Original article posted on the Ineight blog
Accurate, real-time cost tracking of capital projects may be understood and valued in theory. But, as we’ve seen with the slow technology adoption in the industry, that doesn’t necessarily translate into putting it into practice. When project costs aren’t closely managed, they’re more likely to spiral out of control and put projects squarely among scores of others like them: over budget and behind schedule.
But the unique combination of unstable situations hitting the industry and beyond may be compelling enough to convince more project owners to insist on regular cost tracking. Here are some key reasons why monitoring project costs is more important than ever.
Current economic challenges — including inflation, soaring energy prices and material shortages — have been surging in varying degrees and wreaking havoc on project finances. And on top of this, project owners naturally expect cost efficiency as their structure takes shape. All that uncertainty and pressure can put budgets and nerves to the test.
In these instances, tracking project expenses takes on a risk management role. By identifying potential cost overruns early on, owners can take proactive measures to mitigate risk and protect their investment.
A good first step is preemptively discussing with the contractor about potential risks, cost-conserving contingency plans and risk assignment during contract development. But those communications channels must remain open long after contracts are signed. As risk factors emerge, contractors should feel comfortable alerting owners to their potential impact — not just that the budget could be affected, but by how much.
So where does such precise information come from? Through key performance indicators (KPIs), such earned value management (EVM) metrics, put in place at the project’s start. More specifically, EVM’s cost performance index (CPI) is the metric to watch. CPI’s responsiveness to risk factors, either internal or external to the project, makes it an ideal bellwether of their effect on costs. It helps accurately gauge how much those costs are diverging as well as forecast the impact of what-if scenarios and the comparative effectiveness of different backup plans.
Unlike EVM, computer spreadsheet programs and outdated legacy systems can never deliver the project cost status or performance certainty needed to make the best decisions when circumstances call for it, especially when widespread economic or financial hiccups may figure prominently into how the project is managed.
Projects are being hit by the same risks over and over when there is lack of visibility into the degree of impact they have on costs. We alluded to external industry- or economy-based factors above as culprits in throwing project costs wildly off course. With so many affecting the cost of a project, it’s essential to have a firm grasp on the budget so owners, along with their contractors, know when they’re approaching their limits and when they need to adjust.
But what about internal risk factors? Consider the consequences of lack of real-time project cost data and the technology to store and process it all. There may be no clear understanding of where those limits even are or how and when to course correct. Owners may find themselves facing unexpected and uncontrolled cost overruns that can threaten the viability of their project, which can be particularly problematic if budgets are already tight.
Having visibility into cost status and ongoing performance is key. So, let’s circle back to the CPI metric. To gain the full value of what it’s telling about the financial health of the project, it must be accessible along with the other EVM metrics for a complete data-informed picture of what the project looks like.
The easiest way to do this is through online dashboards that condenses all the real-time construction data into user-friendly visual formats that can be understood at a glance. So as CPI values evolve, it’s possible to discern patterns and gradual or sudden changes in cost performance, and therefore what requires extra attention or immediate action.
Infrastructure projects getting off the ground in the U.S. have strict budgets to adhere to and certain KPIs to be measured and met. These builds can come with more and tougher requirements than other capital projects, not the least of which involves adherence to a budget. This comes as no surprise given the propensity for projects to far exceed their approved estimates; but it’s a different story when it involves government funding. Financial transparency thus becomes even more critical for building trust with stakeholders, including investors, regulators and the public.
Now, monitoring project dollars via the CPI metric assumes a compliance-based role, making implementing digital technology imperative. Cost management software that continuously calculates the data that feeds into the CPI provides the necessary feedback on how well project costs are aligning with established KPIs throughout construction. The resulting accuracy delivers a level of cost certainty that has long eluded infrastructure and capital projects alike.
Plus, owners who, along with their contractors, can demonstrate that they’re effectively managing project finances and adhering to budgetary constraints are more likely to be awarded the opportunity to work on future infrastructure projects.
The ultimate benefit of tracking project dollars? Control. It’s impossible to prevent things like inflation and material shortages, but keeping tabs on costs amid these predicaments makes it far easier to navigate through or plan around them.
Project cost management software is designed to give owners, contractors and project teams a line of sight into how cost metrics are faring. Having this visibility makes it possible to compare current costs against the estimate and also forecast the potential effect of current and anticipated risks. Decision making on how to move forward with contingency planning and resource allocation are better informed and improve overall outcomes.
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