The construction markets in New Zealand and Australia are facing significant hurdles. With the rising cost of living, reduced government spending and a slowdown in building consents, the industry is feeling the squeeze. 

As fewer new homes are being built, competition is heating up, with companies bidding lower just to win work. These challenges are putting pressure on profit margins, making effective cost management more crucial than ever.

What are the current challenges in construction?

The construction industry in New Zealand and Australia is currently navigating a tough landscape:

• Economic slowdown: With the cost of living going up, fewer people are buying new houses. This has led to a significant drop in building consents, down 24% in the year ended June 2024 compared with the previous year (Stats NZ).

• Reduced government spending: Governments are tightening their belts, reviewing and restricting expenditure across the board, including construction projects.

• Increased competition: As work drops off, companies are bidding lower to secure projects, further eroding profit margins.

What are common cost management challenges in construction?

Cost management in construction is fraught with challenges that can undermine even the most well-planned projects. Some of the most common issues include:

• Inaccurate estimations: Poorly estimated costs can lead to budget overruns. Estimating too low to win a bid can cause problems down the line when actual costs exceed the budget.

• Unforeseen variations: Unexpected changes in project scope or design can lead to variations that aren’t accounted for in the original budget, putting pressure on profit margins.

• Delayed cost tracking: Many construction projects suffer from delayed cost tracking, where expenses are only reviewed at the end of the month. This lag can prevent timely adjustments and lead to significant budget overruns.

• Inefficient resource allocation: Without proper cost management, resources such as labour, materials and equipment may not be allocated efficiently, leading to wasted time and money.

• Manual processes: Relying on manual processes for tasks like invoice reconciliation and cost tracking can lead to errors, delays and missed opportunities for cost savings.

How can effective cost management help?

In today’s challenging construction environment, one of the best ways to stay ahead is by focusing on what you can control — your project costs.

Here’s how effective cost management can make a difference:

• Accurate bidding and estimates: Understanding the scope of work is key to more accurate bidding. By using back-costing to compare estimates with actual performance, you can identify areas where you need to de-risk, such as through subcontracting.
  
• Reliable data for back-costing: Accurate cost codes are the foundation for comparing actual costs versus budgeted amounts. Ditching general ledger (GL) codes in favour of specific cost codes ensure your back-costed jobs are as precise as possible.
  
  
• Real-time cost tracking: Once you’ve won the job, having the right systems in place is crucial. Process costs quickly and track them against the job in real-time, rather than waiting until the end of the month. This is especially important for expenses like plant hire and temporary labour.
  
  
• Maximise revenue through variations: Quickly identifying variations and capturing the associated costs allows you to claim back expenses efficiently. When bidding low, maximising revenue and margin through the variation process becomes essential.
  
  
• Implement invoice automation: Your estimates are often built from supplier quotes. With invoice automation, you can ensure that each invoice is compared to the project-specific price list. This helps maintain accuracy and prevents unexpected costs, keeping your projects on budget.

How does the construction cost management process work?

Effective cost management in construction involves a series of steps designed to control costs throughout the project lifecycle. The key stages include:

1. Cost estimation 

Before the project begins, detailed cost estimates are created based on the scope of work, materials, labour and other expenses. Accurate estimation is crucial for setting a realistic budget.

2. Budgeting 

Once the estimates are approved, they form the basis of the project budget. This budget acts as a financial roadmap, guiding all cost-related decisions throughout the project.

3. Cost allocation 

Costs are allocated to specific tasks, phases, or departments within the project. This ensures that spending is tracked and monitored closely.

4. Cost tracking and monitoring

During the project, all expenses are tracked in real-time against the budget. Regular monitoring allows for early detection of potential overruns and enables corrective action.

5. Cost control

If costs begin to exceed the budget, cost control measures are implemented. This may involve adjusting resource allocation, revising the scope or finding cost-saving opportunities.

6. Cost reporting 

Throughout the project, cost reports are generated to provide stakeholders with updates on financial performance. These reports help inform decision-making and keep the project on track.

7. Post-project analysis

After the project is completed, a post-project analysis is conducted to compare actual costs with the budgeted amounts. This analysis provides insights for improving future projects.

Why use project cost management software?

Project Cost Management (PCM) software is essential for construction companies looking to streamline their cost management processes. Here’s why:

• Improved accuracy: PCM software helps eliminate manual errors by automating cost estimation, tracking, and reporting. This leads to more accurate budgets and fewer surprises.
  
  
• Real-time data: With PCM software, you get real-time insights into your project’s financial health, allowing you to make informed decisions quickly.
  
  
• Centralised data: All cost-related data is stored in a single platform, making it easier to access, analyse and share with stakeholders.
  
  
• Enhanced collaboration: PCM software enables better collaboration between teams, as everyone has access to the same up-to-date information.
  
  
• Scalability: As your business grows, PCM software can scale with you, handling more complex projects and larger data sets without compromising efficiency.

How to implement cost management software effectively

Implementing PCM software effectively requires careful planning and execution. Here’s a quick step-by-step guide:

Assess your needs

Start by evaluating your current cost management processes and identifying areas for improvement. Determine what features and functionalities are most important for your business.

Choose the right software

Research different PCM software options and choose one that aligns with your needs. Consider factors like ease of use, scalability, integration capabilities and support.

Plan the implementation

Develop a detailed implementation plan that includes timelines, milestones and responsibilities. Make sure all stakeholders are on board and understand the process.

Train your team

Provide thorough training for your team to ensure they understand how to use the software effectively. This may involve workshops, online tutorials or one-on-one sessions.

Monitor and adjust

After implementation, monitor the software’s performance and make any necessary adjustments. Collect feedback from users to identify any issues and address them promptly.

Continuous improvement

Regularly review your cost management processes and look for ways to improve. Use the insights gained from the software to refine your strategies and enhance efficiency.

Conclusion

Simplifying construction cost management is crucial in today's challenging environment. By leveraging tools like Lentune, you can remove manual tasks, gain real-time visibility of costs, and maintain control over your budget. This not only helps in managing current projects more effectively but also provides valuable insights for future projects.

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Why Simplifying Construction Cost Management is Critical

The construction markets in New Zealand and Australia are currently navigating significant challenges, with no signs of relief in the near future. Economic pressures, reduced government spending and a slowdown in building consents are all contributing to a tough landscape. Material costs are rising, project timelines are stretching out and profit margins are being squeezed.

In such an environment, it’s crucial to focus on what you can control — your project costs. Effective cost management is essential to keeping projects on track and ensuring profitability.

Traditionally, cost management has relied heavily on manual processes and spreadsheets. While accounting software can assist with managing finances, it often falls short in handling the specific complexities of construction costing. This is where project cost management (PCM) software becomes invaluable.

Lentune’s suite of automation modules works together to streamline your entire project spend management process. Here are three key benefits of automating your cost management with Lentune:

1. Remove tedious manual work

Lentune automates the repetitive tasks involved in tracking a project’s budget, such as entering timesheets, expenses, purchase orders and invoices. 

Even fixed costs associated with equipment are automatically allocated to each project through Lentune’s Yard module, which manages equipment bookings and allows for market-rate charges. 

By automating these tasks, you can eliminate spreadsheets and manual budget updates, simplifying the entire procure-to-pay process while reducing errors and saving valuable time.

2. Full visibility of costs in real time

Lentune integrates all aspects of a project’s costs, providing full visibility in real time through the project dashboard. This includes committed spend, ensuring you always have an accurate view of your project’s financial status. With purchase orders in place, there’s no need to wait for invoices to see what’s been spent.

ABOVE: A screenshot of Lentune project analytics, powered by Microsoft Power BI.

3. Control over spend

By implementing purchase order automation and setting budgets against individual cost-codes, each part of the budget can be tracked individually. When a new purchase order is raised, the budget for that cost code can be checked. If the budget is reached or close to being reached, further steps can then be taken by the project manager such as raising a variation or pulling back budget from elsewhere.

ABOVE: Lentune's project dashboard keeps your budget updated in real time.

Automate project costs, in one clever platform

Lentune’s cost management platform helps New Zealand and Australian construction companies to streamline the way they handle project finances. Our software replaces time-consuming processes with automated workflows that create more clarity, control and insight than ever before. 

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