Construction Cost Management Best Practices

Cost management is a critical and complex task for construction project managers. Learn why cost control is so challenging in construction projects, what the best teams do differently, and how to get started with practical tools and workflows.

Included in this article, you’ll find the following:

What Is Construction Cost Management?

Construction cost management is the process of monitoring labor, materials, equipment, subcontractors, contingency funds, and overhead costs in construction projects. It involves planning, estimating, budgeting, tracking, and controlling costs. The process starts during preconstruction and runs through project closeout. The goal is to deliver the intended project scope without overspending.

Summary Overview:

Construction cost management is crucial because most projects significantly exceed their initial budgets. Large projects sometimes exceed budgets by up to 80 percent.
The goal is to deliver the intended scope without overspending. This requires close, real-time monitoring of labor, materials, equipment, subcontractors, contingency funds, and overhead costs.
Effective construction cost management protects profit margins, mitigates risk, and stabilizes cash flow.

Why Construction Cost Management Matters

Construction cost management matters because most construction projects go over budget, often by a wide margin. Poor cost control impacts profits, delays timelines, hurts reputation, and weakens client trust.

A 2022 McKinsey study of more than 500 large-scale projects found that cost overruns averaged 79 percent above initial budgets, and delays averaged 52 percent beyond planned timelines. With most projects valued at $100 million or more, these findings underscore the critical importance of controlling costs from the outset.

While external factors such as volatile material prices, labor shortages, and supply chain issues are often difficult to predict and control, effective cost management requires a disciplined focus on the elements directly within a project manager's purview.

Construction cost management can help project managers do the following:

Protect Profit Margins: With such narrow profit bands, any cost overrun can erase earnings — or result in losses.
Mitigate Risk: Poor forecasting or late payment issues directly jeopardize project timelines and financial health.
Adapt to Inflation: Proactive strategies like early procurement or price locking are essential, especially with rising costs. In the UK, building costs are projected to rise 12 percent by 2030, with labor costs up 18 percent and material costs up 15 percent, potentially squeezing margins further.
Gain Competitive Edge: Leveraging methods like Building Information Modeling (BIM), Early Contractor Involvement (ECI), or target pricing can reduce both cost and time, offering a significant advantage. BIM can reduce project timelines by about 20 percent and cut costs by roughly 15 percent.
Stabilize Cash Flow: Efficient cost tracking and payment systems reduce financial strain and enable smoother operations.

Benefits of Effective Construction Cost Management

Benefits of construction cost management include improved collaboration and decision making. When done well, it can also improve financial stability for the project. Cost management helps keep a close eye on budgets and highlight issues before they arise.

Here are some additional benefits:

Greater Budget Accuracy: Realistic estimates reduce surprises later. By analyzing historical data and aligning estimates with current market conditions, teams can avoid underestimating costs and build more reliable budgets. Try using construction budgeting software or one of these construction budget templates to help manage costs.
Faster Decisions: Real-time updates can expedite approvals and invoicing. When teams have immediate access to current cost data and make decisions quickly, delays in procurement, billing, and change order approvals are reduced.
Stronger Stakeholder Communication: Dashboards and reports clarify progress and centralize cost data into visual formats. Sharing these with all stakeholders — from project owners to field supervisors — keeps them aligned and informed. Real-time collaboration helps prevent miscommunication, speeds up decision making, and ensures accountability across the entire project team.
Higher Profitability: Preventing overruns protects your bottom line. When teams catch and correct cost deviations early, they can preserve project margins and avoid absorbing unexpected expenses that erode profit. Learn more about construction cost overruns in our guide.
Lower Risk: Early warnings about cost issues help you address issues before they escalate. Continuous monitoring of all costs allows teams to detect problems early and take corrective action, which reduces the chance of costly surprises or delays later in the project.

Best Practices for Construction Cost Management

Best practices for managing construction costs include being realistic and staying on top of expenses throughout the project. Additionally, use dashboards to keep stakeholders informed, and be sure to audit financials weekly.

The following strategies help keep your project costs under control:

Set a Realistic Budget During Preconstruction: Use historical data and detailed vendor quotes to ground expectations. Identify cost drivers and patterns from past projects to inform better estimates. This context allows teams to build more accurate budgets that reflect real-world conditions instead of best case scenarios.
Track Costs in Real Time Using a Centralized Platform: Avoid version control issues by managing all cost data in one location. Having a centralized system ensures that updates from the field, procurement, and accounting teams are all reflected instantly. This visibility reduces errors and enables faster decision making.
Align Your Budget With the Project Timeline: Delays drive costs. By aligning your budget with the construction schedule, teams can better forecast when expenses will occur and flag budget risks as timelines shift. This alignment allows for smarter resource allocation and reduces the likelihood of project delays. Try using a construction schedule template to see when things are set to happen during the project.
Use Dashboards to Communicate Progress and Raise Flags Early: Dashboards make it easy to track budget trends, cost variances, and upcoming milestones in a format that's accessible to everyone. It’s an easy way to keep decision makers informed of real-time progress without constant manual updates.
Plan for Change Orders With Built-In Contingency Tracking: Establishing a structured process for submitting, reviewing, and approving change orders ensures that nothing slips through the cracks. Using a construction change order template can help keep them consistent. This helps teams manage their contingency budgets responsibly and maintain project momentum despite midstream adjustments.
Audit Financials Weekly, Not Monthly: The earlier you catch cost drift, the easier it is to correct. Frequent reviews help teams identify discrepancies while there’s still time to do something about it. This cadence improves cost accountability and supports a culture of continuous improvement.

Common Challenges in Construction Cost Management

Common challenges found in construction cost management include poor pre-planning and lack of visibility into changing costs. Additionally, poor communication within the team can leave stakeholders in the dark.

Even well-run projects face hurdles. Strong construction project management and communication can make a huge difference.

Here are the most common cost management issues and how to overcome them:

Inadequate Preconstruction Planning: Rushed estimates create downstream issues. When teams make cost assumptions without thorough design, scope definition, or trade input, they risk underestimating labor and materials. These early missteps often lead to scope changes, change orders, and rework that disrupt both the schedule and the budget. Try using construction estimate templates and construction scope of work templates early in the project, well before plans are handed off to the contractor.
Fragmented Field-to-office Communication: Field updates are delayed or incomplete. Without consistent and reliable communication from the job site, project managers struggle to maintain accurate budgets and schedules. Construction management software often has features that can streamline communication and changes via a mobile app.
Lack of Real-time Cost Visibility: Without live updates, teams may rely on outdated data, making it harder to react quickly to things that could cause cost overruns or adapt to shifts in the schedule.
Siloed Data and Poor Coordination: Communication breakdowns cost time and money. When teams rely on separate systems and manual updates, it’s easy for information to get lost or overlooked. Dashboards keep insights centralized across workstreams, which improves coordination and keeps everyone focused on the same data.

Construction Cost Management Starter Kit

Download the Construction Cost Management Starter Kit

Use this free starter kit to help you manage the various elements of construction cost management. This kit includes templates for managing budgets, estimates, schedules, and construction dashboard.

In this kit, you’ll find:

A simple construction estimate template for Excel to handle preliminary estimates.
A general construction budget template for Excel that will work for residential or commercial projects.
A construction change order form for Microsoft Word with sample copy.
A construction milestone schedule template for Excel to track project checkpoints.
A construction project dashboard template for Excel to keep stakeholders informed.

Find more construction management templates for all phases of a build or remodel. Construction cost management is one of the hardest parts of delivering a project on time and on budget. But with the right practices and tools in place, you can move from reactive budgeting to proactive cost control.

How to Get Started with Smartsheet for Construction Cost Management

From pre-construction to project closeout, keep all stakeholders in the loop with real-time collaboration and automated updates so you can make better, more informed decisions, all while landing your projects on time and within budget.

The Smartsheet platform makes it easy to plan, capture, manage, and report on work from anywhere, helping your team be more effective and get more done. Report on key metrics and get real-time visibility into work as it happens with roll-up reports, dashboards, and automated workflows built to keep your team connected and informed.

When teams have clarity into the work getting done, there’s no telling how much more they can accomplish in the same amount of time. Try Smartsheet for free, today.

Stop juggling spreadsheets—track every phase with smarter construction management.

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