Stakeholders in the construction sector include architects, quantity surveyors and allied professionals and engineers.
A lecturer from the Institute of Finance Management (IFM), Zakaria Swedi, told The Guardian recently that the costs were mainly incurred when materials were procured, employees were hired including other overhead costs.
Highlighting cost accounting in the construction industry in Tanzania, he said the industry was unique where the need for accurate cost accounting systems was more important than in other industries since competitive bidding was deeply rooted in its tradition and the lowest bidder won the contract.
“For the purpose of bidding competitively in construction projects, architects, quantity surveyors and allied professionals are required to maintain proper cost accounting systems with sound mechanisms for accurate allocation and apportionment of costs of the project,” Swedi said.
This might indicate that a project was neither underpriced, leading to losses, nor overpriced, resulting in loss of business opportunities to competitive bidders.
In the construction industry, an unreliable cost accounting system may result in management failing to measure the project’s performance accurately.
This might, in turn, lead to strategic decisions being made on the basis of inaccurate project costs, with the result that management would concentrate on less profitable projects at the expense of seemingly loss-making yet profitable projects.
The measurement of construction project performance was therefore vital as it enabled important management decisions to be reached and also assist to identify areas requiring improvement, he said, adding that without a proper cost accounting system, bidding and pricing for tenders become difficult with the result that a project might be lost to competitors.
To ensure that proper costing is done and allow flexibility there were a number of cost accounting concepts that guide cost managers such as Full Absorption, Activity-Based Accounting, Constraint-Based Accounting, Throughput Accounting, Target Accounting, Lean Cost Accounting, Inter-Organisation Cost Management, Whole-Life Costing, Value Management and Risk Management.
He said that costing system depends on the information needed by management as there are no standards or rules in preparing cost accounting for management purposes and this is usually called Costing Accounting and sometimes Management Accounting, warning that the two terms are used interchangeably although they do not mean the same thing.
Due to development in science and technology things have now changed rapidly in all the sectors including construction industry, the don said.
“In this challenging environment, firms should not use their rigid past practices – particularly in cost accounting.
“It was standard practice in the construction industry to factor in an established percentage for business overheads when calculating a job bid.
“Then to remain competitive, a profit margin is calculated of between some two-level points percent (unless the project involves higher skilled technology of labour force),” he said.
Elaborating on the elements of costs in project cost accounting, he said materials costing in construction projects forms the largest part of the total cost.
“Its share in the total cost is more than sixty per cent. Materials used in construction can be divided into direct and indirect materials,” he said.
Those materials which can be traced are direct while those which cannot be traced are known as indirect materials.
He said there should be a proper way of dealing with materials, adding that since this is the major cost in constructions projects, materials needed to be well procured, stored and issued.
He argued that the cost of materials should be kept as low as possible which, in turn, will reduce the construction cost.