Introduction
After awarding of the contract, contractors and clients turn to management of the project. Primarily, cash management is very essential to both parties, in order to avoid additional costs or delays to the project. The contractors seek to maximize positive cash flow and improve profit margins. Therefore, they employ cost control systems that detect cash flow variation or possible problems i.e. cash deficit.
Cash Management and Control
In fact cash flow problems are a major contributor to the financial crisis in construction firms during the implementation stages (Chen, Cheng-Wu et al., 2010). Therefore the ability to forecast any cash flow problems is very paramount. Moreover, cash management systems can be used to estimate during the tendering processes. By utilizing cash management models contractors are able to decrease volatility, relieve quantity and pressure on capital allocation thus resulting in improved profits.
To maintain cash flow there is a need to manage both cash inflow and outflow. When forecasting cash inflow the following factors are always considered; retention and payments schedule. The construction industry like other cash driven businesses depends on cash flow. In fact, cash flow determines the feasibility of a project. Generally, projects with large cash flow are more appealing compared to projects with less cash flow.
Post Contract Cost Control
Post contract control is the process of controlling costs during construction after being awarded a contract (March, 2009, p.206). Primarily, contractors are most concerned with cost control. Additionally, subcontractors, clients, and suppliers also want to control their costs. It was established that effective cost control systems concentrate on key elements. Costs control systems should be easy to use and to understand by all stakeholders. Control systems enable contractors to predict project cash flows while satisfying the clients’ demands. Furthermore these systems aid in the estimation of the impact of risk factors, thus helping contractors to make informed financial decisions (Chen, Cheng-Wu et al., 2010).
To maintain good cost control, contractors ought to identify sources of variation, make accurate evaluations of the impact of proposed changes prior to implementation and continuously review progress and cost. In addition developing a clear budget to build with accurate estimations will eliminate variance. March (2009, p.212) argues that contractors and clients should not result in questionable practices of maintaining good cash flow. These questionable practices include front-loading, back-loading, over measurement, delaying payments and entering into disputes.
Clients’ main objective is to have their projects completed within the agreed contract sum. Similarly, clients require that their contractors seek approval in case of cost variance. Additionally, clients need to be informed early of unforeseen time and cost changes. On the other hand, contractors aim to gain projected profit from their projects or improve anticipated profit margin. Furthermore, they aim to improve turnover and maximize positive cash flow. Moreover, contractors need to provide certainty of the final outcome of their project.
In lump sum, fixed price contracts variation and design changes are major causes of cost movement. Therefore contactors should ensure that design is set before setting the final tender price in order to avoid variation in costs. Furthermore, contractors can control cost on site by using sound procurement, design development and control, contingency and early settlement for cost certainty.
Characteristics of a good cost control system
A good cost control system must ensure payment for work done and be able to monitor the work progress (March, 2009, p.206). Similarly, good control systems analyze profits or losses and pick up any cash flow problems. Essentially, good cost control must give early warning of unexpected project variance, so that remedial actions can be formulated. Moreover, to ensure reliability control systems should prevent any authorized alterations. Subsequently, there must exist restrictions on the maximum amount of money a staff can spend without consulting the management team (March, 2009, p.206).
Project Management
It has become apparent that in construction industries tripartite management is widely used. This is primarily; due to the fact construction projects are complex and thus require a variety of special skilled parties. In tripartite management, the management roles are shared between the following parties; clients, consultants and construction contractors (Harrison & Lock, 2004, p.84). However, the tripartite management technique is not favored since there is no single point of accountability and does not promote the integration of all parties. Moreover there is an adverse bias associated with this management method.
Conclusion
Both contractors and clients wish to control their costs in order to avoid running into financial crises. Therefore cash management becomes very paramount to ensure the feasibility of a project. Contractors ought to manage cash inflow and outflow and identify cash flow problems early and make remedies. Some contributors to cash movement include variation and change in design. Primarily, good cost control systems identify cash flow early and prohibit unauthorized alterations.
References
Chen, Cheng-Wu, Wang, M., Liu, K., & Chen, Tsung-Hao, (2010). Journal of Marine Science and Technology, Vol. 18, No. 5, pp. 644-651 (2010). Application of Project Cash Management and Control for Infrastructure. Web.
Harrison., F. & Lock, D., 2004. Advanced Project Management: A Structured Approach. Burlington: Gower Publishing.
March, C., 2009. Finance and Control for Construction. NY: Taylor & Francis.