S. N.

PATEL INSTITUTEOF TECHNOLOGY& RESEARCH CENTRE, UMRAKH

(A Vidyabharti Trust Institution)
CIVIL ENGINEERING DEPARTMENT
M. E. (Construction Engineering & Management)
3rd semester (2nd Year)
Cost Management of Engineering Projects (3730008)
Questions of Mid Sem Exam
1. What is Strategic Cost Management (SCM)? Explain the Stages of Strategic
Cost Management.
2. What are the Components of Strategic Cost Management
3. Explain need of Strategic Cost management
4. Explain the Cost concept in decision making
5. List out 9 Cost Concepts used in Decision Making and explain any one in
detail
6. Define the following term:
a) Private Cost,
b) Actual Cost and Opportunity Cost,
c) Past Costs and Future Costs,
d) Explicit Cost and Implicit Cost,
e) Incremental Costs or (Differential Costs) and Sunk Costs,
f) Short-Run and Long-Run Costs,
g) Fixed and Variable Costs,
h) Direct and Indirect Costs or Traceable and Common Costs,
i) Sunk, Shut-Down and Abandonment Costs,
j) Out of Pocket and Book Cost:
k) Out of Pocket Costs,
l) Historical Costs and Replacement Costs,
m) Controllable and Non-Controllable Costs,
n) Average Cost,
o) Marginal Cost and Total Cost
7. What is Costing System? And explain objective of Costing System
8. What are the Advantages of Good Cost Accounting System
9. What is Inventory Valuation? List out method of Inventory valuation and
explain any one in detail
10. What are the Objectives of Inventory Valuation
 11. What Is Data Driven Decision Making? Why Data Driven Decision Making Is
Important?
12. Give definition of Project and give types and objective of Project
13. Why Is Project Management Important?
14. What is Cost overrun and which are the various reasons of Cost overruns in
construction?
15. Which are the various steps to deal with Cost overruns
16. How we can calculate the overruns?
17. Which are the various Project Execution Phase
18. Why is a non-technical approach needed for project management?
19. What is The Importance of Cost Control in Project Management
20. What are the various Project Cost Estimating Tools & Techniques?

1) What is Strategic Cost Management (SCM)? Explain the Stages of Strategic Cost
management

Strategic Cost Management or otherwise called as SCM is the cost management technique that
aims at reducing costs while strengthening the position of the business. It is a process of
combining the decision-making structure with the cost information, in order to reinforce the
business strategy as a whole. It measures and manages costs to align the same with the
company’s business strategy.

Stages of SCM

1. Formulating Strategies
2. Communication of Strategies in the entire organization.
3. Planning and Carrying out tactics, to execute those strategies.
4. Developing and implementing controls to track the success.

In Strategic Cost Management (SCM), primary importance is given to constant improvement in

the product to provide better quality to its target customers. It is an essential part of the value
chain that covers every facet such as purchase, design,production and services.
2) What are the Components of Strategic Cost Management?

Strategic Positioning Analysis: It determines the company’s comparative position in the

industry in terms of performance.

Cost Driver Analysis: Cost is driven by different interrelated factors. In strategic cost
management, the cost driver is divided into two categories, i.e. structural cost drivers and
executional cost drivers. It examines, measures and explains the financial effect of the cost
driver concerned with the activity.

Value Chain Analysis: The process in which a firm recognizes and analyses, all the activities and
functions that contribute to the final product. It was propounded by Michael Porter (1985), to
show the way a customer value assembles along the activity chain that results in the final
product or service.

In a nutshell, strategic cost management is not just about controlling the costs but also uses the
information for managerial decision making. The fundamental objective of strategic cost
management (SCM) is to gain a sustainable competitive advantage by way of product
differentiation and cost leadership.

3) Explain need of Strategic Cost management?

 It is an updated form of cost analysis, in which the strategic elements are more clear and
formal and improves the overall position of the company.
 It is used to analyse cost information, and use it to develop various measures to achieve
a sustainable competitive advantage.
 It provides a better understanding of the overall cost structure in the quest of gaining a
sustainable competitive advantage.
 It uses cost information specifically to govern the strategic management process –
formulation, communication, implementation and control.
 It helps in identifying the cost relationship between value chain activities and its process
of management to gain competitive advantage.
 The strategic cost management must be implemented at the initial stages of production,
so as to reduce heavy cost failure.
4) Explain the Cost concept in decision making.

A. Many business decisions require a firm knowledge of several cost concepts. Different types
of costs have differing characteristics. Consequently, when reviewing a business case to
determine which path to take, it is useful to understand the following cost concepts:

Fixed, variable, and mixed costs.

A fixed cost, such as rent, does not change in lock step with the level of activity. Conversely, a
variable cost, such as direct materials, will change as the level of activity changes. Those few
costs that change somewhat with activity are considered mixed costs. It is important to
understand the distinction, since a decision to alter an activity may or may not alter costs. For
example, shuttering a facility may not terminate the associated building lease payments, which
are fixed for the duration of the lease.

By-product costs.

A product may be an incidental by-product of a production process (such as sawdust at a

lumber mill). If so, it does not really have any cost, since its cost would have been incurred
anyways as a result of the production of the main product. Thus, selling a by-product at any
price is profitable; no price is too low.

Allocated costs.

Overhead costs are allocated to manufactured goods only because it is required by the
accounting standards (for the production of financial statements). There is no cause-and-effect
between the creation of one additional unit of production and the incurrence of additional
overhead. Thus, there is no reason to include allocated overhead in the decision to set a price
for one additional unit.

Discretionary costs.

Only a few costs can actually be dropped without causing any short-term harm to an
organization. Examples are employee training and maintenance. Over the long-term, delaying
these expenditures will eventually have a negative effect. Thus, managers need to understand
the impact of their decisions over a period of time when determining which costs to cut back.

Step costs.

Though some costs are essentially fixed, it may be necessary to make a large investment in
them when the activity level increases past a certain point. Adding a production shift is an
example of a step cost. Management should understand the activity volumes at which step
costs can be incurred, so that it can manage around them - perhaps delaying sales or
outsourcing work, rather than incurring step costs.

5) List out 9 Cost Concepts used in Decision Making and explain any one in detail

A. The following points highlight the top nine cost concepts used in decision making. The cost
concepts are:

1. Marginal Cost
2. Out of Pocket Costs
3. Differential Costs
4. Sunk Costs
5. Opportunity Cost
6. Imputed Costs
7. Replacement Cost
8. Avoidable Cost and Unavoidable Cost
9. Relevant Cost and Irrelevant Cost.

Relevant Cost and Irrelevant Cost:

 A cost that is relevant to a decision is called relevant cost. Past costs are not generally
relevant costs because they are sunk costs or costs already incurred. Thus, the book
value of an asset or depreciation charged in accounts in respect of an asset is not
relevant cost. On the other hand, the fall in the resale value of an asset as a result of
using it, as also the running expenses incurred to make use of the asset are relevant
costs.

 Similarly in the case of materials regularly in use, the relevant cost is its replacement
cost and not the book value or the realizable value. For material that is not in regular
use; the realizable value is the relevant cost. If it is possible to use this non-moving
material in place of another material, the value of the latter for which substitution is
made is the relevant cost of the non-moving material.

 The relevant cost of any scarce resource (e.g., labour) is the direct cost of using the
resource plus any contribution earned by that resource on the most profitable
alternative use of the resource. In this sense the relevant cost is the opportunity cost.
Generally relevant costs are the expected future costs relevant to a decision and they
differ among different alternatives.

6)
7) What is Costing System? And explain objective of Costing System.

 A cost accounting system (also called product costing system or costing system) is a
framework used by firms to estimate the cost of their products for profitability analysis,
inventory valuation and cost control.

 Estimating the accurate cost of products is critical for profitable operations. A firm must
know which products are profitable and which ones are not, and this can be ascertained
only when it has estimated the correct cost of the product. Further, a product costing
system helps in estimating the closing value of materials inventory, work-in-progress
and finished goods inventory for the purpose of financial statement preparation.

 There are two main cost accounting systems: the job order costing and the process
costing.

 Job order costing is a cost accounting system that accumulates manufacturing costs
separately for each job. It is appropriate for firms that are engaged in production of
unique products and special orders. For example, it is the costing accounting system
most appropriate for an event management company, a niche furniture producer, a
producer of very high cost air surveillance system, etc.

 Process costing is a cost accounting system that accumulates manufacturing costs

separately for each process. It is appropriate for products whose production is a process
involving different departments and costs flow from one department to another. For
example, it is the cost accounting system used by oil refineries, chemical producers, etc.

 There are situations when a firm uses a combination of features of both job-order
costing and process costing, in what is called hybrid cost accounting system.

 In a cost accounting system, cost allocation is carried out based on either traditional
costing system or activity-based costing system.

 Traditional costing system calculates a single overhead rate and applies it to each job or
in each department.

 Activity-based costing on the other hand, involves calculation of activity rate and
application of overhead costs to products based on their respective activity usage
8) What are the Advantages of Good Cost Accounting System?
(1) Classification and Sub-divisions of Costs:
Costs are collected and classified by various ways in order to provide information to
management for control purposes and to ascertain the profitability of each area of activity. It
enables a concern to measure the efficiency, and then to maintain and improve it. Unprofitable
activities are disclosed and steps can be taken to make an improvement in those activities.

(2) Control of Materials, Labour and Overhead Costs:

An efficient check is provided on stores and materials. Stores Ledger and Material Abstracts are
maintained which provide an effective check on the stores and material used in a business. By
adopting the maximum limit for stores the total capital outlay is controlled and total financial
loss due to over-stocking is obviated. Information of stock of various materials and stores is
constantly available.

This helps in planning the production according to availability of materials and fresh stocks can
be arranged in time. Loss due to carelessness or pilferage or any other mischief is detected and
steps may, therefore, be taken to minimise such loss in future. An efficient check on labour and
machines is provided by giving detailed information about the availability of machine and
labour capacity.

The work is so planned that no section is over-worked and no section remains idle. The
maintenance of time and job cards for workers discloses the loss incurred by idle time and
indicates the directions in which losses may be minimised. The relative advantages of
remunerating labour on the time or piece work or premium plans may be ascertained. It also
measures the efficiency of the wage system in use.

Cost Accounting thus provides a detailed control of materials and stores and labour costs.
Various techniques of materials control are applied in order to avoid the excessive locking up of
capital in stock of materials and stores. Idle time should be kept as low as possible. By having
proper classification of overheads into controllable and uncontrollable or fixed and variable, it
helps to control the overhead costs.

(3) Business Policies:

Business Policy may require the consideration of alternative methods and procedures and this
is facilitated by cost information correctly presented. For example, by the aid of cost reports
management can decide whether the manufacture of certain products increases overhead
expenditure disproportionately or whether to treat by-products even at a loss to make possible
a more important trade in another product.
Thus, it helps management to take vital decisions such as introduction of a new product,
selection of a most profitable product mix, utilisation of spare capacity, exploration of
additional market, whether to make or buy, problem of limiting factor, replacement of existing
assets, appraisal of proposed investment to meet expansion programme etc. with the help of
marginal costing techniques and differential cost analysis.

(4) Budgeting:
It provides the use of budgets and performance reports and enables management to correct
inefficiencies before they enter into business. It is a coordinated plan of action for every
responsible person for comparing the actual results with the budgets. Two important cost
accounting tools for helping managers are budgets and performance reports. Budgets are
financial and/or quantitative statements prepared and approved prior to a defined period of
time, of the policies to be pursued during that period for the purpose of attaining objectives of
management.

Thus, budgets are the formal quantifications of the plans of management. Performance reports
measure actual performance and give accounts of comparisons of budgets with actual results
which facilitate action against those persons whose performance is less than the performance
specified in the budgets.

The technique of control through performance reports is technically known as management by

exception, which is the practice of concentrating on areas whose performance is not upto the
mark as it was planned and ignoring areas that are running smoothly as these were planned.

(5) Standards for Measuring Efficiency:

It provides the use of standards to assist management in making estimates and plans for future
and to provide the basis of management of efficiency. Actual are compared with
predetermined standards to determine the operating efficiency.

(6) Best Use of Limited Resources:

In all varied fields we are concerned to make the best use of limited resources that are available
to us. Thus the intention is to obtain the maximum output from a given input. Cost Accounting
provides the reliable data of costs with regard to materials, wages and other expenses.

These help management to get maximum output at the minimum cost by indicating where
economies may be affected, waste eliminated and efficiency increased ; some of the loss
occasioned by reduced turnover and falling prices may be avoided.
(7) Instrument of Management Control:
It provides management with valuable data for planning, budgeting and control of costs. The
organisation and management of undertaking must be planned and controlled in such a way
that the desired volume of production is achieved at the least possible cost in relation to the
scheduled quantity of the product.
The measurement of the degree to which this objective is attained, is provided by cost
accounting. An efficient system of cost accounting is, thus, regarded as an important part in the
efforts of any management to secure business “stability.

(8) Cost Audit:

The operation of a system of cost audit in the organisation will assist in prevention of errors and
frauds. It will help to improve cost accounting methods and techniques to facilitate prompt and
reliable information to management.

(9) Special Factors:

It informs management about the special factors such as optimum profitability, seasonal
variations in volume and costs, idle time of labour and idle capacity of the machine etc. It also
helps to curtail the losses during the off season.

(10) Price Determination:

It helps management to fix the remunerative selling prices of various items of goods in different
circumstances. During the period of depression a businessman has to become very watchful
and vigilant in tracking down the concealed inefficiencies and sources of wastage, so that he
may reduce the cost of production to the minimum. He has to resort to price cutting to such an
extent so as to recover variable costs. Cost accounting makes a distinction between fixed and
variable costs and helps the businessman in the determination of prices in the depression
period.
The fixation of prices cannot be properly done unless proper figures of costs are available. If
prices are fixed without costing information, it is possible, that prices quoted may be too high
or too low. In periods of depression, it may become necessary to reduce the prices even below
total cost. It is only costing which will guide the businessman in this matter.

(11) Expansion:
Management is able to formulate expansion policy on the basis of estimates of cost of
production at various levels provided by cost accountant.
9) What is Inventory Valuation? List out method of Inventory valuation and explain any one
detail.
Inventory valuation is the cost associated with an entity's inventory at the end of a reporting
period. It forms a key part of the cost of goods sold calculation, and can also be used as
collateral for loans. This valuation appears as a current asset on the entity's balance sheet. The
inventory valuation is based on the costs incurred by the entity to acquire the inventory,
convert it into a condition that makes it ready for sale, and have it transported into the proper
place for sale. You are not allowed to add any administrative or selling costs to the cost of
inventory. The costs that can be included in an inventory valuation are:

Direct labor
Direct materials
Factory overhead
Freight
Handling
Import duties

Inventory Valuation Methods

When assigning costs to inventory, one should adopt and consistently use a cost-flow
assumption regarding how inventory flows through the entity. Examples of cost-flow are:

 The specific identification method, where you track the specific cost of individual items
of inventory
 The first in, first out method, where you assume that the first items to enter the
inventory are the first ones to be used
 The last in, first out method, where you assume that the last items to enter the
inventory are the first ones to be used
 The weighted average method, where an average of the costs in the inventory is used in
the cost of goods sold

Weighted Average Cost method

This method assumes that the goods available for sale are homogenous and values
inventory on the basis of weighted average price
• This methods is based on the presumption that once the materials or goods are put
into a common bin, they lose their separate identity. Hence, the inventory consists of no
specific batch of goods.
 • The inventory is thus priced at weighted average price i.e. average prices paid for the
goods, weighted according to the quantity purchased at each price.
Weighted Average Cost method

Weighted Average Cost method Advantages

1. It is more scientific and smoothens the fluctuation in purchase prices

2. Inventory is valued at one rate

Disadvantages

1. Its tedious- Requires the issue price to be computed each time a consignment is
received

10) What are the Objectives of Inventory Valuation?

(a) Determination of Trading Profit:
Inventory is an important item for ascertaining the trading profit or gross profit. Gross profit is
the excess of sales over cost of goods sold.

Cost of goods sold is computed by adjusting the opening and closing stocks to purchases, as
shown follows:

Cost of goods sold = Opening stock + Purchases – Closing stock.

From the above equation it may be understood that the values of stocks influence the cost and
thereby affect the gross profit. For example, over valuation of closing stock will reduce the cost
and increase the current profit and reduce profits of subsequent years and vice versa.

(b) Determination of Financial Position:

Inventory plays an important role in the ascertainment of the financial position of a business.
Closing stock is shown as a current asset in the balance sheet. Over and under valuation of
stock will give a misleading picture about the working capital position and the overall financial
position of the business.

(11) What Is Data Driven Decision Making? Why Data Driven Decision Making Is Important?

The term “data-driven” may seem redundant, as people who make decisions might already rely
on data. But in the case of data-driven decision making, companies collect data methodically
and analyze it rigorously, so that the information represents reality much more accurately.

Data driven decision making (DDDM) is a process that involves collecting data based on
measurable goals or KPIs, analyzing patterns and facts from these insights, and utilizing them to
develop strategies and activities that benefit the business in a number of areas. Fundamentally,
data driven decision making means working towards key business goals by leveraging verified,
analyzed data rather than merely shooting in the dark.

However, to extract genuine value from your data, it must be accurate as well as relevant to
your aims. Collecting, extracting, formatting, and analyzing insights for enhanced data driven
decision making in business was once an all-encompassing task, which naturally delayed the
entire data decision making process.

Qualitative analysis focuses on data that isn’t defined by numbers or metrics such as interviews,
videos, and anecdotes. Qualitative data analysis is based on observation rather than
measurement.

Quantitative data analysis focuses on numbers and statistics. The median, standard deviation,
and other descriptive stats play a pivotal role here. This type of analysis is measured rather than
observed. Both qualitative and quantitative data should be analyzed to make smarter data
driven business decisions.
IMPORTANCE:

 It enables companies to create new business opportunities, generate more revenue,

predict future trends, optimize current operational efforts, and produce actionable
insights.
 Data-driven decision making leads to greater transparency and accountability, and this
approach can improve teamwork and staff engagement.
 With DDDM, organizations become more agile, detect new business opportunities
sooner, and respond to market changes more quickly. With near-real-time data
collection, managers can swiftly measure results and create a fast feedback loop. These
abilities make data-driven companies exceptionally customer focused and more
competitive.
 Team members often feel a greater sense of control because they can see the goal
posts clearly. The tenor of interactions may become more positive because discussions
are fact-based, rather than driven by ego and personality.
 Data-driven analysis can pay for itself through cost savings and higher revenues.

(12) Give definition of Project and give types and objective of Project.

PROJECT:If there is one single quality which sets a project apart from routine commercial or
industrial operations, it is its novelty. No two projects are ever exactly alike. A project is always
a journey into the unknown, fraught with risk. Projects typically demand the use of resources
that are scarce or expensive, but which have to be deployed over a most complex frame work
of tasks.

TYPES OF PROJECT:

(1) Manufacturing Projects: Where the final result is a vehicle, ship, aircraft, a piece of
machinery etc.
(2) Construction Projects: Resulting in the erection of buildings, bridges, roads, tunnels
etc. Mining and petro-chemical projects can be included in this group.
(3) Management Projects: Which include the organization or reorganization of work
without necessarily producing a tangible result. Examples would be the design and
testing of a new computer software package, relocation of a company’s headquarters
or the production of a stage show.
(4) Research Projects: In which the objectives may be difficult to establish, and where the
results are unpredictable.
OBJECTIVE:

(1) Function or Performance:

The final result must satisfy the requirements of the end user. Considering a project to develop
a racing car, the objectives must be to produce a vehicle that satisfies specified standards for
performance, Reliability and safety.

(2) Containment of Expenditure within Budget:

This is another criterion for project success. Continuing with the racing car development
example, if the development costs were to exceed those planned, then their recovery from car
sales could result in the selling price having to be increased too far above prices charged by
competitors for their rival products. Projects must, therefore, be completed within their
budgeted costs.

(3) Time Scale is the Third Factor:

In the motor car example, the car should be fully developed and proven in time for launch at
the motor show.

(13) Why Is Project Management Important?

1. Strategic Alignment

Project management is important because it ensures what is being delivered, is right, and will
deliver real value against the business opportunity.

Every client has strategic goals and the projects that we do for them advance those goals.
Project management is important because it ensures there’s rigor in architecting projects
properly so that they fit well within the broader context of our client’s strategic frameworks.
Good project management ensures that the goals of projects closely align with the strategic
goals of the business.

2. Leadership

Project management is important because it brings leadership and direction to projects.

Without project management, a team can be like a ship without a rudder; moving but without
direction, control or purpose. Leadership allows and enables a team to do their best work.
Project management provides leadership and vision, motivation, removing roadblocks,
coaching and inspiring the team to do their best work.
Project managers serve the team but also ensure clear lines of accountability. With a project
manager in place there’s no confusion about who’s in charge and in control of whatever’s going
on in a project. Project managers enforce process and keep everyone on the team in line too
because ultimately they carry responsibility for whether the project fails or succeeds.

3. Clear Focus & Objectives

Project management is important because it ensures there’s a proper plan for executing on
strategic goals.

Where project management is left to the team to work out by themselves, you’ll find teams
work without proper briefs, projects lack focus, can have vague or nebulous objectives, and
leave the team not quite sure what they’re supposed to be doing, or why.

As project managers, we position ourselves to prevent such a situation and drive the timely
accomplishment of tasks, by breaking up a project into tasks for our teams. Oftentimes, the
foresight to take such an approach is what differentiates good project management from bad.
Breaking up into smaller chunks of work enables teams to remain focused on clear
objectives, gear their efforts towards achieving the ultimate goal through the completion of
smaller steps and to quickly identify risks.

4. Realistic Project Planning

Project management is important because it ensures proper expectations are set around
what can be delivered, by when, and for how much.

Without proper project management, budget estimates and project delivery timelines can be
set that are over-ambitious or lacking in analogous estimating insight from similar projects.
Ultimately this means without good project management, projects get delivered late, and over
budget.

Effective project managers should be able to negotiate reasonable and achievable deadlines
and milestones across stakeholders, teams, and management. Too often, the urgency placed on
delivery compromises the necessary steps, and ultimately, the quality of the project’s outcome.
5. Quality Control

Projects management is important because it ensures the quality of whatever is being

delivered, consistently hits the mark.

Projects are also usually under enormous pressure to be completed. Without a dedicated
project manager, who has the support and buy-in of executive management, tasks are
underestimated, schedules tightened and processes rushed. The result is bad quality output.
Dedicated project management ensures that not only does a project have the time and
resources to deliver, but also that the output is quality tested at every stage

Good project management demands gated phases where teams can assess the output for
quality and applicability

6. Risk Management

Project management is important because it ensures risks are properly managed and
mitigated against to avoid becoming issues.

Risk management is critical to project success. The temptation is just to sweep them under the
carpet, never talk about them to the client and hope for the best. But having a robust process
around the identification, management and mitigation of risk is what helps prevent risks from
becoming issues.

Good project management practice requires project managers to carefully analyze all potential
risks to the project, quantify them, develop a mitigation plan against them, and a contingency
plan should any of them materialize.

7. Orderly Process

Project management is important because it ensures the right people do the right things, at
the right time – it ensures proper project process is followed throughout the project lifecycle.

Proper planning and process can make a massive difference as the team knows who’s doing
what, when, and how. Proper process helps to clarify roles, streamline processes and inputs,
anticipate risks, and creates the checks and balances to ensure the project is continually aligned
with the overall strategy. Project management matters here because without an orderly, easily
understood process, companies risk project failure, attrition of employee trust and resource
wastage.
8. Orderly Process

Project management is important because it ensures a project’s progress is tracked and

reported properly.

When proper oversight and project reporting is in place it makes it easy to see when a project is
beginning to deviate from its intended course. The earlier you’re able to spot project deviation,
the easier it is to course correct.

Good project managers will regularly generate easily digestible progress or status reports that
enable stakeholders to track the project. Typically these status reports will provide insights into
the work that was completed and planned, the hours utilized and how they track against those
planned, how the project is tracking against milestones, risks, assumptions, issues and
dependencies and any outputs of the project as it proceeds.

9. Managing and Learning from Success and Failure

Project management is important because it learns from the successes and failures of the
past.

Project management can break bad habits and when you’re delivering projects, it’s important
to not make the same mistakes twice. Project managers use retrospectives or post project
reviews to consider what went well, what didn’t go so well and what should be done differently
for the next project.

This produces a valuable set of documentation that becomes a record of “dos and don’ts” going
forward, enabling the organization to learn from failures and success. Without this learning,
teams will often keep making the same mistakes, time and time again. These retrospectives are
great documents to use at a project kickoff meeting to remind the team about failures such as
underestimating projects, and successes such as the benefits of a solid process or the
importance of keeping time sheet reporting up to date.
(14) What is Cost overrun and which are the various reasons of Cost overruns in construction?

A cost overrun, also known as a cost increase or budget overrun, is an unexpected cost incurred
in excess of a budgeted amount due to an underestimation of the actual cost duringbudgeting.

The different ways in which cost overrun can be described include:

 As a percentage of the total cost.

 As a total percentage including the original budget and the overrun amount.
 As a percentage of the cost overruns to the original budget.

In order to address and manage cost overruns, it is important to identify what the root cause is.
While specific events such as extreme weather conditions can cause delays or damage which
may result in cost overruns, cost overruns are often the result of more complex project
management issues that can be difficult to untangle.

There are a number of possible reasons for this:

[Link] Costs
So many things can happen between the time a contract is signed and when it is finally
executed. And they can all influence the cost of materials, equipment and labor and overhead,
such as administrative, finance and legal costs. Unplanned costs – whether they are unexpected
or overlooked – can bedevil any project.

Guard against this cost overrun by building reserves and regularly checking material and
supplier contracts against buying patterns, which influence supply and demand, and therefore,
costs. Successful project managers not only produce project budget and spending outlooks;
they also check them constantly.

2. A Communication Breakdown
This can happen among any two people involved in a project, but the miscommunication that
could end up costing you money is most likely to take place between the project manager and
another employee in a key role. You can’t possibly be in the same room for every meeting or
listen in on every phone call, but you can be in the pipeline in other ways, so that you can guard
against one of the primary causes of cost escalation in project management.

Guard against this cost overrun by keeping your project leader's clear, organized and detailed
project plan nearby at all times -- and insist that others involved in the project do the same.
3. Changes in Project Scope
It’s a rare project that gets smaller over time; a project almost always grows, and with that
growth, the costs. Many people defend “scope creep,” saying that it should be expected, as a
project begins to take shape. Don’t fight it; embrace it, they say. In theory, you may agree, but
what about that burgeoning bottom line?
Guard against this cost overrun the only way possible: By setting strict rules about how much
change you will accept and by what date – and then standing by your decision.
4. Underestimating Project Difficulty or Complexity
It’s more likely to happen with big, expensive projects – the type with hidden “surprises” that
haven’t been unearthed yet, like building projects that involve excavation work. But
underestimation can impugn smaller projects, too.
Guard against this cost overrun by ensuring that you hire bona fide experts to undertake the
initial review of your project. Of course, even experts make mistakes, but those who have
experience are more likely to rely on their experience, as they consider “what if?” scenarios. As
the boss, it's always beneficial to visit projects similar to yours – and take copious notes of what
went right and what could have gone better, if those project leaders knew then what they
know now.
5. Inadequate Financing
A project whose complexity has been underestimated can lead to unrealistic cost estimates and
then problems when it comes to financing. And if financing dries up in the middle of a project, it
can come to a grinding halt, all of which proves that project management is part art, part
science.
Guard against this cost overrun having a frank conversation with your lenders about what they
can do if you run into financing trouble. Having a back-up plan in place – even if you don't need
it – probably won't be cheap, but it could spare you the much bigger expense of a stalled
project.
[Link] Delays
During the course of any project, it's fair to expect at least a few delays. All the moving parts,
and people, practically guarantee that something or someone will not perform as planned. But
as you surely know, there's a big difference between an isolated incident and a repetitive
problem that can trigger some of the most frustrating causes of cost-escalation in project
management.
7. Lack of Leadership Experience
When a project runs off the rails because of a lack of leadership on the part of the project
leader, it can be painfully obvious who is responsible. A lack of project management experience
can reveal itself in myriad ways: lack of planning, poor communication, insubordination and
missed or unenforced deadlines, among them.
Guard against this cost overrun by hiring an experienced team leader, who excels at
communicating (with you) and who provides regular project updates.
8. Lack of a Contingency Plan
It may sound obvious now, but like many small-business owners, you may resist drafting a
contingency plan - “plan B" - when you're busy trying to get "plan A" launched and off the
ground. On the other hand, your mind may already be programmed to think in terms of backup
plans, just in case things go awry.
Guard against this cost overrun by taking the time to draft a “plan B,” right from the start. A
contingency plan could serve you, as well as your can-do attitude can, by putting your project
back on the rails, by reducing cost overruns.

(15) Which are the various steps to deal with Cost overruns.

Many resources are sharing advice on how to avoid budget overrun, but as we all know, people
tendency is not to learn from other peoples mistakes, rather make the mistakes themselves.
But how to deal with project cost overrun when you already are it the situation?

If you already experiencing construction project cost overrun, take these actions:

1. Understand the real reasons why your budget overrun

2. Create an action plan
3. Be responsive to your customers and subcontractors
4. Talk to your team honestly and agree on the priorities
5. Try to retrieve budget, but don't be greedy
6. Stop works when payments are late
7. Set up cost control system

1. Understand the real reasons of budget overrun

Underestimated or wrong calculation

One of the major reason for cost overrun is a wrong estimation of the budget. Without change
orders, it can be difficult to turn the situation in your favor. Now the real lesson you can learn
from this mistake is to understand the error in the estimate. It could be that the project was
underestimated on purpose, hoping to turn it around in long run. Whatever the reason it needs
to be clear and to avoid it in future.
Scope creep

Some customers continuously asking for small changes, explaining how easy it would be for you
as a contractor to do them, at the same time not expecting to get billed or promising bigger
junks of work for that in the future. But in reality, these “small requests” sooner or later go out
of control. Going the extra mile will quickly become an expectation for the customer. It’s like
“feeding the monster”. Instead, you should agree on the scope with the client, finish what you
have promised and get paid for all what is out of the scope. And by the way, never use the
words easy, fast, simple when talking about your works. These are the words explaining other
peoples works.

Long-term economic effect

This can be a budget overrun reason when your project is very long, it was stopped for some
period or the project calculation was done at the low economy time and the economy now is
growing fast. It would be wise to have some “fuse” in your contract for such situations. Some
standard contracts have standard conditions, so you can take a closer look at your contract and
see if you can review your budget with customer according to contract conditions.

Bad cost management & cost control.

The worst thing is when you find out that your project is over budget at the end of a project.
Usually, it is closely related to a bad budget management. It is very common when the times
are good, less attention is paid for budget and cost control. Everybody feel confident and the
overview looks nice. But if you don't pay attention to your project expenses, it can happen that
you will be invoiced higher than agreed from subcontractors, scope changes are not counted
accordingly, and some big unpaid invoices was forgotten into a desk drawer, what would eat
the project's profit just like that. Make sure that you have a trustful real-time information about
your budget situation, and if not, take actions to have it as soon as possible.

Bad resource utilization

Bad management or unproductive use of resources “eats” your margin and leads to budget
overrun. It may don't mean that your employees or subcontractors are doing a bad work, but it
might mean that they are constantly switching between projects and/or construction sites not
fully finishing the tasks and this makes a work non-productive. This is common if the business is
booming and hard to find subcontractors.
 2. Create an action plan
Now if you understand what is causing your budget overrun you can create an action plan, for
getting the thing on the right track. Sometimes company management just trying to extinguish
the fire. But the most important thing is to take the time to focus, create a plan and start
implementing it immediately. As Seneca said, “If one does not know to which port one is sailing,
no wind is favorable”. You and your team should know exactly what should be done to get
things better. Sometimes, planning will also show that there is no another good way from the
situation, even so, it will save you from getting in more troubles.

3. Be responsive to your customers and subcontractors

When things are going wrong, it would be the bad decision to avoid talking with your customers
or subcontractors. It may be that you don’t know what to say or you are afraid of the reaction,
however - be responsive and show up a willingness to communicate. This will create more trust
and credit. Do not try to hide things or even worse, do not lie. Instead, you can openly say: “I
know that things look [is] bad and the reason is… I’m working on a plan right now and I will get
back to you [specify term]...”. Keep on your promise despite any circumstance. If people do not
reach you or you are not keeping your promises, peoples become nervous and this makes
things much worse.

4. Talk to your team honestly and agree on the priorities

Sometimes business owners are trying to save a team from the bad news. Maybe it is because
we all want our team to be motivated or maybe we want to save our own value in the eyes of
the team. I think this is wrong. If you have a good team, they might come up with good ideas
and even help you to save the business. Also, they will understand the priorities and will be able
to act in a more effective way and concentrate on the most important things.

5. Try to regain budget, but don't be too greedy

When costs are running over the first thing you should to is stopping scope creeping. Instead,
you should manage and track the change orders with care. Be sure that without the permission
nothing will is done. One way to regain additional budget is to negotiate better pricing or terms
for materials, works, renegotiate contracts with subcontractors, etc. But don’t be too greedy,
this might ruin the relationship with your parties. Keeping fair pricing and good relations with
customers & subcontractors - is a long-term strategy for winners.
 6. Stop works when payments are late

I have seen situations when the owner is not paying the invoices on time, and the General
Contractor is patiently proceeding with construction. Then suddenly the customer goes to
bankruptcy, and the court journey starts, creating even more expenses. If the customer does
not pay invoices on time - immediately talk with the customer and try to understand the reason
why he is late. It might be that this customer is not liquidity or not getting payments from their
creditor. The rational solution in this situation is to stop works until you get paid, and this gives
you the chance to suggest for them someone who can take it over. Be sure that you don't
invest a dangerous amount of money into a spooky project.

7. Set up cost management with the cost control system

If a project suffers budget overrun it is critical to set up a cost control system like bauwise cost
management software to have better control over the budget vs actuals, subcontractor
agreements, change orders, cashflow and including the ability to approve purchase invoices
online. Project managers and company management should be able to operate real-time data
and control key indicators, such as profit, completion percentage, cost forecast, and others.
Outdated data can cost you crucial time and do not give you a real picture. Cost management
system helps you to save time, track your expenses and have more control.

(17) How we can calculate the overruns?

Calculating an over-budgeted amount is pretty straightforward. All you need is your original
budget, the actual expenses, and maybe a calculator.

First, subtract the budgeted amount from the actual expense. If this expense was over budget,
then the result will be positive.

Next, divide that number by the original budgeted amount and then multiply the result by 100
to get the percentage over budget. If your expenses were lower than your budgeted amount,
then this number will be negative, describing the percentage under budget.

A practical example calculating the percentage over budget

To use this tool in a real-world setting, start by first analyzing the percentage over budget for
the entire budget. After that, repeat the process for specific line items to see which were over
budget and which were under budget.
Here's an example for a generic home-improvement project.

Item Budgeted Amount Actual Expense

Materials $500 $527
Labor $200 $200
Equipment rental $150 $157
Total budget $850 $884

First, calculate the percentage over budget for the total budget to get an understanding of the
overall project. Start by finding the difference between the actual total expenses and total
budgeted amount. In this case, that's $34. Next, divide by the total original budget and multiply
by 100, yielding a percentage over budget of 4%. In other words, this project cost 4% more than
anticipated, so it was just slightly over budget.

Scanning the individual line items, the labor expense was squarely on budget, while the
materials and equipment rental contributed to the budget overage. It makes sense to calculate
their percentage overages next.

Using the same math, the materials cost was 5.4% over budget, and the equipment rental was
4.7% over budget. Neither of these overages is substantial; each is small enough that the
discrepancy could be attributed to something as simple as forgetting to include sales tax in the
original budget.

Calculating percentages over budget is an indispensable budgeting tool

This example is admittedly very simple. However, this process is just as important for larger or
more complex budgets. Whether you're planning for a family vacation, a home improvement
project, or the operating budget of a Fortune 500 company, the percentage difference between
the budgeted amount and actual expense is a core analytical tool for every budget. And now
you have everything you need to know to put this tool to use in your budgets, big and small.
(16) Which are the various Project Execution Phase?

Execution Kick-Off:-
The Project Manager can begin the phase activities following the completion of all planning
activities including approval of the PMP, functional specifications & project funding.

Acquire Project team:-

The project manager follows necessary steps to obtain the human resources needed to
complete the project. Resource calendars are built and resource allocation for the project is
done based on the negotiations and acquisitions with the involved business units and resource
pool managers.

Develop Project Team:-

The project manager evaluates each individual skill sets to ensure that the each team member
has the proper skill sets for each upcoming project phase. Note: your training plan, schedule
and costs come in handy as described in the planning phase.
Project leaders that can align their vision and work with their teams will successfully deliver key
programs and projects. The alignment of vision and strategy to implementation will help you
close those gaps.

Executing the Project Management Plan:-

The project manager executes the project management plan activities by performing the
activities contained within each of the plans such as Communication Plan, Risk management
plan,[Link] project manager will direct the various technical and organizational resources that
exist in the project to execute the work defined in the project management plans.
Conducting Status Review Meetings (PSR):-
Project status meetings help project managers in reviewing the status collected from the team
members. They help the project managers in assessing what has been accomplished till date
and compare them with the planned activities.
They allow project managers in the assessment of current problem areas and project risk areas;
as well as communicating critical project information with quick feedback. Having these project
status meetings also eliminates the communication problem that arises out of an assumption or
belief that "everyone knows what's going on in this project". Often team members do not
know, because they are busy with their own tasks.
The project execution phase will reveal unanticipated problems or issues, so project leaders
must be prepared to pivot and make tactical changes.

Update Project Schedule and Management plans:-

In most organizations, the project management team is the group of people responsible for
updating the project plan.
Keeping the plan current is an important role of the project manager (or project administrator).
Project updates focus on the three project management constraints, cost, time and scope. An
effective project manager knows that a change in one of these areas results in changes in the
other two. A current project plan will show the effect of these changes on the overall project.
Therefore, any changes and updates from the previously defined plan must be duly recorded
and approved by the relevant parties.

Quality Assurance:-
Quality Assurance is part of the Executing process group and is performed throughout the
duration of the project. Quality Assurance is the process of auditing the quality requirements
and the results from quality control measurements to ensure that appropriate quality standards
and operational definitions are used. The key benefit of this process is that it facilitates the
improvement of quality processes.
Acceptance of Deliverables:-
Acceptance criteria for project deliverables establishes in advance an agreed upon standard of
performance or capability that the user will accept in a specific [Link] criteria
then become the fundamental guideline for the design team to build a solution that the user
will find acceptable.
The execution phase ends when the user has agreed to accept the deliverable(s) in the state
that they exist. The acceptance criterion is the standard that the user uses to judge if each
deliverable is satisfactory.

Complete Execution Phase Review:-

The project manager contacts all participating stakeholders to review and document lessons
learned in the execution phase. A formal Phase Review form is duly filled and sent to the
Project Sponsor for approval.
It is basically to seek permission to proceed to the next phase and closure of the existing phase.
All deliverables are reviewed, accepted & approved, any pending issues are documented along
with their resolution plan and all relevant plans and documents are updated accordingly.

(18) Why is a non-technical approach needed for project management?

Non-technical approach needed for project management because projects occur at every level
of all organizations regardless of industry or profession. An effective project management
process is beneficial for everyone. Furthermore, a majority of today's workforce is involved in
multiple and often simultaneous projects with little or no formal project management training.
It is imperative that non-PMP project managers understand the value of utilizing a simple,
practical approach to help them effectively work on and manage their projects successfully.

Hurdles for the Non-PMP Project Manager

1. Time—The majority feels overwhelmed by too much to do and therefore unable to

create the time to do the planning needed. The reality is that there are often fewer
people doing more things with fewer resources in exactly the same amount of time.

2. Training—Most haven't been taught a project management process that is applicable to

their types of projects. If they have been exposed to project management training, it is
either in MS Project (which many find overwhelming) or they have been given project
management templates that are too involved for their level of projects.

3. Assumptions—The non-PMP project manager, like many of us, doesn't know what he or
she doesn't know. They need light shed on incorrect assumptions that can negatively
impact their projects, their productivity and, ultimately, their lives.
(19) What is The Importance of Cost Control in Project Management?

The importance of cost control in project management success is something every project
manager is familiar with. The ability to maintain an organized approach to tasks while staying
aware of cost control is not an easy skill. Although time and resource management are vital to
achieving goals, cost performance is ultimately what determines a positive project outcome.

There has in recent years been great need for an understanding of construction economics and
cost control, particularly during the design stage of projects.

The importance of this due largely to the following:-

1. The increased pace of development in general has resulted in clients being less likely to
tolerate delays caused by redesigning buildings when tenders are too high.

2. The clients requirements today are more complex than those of their Victorian counterparts.
A more effective system of control is therefore desirable from inception up to the completion
of the final account, and thereafter during cost-in-use.

3. The clients of the industry often represent large organizations and financial institutions. This
is a result of takeovers, mergers and some public ownership. De-nationalization has often
meant that these large organizations remain intact as a single entity. There has thus been an
increased emphasis on accountability in both the public and the private sectors of industry. The
efficiency of these organizations at construction work is only as good as their advisers.

4. Contractor’s profit margins have in real terms been reduced considerably during the past
decade. This resulted in their greater cost-consciousness in an attempt to redress possible
losses and remain competitive.

5. There has, in general, been move towards the elimination of waste, and a greater emphasis
on the efficient use of the world’s scarce resources. This has necessitated a desire for improved
methods of forecasting and control of costs.

6. There is a general trend towards greater cost-effectiveness, and thus a need to examine
construction cost, not solely in the context of initial costs, but in terms of whole-life costs.

7. World recession has generally produced a shortage of funds for capital purposes and
construction in general. This has been coupled with high inflation and interest charges,
resulting in an increase in the cost of construction. Although the relative costs compared with
other commodities may be similar, the apparent high costs have resulted in greater caution,
particularly on the part of clients.
(20) What are the various Project Cost Estimating Tools & Techniques?

There are some tools and techniques used by professional project managers that you can use to
develop more accurate cost estimates.

1. Expert Judgement
2. Analogous Estimating
3. Parametric Estimating
4. Bottom-Up Estimating
5. Three-Point Estimates
6. Reserve Analysis
7. Cost of Quality
8. Project Management Estimating Software
9. Vendor Bid Analysis

Expert judgment uses the experience and knowledge of experts to estimate the cost of the
project. This technique can take into account unique factors specific to the project. However, it
can also be biased.

Analogous estimating uses historical data from similar projects as a basis for the cost estimate.
The estimate can be adjusted for known differences between the projects. This type of
estimate is usually used in the early phases of a project and is less accurate than other
methods.

Parametric estimating uses statistical modeling to develop a cost estimate. It uses historical
data of key cost drivers to calculate an estimate for different parameters such as cost and
duration. For example, square footage is used in some construction projects.

Bottom-up estimating uses the estimates of individual work packages which are then
summarized or "rolled up" to determine an overall cost estimate for the project. This type of
estimate is generally more accurate than other methods since it is looking at costs from a more
granular perspective.

Three-point estimates originated with the Program Evaluation and Review Technique (PERT).
This method uses three estimates to define an approximate range for an activities cost: Most
Likely (Cm), Optimistic (Co), and Pessimistic (Cp). The cost estimate is calculated using a
weighted average: Cost Estimate = (Co + 4Cm + Cp)/6

Reserve analysis is used to determine how much contingency reserve, if any, should be
allocated to the project. This funding is used to account for cost uncertainty.
Cost of Quality (COQ) includes money spent during the project to avoid failures and money
spent during and after the project due to failures. During cost estimation, assumptions about
the COQ can be included in the project cost estimate.

Project management estimating software includes cost estimating software applications,

spreadsheets, simulation applications, and statistical software tools. This type of software is
especially useful for looking at cost estimation alternatives.

Vendor analysis can be used to estimate what the project should cost by comparing the bids
submitted by multiple vendors.
Using some of these tools and techniques when you're planning your project can help with
your project budgeting.