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How cost management is used in construction projects.

You may have read some previous articles about construction projects, and noticed cost management mentioned as being the responsibility of a few different project roles. Cost management is an important part of a construction project to ensure a budget is in place. It also ensures that the project sticks to the budget.

So, it stands to reason that cost management techniques are important. They help all the project financials run smoothly. But what are they?

This video gives an overview of what construction project finances are. Let’s jump into some of the techniques we use in a construction project.

Payment Method

Many times in construction projects the fee for services will increase. This can be for several different factors, such as scope creep, unforeseen constraints, or unforeseen delays. This makes the process of paying for services challenging, especially when there is a delivery deadline. In most projects the contractor or consultant will issue an invoice to the client with a payment deadline on it.

Normally, the invoicing schedule has been previously agreed with the client and could be, for example, monthly or every 2 months. In other cases, a unique schedule might be agreed and might revolve more around the financial year.

After the invoice is issued, the client needs to pay by the deadline, usually 30 days from the invoice date. This might change if there are disputes or enquiries around the invoice and services it relates to.

Letter of Credit (LOC)

This is a financial guarantee from a financial institution like a bank. It ensures that a certain amount will be paid when requested. They are commonly used in construction projects to reduce the risk to the contractor, consultant, or client. The bank will commonly step in to protect the payment to the seller if the client is unable to pay for the services. It can also protect the client as there is an agreement in place between the client and the contractor/consultant if the work is not completed to a satisfactory quality.

A flowchart showing how a letter of credit works

Surety Bond

This is a credit instrument that binds the contractual obligations between the client and contractor/consultant. They assure financial security, giving buyers confidence that the contractors/consultants will complete work according to the terms agreed. Mostly this relates to the quality of the work provided.

Performance Bond

This guarantees satisfactory completion of a project by a contractor/consultant. The bond protects the client if the contractor/consultant fail to meet the agreed obligations in the contract.