Effective cost management aims to ensure value for money is achieved and projects are delivered within their approved budget.
The approved project budget would have been established at the project definition, funding and approvals phase. Guidance on developing a project budget, as outlined within the cost plan, is available.
After the project has received approval and funding, you should assess the difference, if any, between the approved budget and that documented in the business case. You should continue to assess any changes to the project budget throughout the project lifecycle, including as the estimated project costs become more certain when, for example, a contract is signed with the contractor.
Throughout the project, you should establish cost management processes to understand the project costs and provide an early warning of potential financial problems, these may include:
- cost control activities
- value engineering, and
- cost reporting and record keeping.
The works contract will outline specific contractual obligations and rights in relation to the process for contractor payments. Guidance on key contractual obligations and rights in the delivery phase is available.
Cost control activities
The objective of cost control is to manage project costs within budget while still achieving the agreed scope, quality and program. Costs may include the costs of the project team, advisory services from specialist consultants, and the works budget, which is set in the building works contract.
Cost control activities should include:
- using the cost plan to monitor and control the estimated costs across the project lifecycle
- establishing and maintaining change procedures and providing a timely response to changes that may impact cost
- managing the total project budget which involves:
- ensuring no decisions are taken where cost implications would cause the total budget to be exceeded, and
- regularly monitoring and managing contingency, risk allowances and reporting accordingly
- analysing relevant cost information to provide information to decision-makers, and
- timely escalation and reporting of potential cost problems and key financial metrics to the appropriate parties within the governance structure to allow for corrective action to be taken.
What is value engineering?
Value engineering is used to manage cost problems on the project. Value engineering is about taking a wider view and looking at the selection of materials, plant, equipment and processes to see if a more cost-effective solution exists that will achieve the same project objectives.
The process involves identifying areas or elements which, through judicious substitution or elimination, can yield potential cost savings, while maintaining the project's function, quality and requirements.
Value engineering can be undertaken both before the delivery phase (during the development of the project requirements) and during the delivery phase, with the contractor, as a way to manage cost overruns.
The contractor may be able to make a significant contribution to value engineering based on their experience. If the contractor proposes value engineering solutions, you will need to review the proposed solutions to ensure that the changes do not significantly affect the required functional outcomes, whole-of-life quality, delivery program, or incur additional hidden costs that outweigh the savings on offer, for example, higher maintenance costs.
Cost reporting and escalation in the delivery phase
Regular cost reporting during the delivery phase is an important mechanism for monitoring and controlling project costs and also escalating key budget issues in accordance with the project’s governance structure. The time and type of cost reporting will be dependent upon the project's size and complexity, its governance structure and the overall project reporting requirements.
Typically, cost reporting should provide an update of the following:
- project costs incurred to date
- future expected cash flows, and
- anticipated final cost of the project.
In addition, cost reporting may include assessments of:
- ongoing risks to costs
- any potential maintenance costs which should be considered, and
- potential savings.
Financial record-keeping in accordance with the capital works funding agreement
If the project has received government funding, under the capital works funding agreement, the TAFE is required to keep full and accurate records of financial matters so that:
- all financial transactions, including receipts and payments, are clearly and separately identifiable
- if required by law or the relevant minister, financial statements under the Australian Accounting Standards can be prepared
- if required by law or the relevant minister, the TAFE's accounts and records can be audited in accordance with Australian Auditing Standards, and
- all taxation liabilities and payments can be clearly identified.
Reviewed 22 March 2023