What Is Cost Planning in the Construction World?
Cost planning is a key due diligence step in preparing for a construction project. Cost planning tells a property owner how much a proposed project will cost. Additionally, cost planning will tell when the expected expenses will most likely occur.
This information is critical for obtaining project financing and for determining whether a project can be profitable. Without cost planning, property owners would enter blindly into construction projects and possibly into insolvency.
Cost planning determines the fiscal feasibility of a construction project. After the owner has set a maximum cost, cost planning will determine whether that cost cap can be met. If not, the project is not feasible in its current state and should be reworked to reduce costs. Additionally, cost planning is used to structure financing for a project. Cost planning informs the owner exactly when finance installments will be needed, so the owner can keep current with billings.
Cost planning typically involves two features. The first is an overall budget for the project. This is the total amount that the project is expected to cost. This amount is based on the current project scope and design and can be determined through various types of estimates. The second feature of cost planning is the allocation of costs over time. This involves predicting when along the project schedule costs will actually be incurred and paid.
A central benefit of cost planning is that the owner is aware of financial expectations. This allows an owner to secure the proper financing and business plan. Without cost planning, owners would not know if a project is expected to be profitable. Additionally, cost planning allows an owner to properly structure a construction loan. Instead of borrowing the total project cost upfront (and beginning to pay interest on the total immediately), cost planning allows an owner to borrow only what will be spent in a particular period and to avoid paying interest on the balance until it is received.
Cost planning should be done three times before the start of construction: once at the project's initial inception, once after the preliminary design is complete, and once after the final design is permitted. Additionally, the cost plan should be regularly updated and tracked during the course of construction to ensure accuracy, typically after each project milestone.
Although construction costs can be planned and estimated, they also can significantly change during the course of actual construction. Even the smallest changes to design and scope can lead to drastic cost changes due to having to rework a completed portion of the project. The best way to meet original cost planning estimates is to limit the amount of design change that occurs on a project.
Mr. Michael Johnson has over seven years of experience in the construction and real estate industries. Michael has a Masters of Construction Management from the University of Southern California and has work experience with the world's largest real estate management firms. Many of his clients include Fortune 500 Companies and he has worked on a wide array of projects.