the final profit to be earned on the job
• More accurately predict future estimating costs

As a result, a comprehensive cost analysis can help contractors and owners streamline processes, detect areas of potential savings, and maximize project efficiency.

How to Conduct a Construction Cost Analysis

A construction cost analysis involves a thorough examination of project expenditures. As you can imagine, a lot of information is needed to evaluate total construction costs. Here are the critical steps that will allow stakeholders to accurately track project costs.

1. Gather Project Data

Begin by collecting comprehensive data related to the project. This includes construction plans and specifications, bills of quantities, contracts, invoices, change orders, and any other relevant documents. Having a thorough understanding of the scope of work, as well as the various construction phases included within the project schedule, will allow you to better understand the data throughout the project.

2. Categorize Costs

Categorize the costs into different groups such as labor costs, material costs, equipment, subcontractors, permits, overhead, and contingencies. Classifying these costs into different line items will make it easier to analyze the data and pinpoint deficiencies.

3. Develop a Cost Baseline

Establish a cost baseline by creating a detailed budget or estimate at the beginning of the project. The baseline serves as a reference point for measuring cost performance throughout project development.

4. Track Actual Costs

Regularly track and record actual costs incurred during the project. This includes labor hours, material quantities, equipment rentals, and subcontractor expenses. Ensure that the data is accurate, up-to-date, and aligned with the project timeline. If you are behind schedule, you may need to spend more money to catch up. A schedule slip can be a lagging indicator of financial health.

5. Compare Actual vs. Budgeted Costs

Compare the actual costs against the budgeted costs to identify variances. Analyze the reasons for deviations, such as changes in scope, unforeseen conditions, or market fluctuations. This analysis helps in understanding cost drivers and making adjustments to future estimates.

6. Conduct Cost Forecasting

Use historical cost data and trends to forecast future costs accurately. This involves considering factors like inflation, productivity rates, market conditions, and potential scope changes. A reliable cost forecast helps in proactive decision-making and risk mitigation.

7. Analyze Cost Performance

Analyze cost performance by calculating key metrics such as the cost performance index (CPI), earned value, and variances. These metrics provide insights into the project's financial health and the extent to which the project is meeting its cost objectives.

8. Identify Cost-Saving Opportunities

Because construction is so subject to cost overruns, it’s important to look for areas where money can be saved. This may involve optimizing resource allocation, negotiating better pricing with suppliers, improving productivity, or implementing value engineering strategies.

9. Communicate Findings and Recommendations

Prepare comprehensive reports and presentations to communicate the cost analysis findings to stakeholders. Clearly highlight areas of concern, cost-saving opportunities, and recommended actions. Effective communication fosters collaboration and ensures everyone is aligned with the cost management goals. Consider using something like a cost-benefit analysis template to convey your findings.

10. Continuous Monitoring and Adjustment

Cost analysis should be an ongoing process throughout the project lifecycle. Continuously monitor costs, update forecasts, and compare actuals against the baseline to ensure cost control measures are effective. Adjust the cost analysis approach as needed to address evolving project requirements and challenges.

By following these steps, construction professionals can conduct a thorough and effective construction cost analysis. This process enables proactive decision-making, risk management, and the optimization of project costs to achieve successful project outcomes.

Strategies for Effective Project Cost Tracking

Construction cost analyses can be very beneficial to project stakeholders. There are a few things that stakeholders can do to help improve the accuracy of their cost tracking:

1. Start with a detailed cost estimation: Accurate cost estimation at the project outset is crucial. Utilize historical data, industry benchmarks, and expert knowledge to develop detailed estimates that reflect the specific scope and requirements of the project. A strong starting point can put a project on the path to success.
2. Engage in robust budgeting and cost control: Establish a well-defined budget and implement effective cost control measures. Regularly monitor actual costs against the budget, track any deviations, and promptly address potential cost overruns before they evolve into larger issues.
3. Streamline change order management: Change orders can significantly impact project costs. Develop a simplified change order management process that ensures proper documentation, thorough review, and timely approval to mitigate potential cost escalations.
4. Communicate and document: Effective communication and documentation play a vital role in tracking the project life cycle costs. Implement a centralized project management system that enables real-time collaboration, facilitates document sharing, and provides clear visibility into project costs for all stakeholders.

Tools for Tracking Project and Scope Costs

If you’re looking to implement or improve your construction cost analysis process, there are a few tools to consider. The first is project management software. This software should include cost-tracking features, allowing project teams to monitor costs, track progress, manage change orders, and generate detailed reports for analysis.

Additionally, you may want to consider implementing Building Information Modeling (BIM). BIM technology offers a holistic view of the construction project, facilitating accurate cost tracking. BIM software integrates design, scheduling, and cost data, allowing stakeholders to analyze costs across different project stages.

If you implement BIM into your project, you can then consider using tools like Avvir. Avvir is an innovative cost-saving tool that utilizes advanced reality capture technology to streamline construction cost analysis. By combining laser scanning or 360 photography, BIM, and artificial intelligence, Avvir enables real-time monitoring of construction progress and accurate comparison against the project schedule and schedule of values.

Avvir automates the comparison of as-built conditions with the BIM model, detecting discrepancies and potential errors early on. This technology eliminates the need for manual data collection and reduces the risk of costly rework, potentially saving labor hours. It enables GCs and owners to identify and address issues promptly, leading to improved project efficiency and cost savings.

Furthermore, Avvir's automated progress tracking and analysis capabilities provide stakeholders with accurate insights into project costs, helping them make data-driven decisions. The tool's ability to identify schedule deviations and potential cost overruns early on empowers project teams to take corrective actions swiftly, ensuring projects stay on track and within budget.

Construction Cost Analyses Can Improve Your Project

Effective construction cost analysis is crucial for managing project costs and ensuring successful outcomes. By implementing strategies such as detailed cost estimation, robust budgeting, streamlined change order management, and transparent communication, construction professionals can improve their cost-tracking practices.

Use tools like project management software and BIM technology to further enhance cost-tracking accuracy and efficiency. With our advanced reality capture capabilities, Avvir offers a cost-saving solution by automating progress tracking, detecting errors, and enabling real-time cost analysis. Reach out today to learn more about how Avvir can potentially improve your construction cost analysis process.