How to control the cost of a construction job

It’s month four on site. The site manager reports that the structure is “about halfway”, accounting says more has already been spent than planned for this stage, and the latest progress billing is still under review by the supervising engineer. Nobody is lying, but each of them measures something different. And the question that matters, whether the job still has margin, has no answer until closeout, when nothing can be fixed anymore.

This guide explains how to organize cost control on a job with five pieces: an item-based budget, actual cost by cost center, physical versus financial progress, progress billings and cash flow. All of it can be done in a spreadsheet.

1. The item-based budget is your baseline

The cost budget (not the contract’s sale price) is built by work item: earthworks, structure, masonry, installations, finishes. Each item has a quantity, a unit and a unit cost.

Two rules:

1. Freeze a baseline when the contract is signed. If approved changes come later, record a new version, but don’t overwrite the original: without it you can’t measure variances.
2. Use the same item structure to budget, to post costs and to measure progress. If the budget says “structure” and purchases are posted as “miscellaneous materials”, you’ll never be able to compare.

2. Actual cost goes by cost center, not by account

Each job should be its own cost center, and within it every expense should carry its work item. That includes materials, subcontracts, labor, equipment rental and maintenance, and site petty cash.

A detail that is often forgotten: committed cost. A purchase order that has been issued but not yet invoiced is already a cost of the job. If you only look at invoices received, you find out late.

3. Physical versus financial progress

• Physical progress: how much of the job is actually built. It’s calculated per item (executed quantity ÷ total quantity) and weighted by each item’s budget.
• Financial progress: how much you have billed the client (or how much you have spent, depending on what you want to compare).

The classic mistake is measuring progress by money spent: having spent 45% of the budget doesn’t mean 45% of the job is done. To cross-check both, use earned value:

• Earned value (EV) = each item’s budget × its physical progress.
• Planned value (PV) = what, according to the schedule, should be built by now.
• Actual cost (AC) = what has been spent and committed to date.
• CPI = EV ÷ AC. Below 1: each boliviano spent produces less work than planned.
• SPI = EV ÷ PV. Below 1: you’re behind schedule.
• Estimate at completion (EAC) = total budget ÷ CPI, if performance holds.

The schedule that gives you planned value is best built with its critical path; for a refresher, see the critical path explained in five minutes.

4. Worked example

Suppose a Bs 2,000,000 contract with a cost budget of Bs 1,700,000 (expected margin of Bs 300,000). At the end of month 4:

Item	Budget	Physical progress	Earned value	Actual cost	Variance
Earthworks	150,000	100%	150,000	160,000	−10,000
Structure	700,000	60%	420,000	470,000	−50,000
Masonry	350,000	20%	70,000	80,000	−10,000
Installations	300,000	10%	30,000	35,000	−5,000
Finishes	200,000	5%	10,000	15,000	−5,000
Total	1,700,000	40%	680,000	760,000	−80,000

According to the schedule, by this date you should have built Bs 765,000 of work (45%).

• CPI = 680,000 ÷ 760,000 = 0.89
• SPI = 680,000 ÷ 765,000 = 0.89
• EAC = 1,700,000 ÷ 0.89 ≈ Bs 1,900,000

If nothing changes, the margin drops from Bs 300,000 to about Bs 100,000. The table also tells you where to act: the structure accounts for more than half of the variance.

5. Progress billings: from approved quantities to the certificate

The progress billing (in Bolivia, the valorización) turns progress into money. The healthy cycle is:

1. The site manager records the executed quantities per item for the period.
2. The supervising engineer approves or rejects them. Only what is approved goes into the billing.
3. Gross billing = Σ (approved quantity × contract unit price).
4. The agreed deductions are applied: advance payment amortization, guarantee retentions and any penalties. Percentages and conditions are set by your contract; review them with your legal advisor or accountant.
5. The certificate with the net amount is signed, invoiced and collected.

Continuing the example, suppose you have billed Bs 700,000 cumulatively (35% of the contract) while your physical progress is equivalent to 40%. That leaves about Bs 100,000 of executed work you haven’t billed or collected yet. That gap between physical and financial progress is money you are financing yourself.

6. Job cash flow

Continuing the example: you spent Bs 760,000 and, out of the Bs 700,000 billed, suppose you have collected Bs 560,000 (the rest is in process or retained under the contract). The job has a negative cash balance of Bs 200,000.

Project the job’s cash month by month with three lines:

Line	Source
Expected collections	Planned billings, less contract deductions, on the date the client actually tends to pay
Expected payments	Committed purchases, subcontracts, site payroll and equipment
Retentions to be released	Retained amounts and the contractual condition for their return

If the most negative cumulative balance exceeds your credit line or available cash, you know before it happens.

Warning signs

• CPI below 1 for two or three cuts in a row.
• Financial progress well behind physical progress: work built but not billed.
• Quantities waiting for approval longer than what you define as normal.
• An item with high actual cost and low physical progress.
• Site petty cash handed out and not yet reported.
• Contract guarantees close to expiry with no renewal underway.

Common mistakes

• Measuring progress by spending instead of by executed quantity.
• Mixing jobs in one cost center or posting expenses without a work item.
• Ignoring committed cost and looking only at invoices received.
• Overwriting the baseline every time the budget changes.
• Billing without approved quantities, which ends in objections and late payment.
• Forgetting retentions when projecting cash.

Monthly cut checklist

1. Period quantities recorded and approved by the supervising engineer.
2. Month’s costs posted by item, including reported petty cash.
3. Open purchase orders added as committed cost.
4. EV, PV, AC, CPI, SPI and EAC recalculated.
5. Progress billing issued and physical-financial gap reviewed.
6. Job cash flow updated and guarantees reviewed.

Taking it into a system

With one or two jobs, this discipline works in a spreadsheet. When you run several at once, an ERP like MKA can carry the quantities approved by the supervising engineer through to the progress billing with its statuses, and show budget versus actuals and earned value by cost center (see the solution for construction companies).