Topic 2 Time and Cost Management - Programming, Scheduling and Budgeting (Part 5 - Budget and Cost C

SCE5281 Construction Management Topic 2 Time and Cost Management - Programming, Scheduling and Budgeting (Part 5 - Budget and Cost C 1 Topic 1 Site Organization and Planning (Part 7 – Budgetary and Cost Control) 2 Budgets and Budgetary Control Budgets are used for planning the income and expenditure of a company or an organization. With the growing complexity of the construction industry, it is essential that firms also plan their policy well into the future. Through budgets such plans can be converted into the quantitative and monetary terms. Policy Budgets A firm can arrive at a tendering price for its projects by budget analysis and knowing what resources are available to carry out the work. From the budgets the firm will know, for example, how much capital is necessary, and can then decide whether to expand or contract any particular aspect of the business. From past results it may also be possible to determine a change in demand that could give an indication of possible new expansion plans. 3 Budgets and Budgetary Control Project budgets and working capital • The contractor has to know what capital is going to be needed for a project and when it will be required. To do this, the contractor will have to grow up a programme for the project and from this find the rate of expenditure and rate of income, based on a particular time period. The difference between these two will give the amount of working capital required in this time period. • If required, budgets can be prepared for the labor to be used (based on the labor graph), for materials and plant (based on schedules and the programme), and for the site overheads (based on the programme). • The working capital of a company is defined as a company’s total current assets. Current assets are made up of case, stocks or raw materials and those incorporated in work in progress. Working capita is required for many regular short-term commitments; to pay salaries and wages, to buy raw materials for construction, to pay interest, etc. • In a construction project, the need for working capital arises because of a delay between the expenditure on resources and the payment for goods subsequently provided. 4 Budgets and Budgetary Control Budgetary control • After a budget has been established, it is important to achieve the target set in the budget through a system of budgetary control. • Budgetary control is a continuous comparison of the actual achievement with the planned. By doing so any deviations from the plan can be seen and necessary actions can be taken either to bring things back on course or to change the plan. 5 Budgets and Budgetary Control Example 1 Non-repetitive construction – construction of a commercial building It is assumed that a contract has been entered into with the client and that payment for work carried out will be made 14 days after the end of the month in which the work is completed. Retention will be 10 per cent of the weekly income received initially with a maximum retention of 5 per cent of the contract sum ($80,790,000). Half the retention will be released 14 days following the completion of the project, the other half will be released six months after completion. The cost per operation has been ascertained and allocated to the master construction programme. From this programme it is now possible to arrive at the expenditure for each month. (Fig. 1.1) Using a similar method, it is possible to arrive at the program of income for the project, the value of each operation were calculated from the bill of quantities. The expected amounts of the monthly income are shown in Fig 1.2. Note: Payment takes place 14 days (2 weeks) after the end of the month in which the work is carried out. 6 Budgets and Budgetary Control Budgets and Budgetary Control Example 1 These figures for income and expenditure have been recorded graphically in Fig. 1.3. the working capital required at any time can now be found from the difference between income and expenditure from the graph. 8 Budgets and Budgetary Control Example 2 Repetitive construction – construction of 10 blocks of residential flat. It is assumed that a contract has been entered into with the client payment will be made in stages for each unit, e.g. excavation, concrete foundations, c