Cost management is key to ensuring construction projects stay on budget and on schedule. Yet many projects, as many as 33% come in over budget, as reported in the Construction Cost Management Report by Dodge Data & Analytics (Dodge). Surveyed contractors note that even among their best-performing projects, one out of five does not meet the budget requirements.
Efficiently tracking construction costs and monitoring risks make a big difference in maintaining budgets. Tracking costs and monitoring risks, however, requires a strong cost management discipline. Insights into current cost management practices can help fine-tune practices to build discipline. In this article, we’ll review highlights from the report from Dodge and key construction cost trends to take into your business.
- Owners and general contractors alike prefer a single primary tool for cost management, complimented by a limited number of third-party tools.
- Forecasting costs with real-time field data is the top future need for cost management.
- Alignment between owners and general contractors is critical to building an integrated cost management discipline, and revealed as an opportunity for both project teams and solution providers.
- Project-focused staff shows higher capability of being involved in cost management on a more holistic level. One reason is due to the ease in which technology allows this to happen.
5 Construction Cost Trends
1. Owners and contractors prefer a single cost management tool, yet most use more than one
Overall, owners, general contractors, and specialty contractors use more than one tool for cost management. Forty-four percent leverage more than one tool but lean on one as their primary. Thirty-three percent use two to five tools with none as their primary. Only 21% use one tool alone, while 5% use more than five tools with none as their primary.
For respondents in project-related roles, there is a strong preference for using a primary technology tool for cost-management-related challenges such as establishing a system of cost accounts, status reporting during a project, and identifying areas of the project that require more attention in real-time.
For best results from a primary cost management tool, prioritize ease of access and use.
We can see a consistent preference for having a primary cost management tool, yet just over a fourth of owners and contractors actually use one tool alone. The leading approach to construction cost management relies on a primary tool with supporting tools. For that reason, it’s important to choose a primary tool that allows you to connect your project data to cost activities and schedules. Integrations factor in here too to connect the field and office teams while avoiding data silos.
For best results from a primary cost management tool, prioritize ease of access and use. These solutions should connect to schedule and cost activities over the lifecycle of the project.
The Dodge report also indicates a preference for third-party tools among respondents. About 47% use third-party tools, with around 60% leaning on desktop applications and 40% using cloud-accessible ones. Thirty-two percent of owners and contractors use internally developed tools, and 16% use spreadsheets.
We’ll likely see the number of people using internally developed tools and spreadsheets decrease in the future due to the customization capabilities of third-party tools and the maintenance costs of homegrown solutions. Organizations can generate better cost-related outcomes for all involved partners by focusing on using fewer, more comprehensive tools that engage all stakeholders in a shared approach to cost management.
2. Success criteria for cost management solutions: what owners and general contractors expect
When measuring cost management success, respondents indicated that they use the following three metrics most frequently:
- Turnaround time on processing change orders/variations
- Achieving expected profit margin
- Final cost compared to budgeted cost
Owners and contractors are split evenly on the subject of spending levels on cost management. Thirty-nine percent believe they are spending more than they should have to, 32% think they are spending the right amount, and 29% say they’re spending less than they should. In the subgroups, variation exists with owners more likely to believe they’re spending too much, especially those in public entities (55%). Contractors, on the other hand, especially those in trades, are the least likely to believe they are overspending (31%).
There is also a significant amount of variation between how owners and general contractors measure the success of cost management solutions. Owners cite the following metrics most frequently:
- Final cost compared to budgeted cost (30%)
- Generating useful data to benchmark for future projects (26%)
In comparison, contractors pinpoint minimal unplanned changes as their top success criteria. These preferences align with the responsibilities of each role but also indicate a lack of synergy on what successful cost management means.
3. Forecasting costs with real-time field data in top future need for cost management
Respondents selected the most critical future need from 14 cost management practices. Thirty percent selected forecasting critical costs with real-time field data as the most important to improve over the next three to five years. This practice ranked number one across all four regions studied, with the United Kingdom selecting it most frequently (32%) and Canada choosing it least frequently (26%).
Other top future needs were dynamically tracking each dollar in budgets (29% overall) and managing collaborative workflows (26% overall). As with other areas surveyed, we can see variance between the subgroups. Owners are most interested in dynamically tracking budgets and using field data for forecasting. These are two cost management practices that are also beneficial to contractors.
Three times as many contractors (compared to owners) want to improve their future estimates. Twice as many want to benchmark cost performance. Again, these two practices are beneficial to owners yet appear to be more pressing needs for contractors.
4. Project teams could be more involved in cost management
One area of opportunity for construction firms is the greater involvement of project teams in cost management. The report emphasizes the ability of these teams to participate in an integrated approach to cost management. Dodge’s findings “indicate that project-focused staff are ready and able to participate in a more holistic and integrated approach instead of the traditional office-based function with just discrete, periodic inputs from the field.” This was made evident by project-based staff reporting:
- Higher levels of cost management capabilities
- Lower levels of difficulty with their most challenging cost management activities
- Greater satisfaction using technology to address them
These responses indicate a significant opportunity to improve cost management practices by involving capable, skilled staff in the process. Doing so will help to integrate the practice into a firm-wide discipline.
5. Owners and contractors have opportunity to align more
In the Dodge report, there are notable differences in priorities for owners and general contractors. For example, contractors note improving cash flow as a top need. Yet owners are more focused on improving their ability to forecast critical costs with real-time data from the field. Both of these areas require involvement from owners and general contractors. For example, cost flow contributes to the owner’s overall project health, and forecasting critical costs requires contractor participation.
Variations like the one mentioned above represent a need for greater owner and general contractor alignment. Getting on the same page about cost management success, tools, and priorities will power leaner construction and smoother workflows throughout all phases of a project.
From cost management insight to action
To move cost management forward, owners, contractors, and project staff need a comprehensive tool they can rely on to centralize and improve the visibility of related cost activities and risks. This tool should be equipped with capabilities to support the future top need of forecasting costs in the field with real-time data.
If you’re eager to get cost overruns under control…
We highly recommend downloading The Construction Cost Control Toolkit – a collection of digital resources built to help your teams standardize and accelerate their cost management workflows. You’ll get how-to guides, a checklist, and data-backed insight that’ll help you build a business case for improving your current cost management workflows. Everything in the toolkit is yours, completely free.