Wednesday 9 February 2022

Analyze project cost management risks and control

Under the situation that the profit margin of the construction market is getting lower and lower, strengthening the management of project construction costs and plugging the "black hole" of "running, running, dripping and leaking" is the focus of management. after years of research, the author has analyzed more than a dozen project cost management cases. starting from the project bidding, construction and cost structure that constitutes the project cost, the causes of the formation of the "black hole" of the project cost are analyzed, and the measures of "blocking" are proposed.

investigate the causes of the formation of the "black hole" of project cost management

the construction process of the project involves all aspects and is an integrated and coordinated system. project losses or cost increases, both the "black hole" caused by objective reasons and the "black hole" caused by subjective reasons. let's call them "natural black holes" and "artificial black holes".

"natural black hole" - the "black hole" that project management cannot control and leads to project losses. there are roughly the following:

bidding down creates a "black hole". enterprises take the relatively low quotation as the "weapon" to win the bid, often in the preparation of the bid, reduce the number of temporary projects or reduce the unit price of temporary projects, but in actual construction, for the sake of project quality, safety, construction period, the number of temporary projects or according to the actual occurrence, unit price or according to the market price adjustment, can not be reduced at all; reduce the indirect cost rate of the project, but in actual construction, in order to maintain normal management order and protect the labor insurance expenditure of employees, it is not reduced due to the reduction of the rate of bidding; reduced planned profits; reduce the unit price of materials; the unit price of materials has not been reduced, but the total price of materials is wrapped up in the contracted project contract, which undoubtedly bears the risk of material price increases; promising that the equipment will not be depreciated is a real commitment to the owner, and it is a self-lying and self-deception for the project builder.

geological changes "black holes". in the construction of the project, once the geological structure changes occur, the original cost accounting will be seriously inaccurate. if the geological changes are not conducive to cost control and suddenly increase the cost of the project, it is the "nightmare" of the total cost of the project when bidding. for example, the entrance of a tunnel is designed according to the solid stone, and the stone quality of the section is secondary solid stone during the actual construction, which forces the project to change the construction method, and the long-distance drill hole and support are changed to short-distance drill holes, support or manual drilling explosion and support, which will inevitably increase the total cost of the project.

construction technology is invested in the "black hole". due to design changes or changes in geological conditions, it may increase the difficulty of construction technology, if new technologies are needed, technical research must be carried out to increase technical investment.

enterprises (owners) create a "black hole" of excellence. there is nothing wrong with project excellence, but regardless of cost, creating excellence for the sake of excellence will put the cart before the horse. in this way, it will inevitably increase the investment in "image" or exceed the standard construction, and the phenomenon of fighting manpower, equipment and funds will appear, and the cost expenditure will be increased.

construction organizations design "black holes". due to the difference between the bidding and the actual construction site, there is a disconnect between the construction organization design of the project and the actual situation, such as errors in the planning and arrangement of personnel, materials and equipment, and lack of time and quality considerations for individual sub-projects or processes, which may increase the cost of the project department.

The project department worked on the "black hole". this situation mostly occurs in enterprises that use the project department as the economic accounting object, rather than the project as the economic accounting object. once the engineering tasks are not connected, there is a phenomenon of work stoppage. during the work-off period, the social security expenses of its employees and the depreciation costs of idle equipment will continue to be borne by the project department.

"Artificial black hole" - the "black hole" where the project department does not have any external influence and its own control is not enough to cause the project to lose money. it mainly includes the following:

The overall goal of cost control is the "black hole". there is no overall goal of cost control, or although there is, but it is not strictly enforced, and the project cost is out of control.

Material management system "black hole". 


In the loss-making projects, the phenomenon of unplanned purchase of materials, over-quota purchases, and high-priced purchases abounds, and the result is a backlog of materials and overruns; the quantity and quality of the warehouse are not strictly controlled, and the phenomenon of waste and loss is serious.

Subcontracting engineering "black hole". 


For the labor subcontracting team, there is no strict quota material system, resulting in material overruns; there is a phenomenon of double invoicing of the number of projects constructed by the subcontracting team; without considering the winning bid price, subcontract the project at a price higher than the winning bid price, resulting in a huge loss; let a number of external units be attached, only symbolically charge a little management fee, and finally the affiliated units will go away, and all the aftercare costs will be borne by the affiliated project department, resulting in huge losses.

Contract management "black hole". 


There is no awareness of contract management, little knowledge of contracts such as purchasing goods, hiring personnel, providing services, subcontracting projects, and contracting projects, and not understanding the basic elements of contract formation, validity, performance, rights and obligations, and liability for breach of contract, resulting in chaotic contract management.

engineering mass "black hole". if there is a quality problem in the project, it will lead to rework and increase the cost of project quality.

Device utilization "black hole". 


Poor planning for the use of engineering equipment, blindly purchasing or leasing a large amount of equipment, often resulting in low equipment utilization, resulting in a sharp increase in project costs.

Security accident "black hole". 


As with the existence of project quality problems, once a project safety accident occurs, direct or indirect aftercare expenditure will also form a "black hole".

The project management fee "black hole". 


The main thing is that office expenses, travel expenses and business entertainment costs are out of control. high-end office supplies are bought at will, planes are free to sit, and high-end hotels are free to live. expand the scope of business entertainment expenses without authorization and raise the standard of expenditure.

"clogs" the "black hole" of project cost management

The "blockage" of "natural black holes". 

The decision-making and regulations formulated by the enterprise play a decisive role in the profit and loss of the project department. therefore, when formulating policies and regulations, enterprises must analyze the market changes during project bidding and construction, and adjust them in a timely manner.

Do not contract potential loss projects. 

The potential loss projects are projects where the bidding price is accounted for below the cost. when calculating costs, it is necessary to take the market changes and the experience accumulated by the cost of previous construction projects as far as possible. for the special purpose of contracting such a project, the enterprise should follow the normal cost control method, clarify the cost target of the project allowed expenditure, and cannot blindly limit the total cost to the winning price.


Optimize the design of the construction organization. 


The rational allocation of manpower, materials, machinery and other resources and the rational optimization of the process are the greatest savings in the utilization of project construction resources. therefore, without reducing the quality of the project, change some traditional backward construction methods and use alternative engineering materials as much as possible.

The scale of operation should be appropriate. 


Enterprises are economic organizations for the purpose of profit, in the process of operation, if the ratio of its net profit to the total operating amount of the enterprise can reach or exceed the average level of the same industry, then the scale of operation of the enterprise can be considered moderate, and even need to expand the scale of operation. 


Otherwise, the scale of operation of the enterprise may be large, which means that the risk of bad debts, the risk of projects not being completed on schedule, and the risk of engineering quality and safety accidents are increasing.


Fixed assets are procured by tender. in the project cost, the depreciation of fixed assets accounts for about 5%, and if the equipment of the enterprise is purchased by bidding, the purchase price is expected to be reduced by about 10%. therefore, enterprises should conduct tendering within their systems to purchase fixed assets.


Implement the mode of operation of separating the cadres from the dry. 


That is, the engineering tasks undertaken by the project department are uniformly distributed by the enterprise. however, in order to improve the enthusiasm of the project department to undertake the project task, priority should be given to the construction of the project department that contracted the project; when the management and technology of the project department are difficult to meet the needs of the project, the enterprise will arrange other project departments to carry out construction.

The "blockage" of "artificial black holes".

the "blockage" of the self-constructed project "artificial black hole". self-constructed projects refer to project departments composed of internal employees, migrant workers and labor teams directly organized by enterprises to carry out construction. in this regard, the "artificial black hole" should be "blocked" from the following aspects: first, determine the total cost of the project and the profit and loss target. the cost target is the basis for the project to control the cost, and the profit and loss target is to assess the ability of the project cost management, and the enterprise should send a working group to evaluate the project and determine the total cost target, the sub-project cost target and the profit and loss target of the project. 


The second is the bidding and procurement of materials. 

As mentioned earlier, the implementation of bidding and procurement of fixed assets and equipment, in fact, the material cost of project construction (including machinery use fee) is also the most important component of the project cost, accounting for more than 70% of the total cost of the project. taking advantage of the scale effect of procurement, it is possible to increase the bargaining chips for price reductions. it is necessary to fully consider the time value of the funds and pay as late as possible without increasing the price of materials. 


The third is to strengthen safety and quality management. 


The project department should establish the concept that safety and quality are benefits, actively prevent and avoid possible safety and quality accidents, and reduce or avoid safety and quality costs. 


The fourth is to designate a special person to be responsible for contract management, review all contracts that have been signed and are being performed, and negotiate with the other party to change the contract if it does not conform to the provisions of the contract law; if you do not agree to the changes, you must sign a supplementary agreement or amend the relevant terms; if the other party requests a change in the contract, it must adhere to the principle of consensus. 


Fifth, the project department should formulate or improve the rules and regulations related to cost control in combination with actual conditions. it is necessary to attach importance to the implementation of the above-mentioned systems and strengthen the inspection of the implementation systems of operational departments.

The "blockage" of the subcontracted construction project "artificial black hole". 


A project for subcontracting construction refers to a project in which the main body of the project is subcontracted to an external construction team for construction. in this regard, the "artificial black hole" should be "blocked" from the following aspects: 


First, the price of the subcontracted project is determined in accordance with the way of determining the total cost target. determine the direct project cost of the subcontracted project according to the quota for determining the total cost of the project and the amount of work undertaken by the subcontracting unit; according to the qualification level of the subcontracting unit, the rate of enterprise management fees, labor insurance premiums and financial expenses that should be calculated shall be appropriately reduced; appropriately reduce the planned profit margin of the project; the tax is calculated according to the tax type and tax rate specially stipulated by the state or the project; the sum of the above costs is the total price of the subcontracted works. 


The second is to allocate and settle project funds in strict accordance with regulations. 

The project department must, in accordance with the settlement method of the project price specified in the contract, inspect and price the qualified project quantity completed by the subcontracting unit on a monthly or according to the process, settle the project payment, and shall not prepay the preparation material and project payment to the subcontracting unit. 


It is necessary to establish a joint signing system for the settlement of project funds, that is, when settling project funds, in addition to the inspection and valuation statements, it is also necessary to listen to the opinions of various business departments. the third is to strictly prohibit external units from attaching to construction. 


The project department must prohibit external units from relying on enterprises in various forms to build externally in accordance with the requirements of enterprises. for any project that wins the bid in the name of the enterprise, the enterprise must directly sign a contract with the construction unit, and the project department and the construction unit shall inspect the work and calculate the price and settle the project payment. no project department shall allow an external unit to contract the project, inspect the price and settle the project in the name of the enterprise.

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