Cost analysis is a critical process in construction projects. It is comprehensive breakdown of all cost to be incurred in performing any activities per project requirement and specification. It maintains its importance not only from cost control and estimation point of views but also as a planning, administration, management and for people involved in business development marketing and sales. For a contracting organization which competes in a tender or bid process to get new projects or creating any new construction project, cost analysis is far more important as effectiveness of cost analysis of activity and line items in the contract will determine not only the budget of the project but also the profitability for the organization.
The process of cost analysis can vary from organization to organization and use of tools. The generic approach for cost analysis is outlined here.
- Breakdown the activities for which the cost analysis is to be performed further if possible in work units where it is possible to directly assign project resources.
- Estimate the resource requirement for the work based on the specific deliverable specification. Many published standard industry information can provide guideline for resource estimate. However in organization with effective project documentation process, it is usually the internal statistics that is more helpful and accurate as it is based on the understood productivity of the organization on similar projects in the same organizational context. It is always wiser to involve the execution team members or experts for activity resource requirements.
- Resource will include all hard and soft resource, i.e. man, plant and machinery, consumables, services man-hours, etc.
- Once the resource requirement for the unit of work or the whole volume of work has been finalized, it is time to load it with the unit cost of these resources.
- Resource cost varies greatly with change in geography, complexity of project specification, regulations, environmental norms, tax regulations, law and order situation and other laws of land.
- Standard published cost information can be a guide, but more accurate estimate can be sourced from vendors if time allows for it.
- Post cost loading of resources, the overheads and miscellaneous cost are added to the cost.
- If the cost analysis is being done as a part of bid process for submission to client, the profit, predetermined or based on the market condition is added to arrive at the overall and unit cost of the activity.
Use of old data either for resource estimate or cost is to be avoided as, the current situations might have changed. Projects based on old cost estimates often turn in a loss making machine as the execution begins. It is a wiser for an organization to maintain cost analysis as a regular process and to keep the cost data updated. It not only guarantees quick turnaround of the project estimation process but also increases the probability of financial success. There exists different estimating techniques for cost and resource in a construction project, the selection of method is governed by the accuracy, consistency and user comfort of the method.