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Construction Cost Planning Benefits and Industry Best Practices

27 January, 2025
10 mins read
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Cost planning in construction blog post by RIB Software

As the 18th-century inventor and statesman Benjamin Franklin once said, “If you fail to plan, you are planning to fail.” This simple yet meaningful phrase certainly applies to cost planning in construction, where extra time and effort can lead to improved budget and schedule adherence, while inadequate planning can create unwanted challenges.

In this blog post, we review the definition and elements of a cost plan and explain some of the key benefits. We also provide some useful tips and best practices for effective cost planning.

What is Cost Planning in Construction?

Construction cost planning is the process used to break down all project elements and produce detailed cost information for each component. Cost plans are the documents used to capture, share, and track this data throughout a project’s lifecycle.

Different construction cost planning types and formats have been developed to suit the specific needs and phases of a project. For example, an initial cost appraisal developed in the early stages of planning may be superseded by an approximate quantities cost plan with more granular information once the design phase is completed and the tendering process begins.

What is Included in a Construction Cost Plan?

In general, the cost plan should include all elements that will link to expenses throughout the project. Direct costs like materials, labor, and equipment are tied to the physical construction process and can usually be tabulated based on established unit costs and quantities. Indirect costs involve expenditures that are necessary to complete the project but are not directly related to construction, such as:

  • Overhead incurred through office staff, rent, and utilities
  • Administrative expenses for permits, licenses, and legal fees
  • Contingencies added to the project budget to cover unforeseen expenses

Once all direct and indirect costs are properly accounted for, cost planning techniques in construction allow a realistic budget to be created and the expected profit margin to be calculated.

Who is in Charge of Construction Cost Planning?

Since the construction project manager oversees all elements and phases of the project, they are ultimately responsible for cost planning as well. Still, they may seek the guidance and experience of other stakeholders to ensure plans are accurate. Financial controllers and accountants might have oversight responsibilities for cost planning, while construction architects and design teams provide input on cost elements and their alignment with the overall project scope.

Cost Planning vs. Cost Estimating

Cost estimating and cost planning have similar purposes but differ in scope and execution. Cost estimates serve as cost benchmarks based on project design and scope information, but they are not always entirely accurate since they are based on limited or historical information.

The cost planning process utilizes the data from the construction cost estimation process as input. Still, it also takes factors like price fluctuations, labor availability, and supply chain risks into consideration to produce more accurate results. Cost planning is typically utilized in the later stages of a project when this detailed information is readily available.

Benefits of Construction Cost Planning

Top four benefits of construction cost planning
Construction Cost Planning Benefits

The value of cost planning cannot be overstated since the financial performance of a project can only be assessed correctly when accurate and granular information is continually updated and evaluated throughout each phase. Additional benefits of the process include:

Risk mitigation

A detailed construction cost plan helps to minimize financial risks by identifying areas of excess cost early on so that plans can be changed, or resources can be reallocated to avoid overruns. Cost plans also provide a mechanism to track and monitor financial performance so that negative trends will not jeopardize project budget adherence.

Budget management

Cost planning supports construction budget management by providing detailed breakdowns of anticipated expenses necessary to manage the cash flow, and ensure funds are available when they are needed. Cost plans also make it easier to track expenditures against the budget and identify variances.

Decision making

Cost plans improve decision-making by providing stakeholders with the information they need to assess the impact of changes. For example, a designer considering a flooring material change can tap into the cost planning process to see how this option might impact the overall cost and profitability of the project.

Bid tendering

Cost planning techniques in construction improve the bid tendering process by defining baseline values to assess whether bids are underpriced, overpriced, or in line with the information gathered and analyzed earlier. Contractors also benefit from accurate cost planning information as they adjust their bids and proposals to align with client expectations.

Tips for Effective Cost Planning in Construction Projects

Overview of six tips for successful cost planning in construction projects
Tips for Effective Construction Cost Planning

Construction cost planning is a useful process, but it must be performed correctly to fully unlock the benefits. A few basic tools and practices go a long way toward ensuring cost plans are accurate, timely, and beneficial.

1. Understand the project scope

Determining the full scope of a project can be difficult, especially when 75% of construction projects experience scope creep in some form. Nevertheless, a useful construction cost plan can only be created when the scope is fully understood, and all major components and work packages are defined. A comprehensive scope definition also helps to:

  • Determine what materials will be procured, and when
  • Predict equipment purchasing and rental needs
  • Understand the project duration and calculate overhead
  • Assess short and long-term labor availability and costs

2. Evaluate alternate materials and strategies

While establishing a fixed project scope is important, a detailed construction cost plan also provides an opportunity to evaluate the impact of material and strategy changes. For example, pre-fabricating or outsourcing parts of a structure might increase upfront material costs but decrease labor costs during the building phase. Evaluating these scenarios with the benefit of detailed cost planning templates helps to identify whether alternate strategies will improve budget and timeline performance. Material grades and vendors can also be compared to see where other cost-saving opportunities exist.

3. Define contingencies and allowances

A construction contingency is a percentage of the budget (typically 5-10%) set aside to cover unplanned expenses. At the same time, an allowance might be used to cover items like fixtures and appliances that are subject to price adjustments. Estimating contingencies and allowances is also one of the important stages of cost planning in construction since it will provide a buffer for the unexpected or unknown, which is an important part of the project cost structure. Understanding the scope, complexity, and risks associated with the project helps to make contingency budgets more realistic.

4. Communicate with stakeholders

A robust construction cost plan cannot be created in a vacuum, so it is essential to engage and collaborate with stakeholders, including contractors, subcontractors, vendors, and designers, throughout the process. These stakeholders can provide valuable insight into cost drivers, risks, and opportunities that might be missed without effective collaboration. At the same time, transparent communication helps all parties better understand the project’s financial goals and objectives and how their role contributes to success, ensuring effective construction cost control.

5. Regular reviews and updates

To avoid joining the 90% of projects that experience cost overruns, it is important to remember that construction cost planning should never be a “set and forget” exercise. Actual direct and indirect cost performance should be continuously tracked and compared to the plan to identify discrepancies. Any variances should be analyzed quickly to determine the root cause and determine if corrective actions are needed. The plan should be updated to reflect actual costs when new discoveries are made.

6. Utilize professional construction software

Spreadsheets and basic templates were the original software tools for construction cost planning, but new software platforms have evolved to simplify and streamline the process. Cost estimation software automatically compiles information from past projects, industry benchmarks, and real-time market rates to provide more precise inputs. Budget tracking and project management tools also make it easier to monitor expenses, detect discrepancies, and notify stakeholders when additional actions are required. Collaboration is another key to effective cost planning, and cloud-based software solutions help to keep all contractors, clients, designers, and project leaders on the same page as they resolve discrepancies quickly.

Conclusion

Cost planning in construction is an activity that can only produce desirable results when information is both complete and accurate. Advanced software tools and practices make the planning process faster and easier than ever before. RIB CostX is a versatile takeoff and estimating solution that supports project teams with granular real-time cost information, subcontractor comparisons, and advanced reporting capabilities. Contractors enjoy the convenience of the RIB CostX viewer as they submit quotes and review new information. 

RIB CostX is trusted by thousands of contractors and companies to improve their quality, collaboration, and on-time delivery. Get your demo today to discover how RIB CostX can transform your business!

RIB CostX ▷ The Best Takeoff & Estimating Software
RIB CostX ▷ The Best Takeoff & Estimating Software