RESEARCH ON THE COST MANAGEMENT MODE
OF CHINESE REAL ESTATE ENTERPRISES
Jianyin Luo and Yufei Li
Beijing UFIDA Co., Ltd, No. 68 Road Beiqing, 100094, Haidian District, China
Keywords: Real estate enterprises, Cost management, Mode research.
Abstract: The real estate industry is now going through a painful period. Many far-sighted companies are hence
grasping this opportunity firmly to strengthen their internal organs. One important way of internal
improvement is cost management. Based on the empirical researches on leading real estate firms (Vanke,
China Sea, Pearl River, and Country Garden) over many years, this paper integrates effective cost
management modes for China’s real estate industry. Every mode introduced in this paper is developed into
the following part: Enterprise Characteristics; Mode Characteristics; Mode Advantages; Mode
Disadvantages; Applicable Enterprises, etc.
1 INTRODUCTION
The real estate industry is now going through a
painful period. Many far-sighted companies are
hence grasping this opportunity firmly to strengthen
their internal organs. One important way of internal
improvement is cost management. Based on the
empirical researches on leading real estate firms
(Vanke, China Sea, Pearl River, and Country
Garden) over many years, this paper integrates
effective cost management modes for China’s real
estate industry. Every mode introduced in this paper
is developed into the following part: Enterprise
Characteristics; Mode Characteristics; Mode
Advantages; Mode Disadvantages; Applicable
Enterprises etc.
2 RESEARCH ON VANKA’S
COST MANAGEMENT MODE
2.1 Enterprise Characteristics
Typical enterprises of this mode include Vanka,
Wanda, Excellence Group, and Eontime. They
always focus on real estate development and
management while outsource other core activities
such as design and construction.
2.2 Mode Characteristics
The mode characteristics of Vanke could be
concluded as giving priority to macro cost control,
while giving consideration to the progress and
quality of a project.
 A target cost management system which sets a
corresponding target cost for every project is
established. This system benefits the overall
process of project development.
 Dynamic cost accounting. Dynamic costs are
computed in the following situations: making a
contract, changing certificates, settling a
contract, paying for a contract, and non-
contractual expenditures. By adopting dynamic
cost accounting, the latest happening in the
project could be reflected in time.
 Cost management work is done according to
standard operating procedure.
 The method of cost accounting is consistent
with its principle. However, it is not required
that cost accounting be extraordinarily accurate.
 Overall situation consciousness is emphasized
because cost is not only the responsibility of
Cost Department.
 Focus on the control of total cost.
 Under the framework of total cost,
responsibility costs are assigned to specific
departments’ specific activities according to
their separate division of labour.
Correspondingly, supervising and inspecting
345
Luo J. and Li Y..
RESEARCH ON THE COST MANAGEMENT MODE OF CHINESE REAL ESTATE ENTERPRISES.
DOI: 10.5220/0003610203450350
In Proceedings of the 13th International Conference on Enterprise Information Systems (BIS-2011), pages 345-350
ISBN: 978-989-8425-54-6
Copyright
c
 2011 SCITEPRESS (Science and Technology Publications, Lda.)

system, together with performance evaluation
system is then deployed to reduce the costs of
every division, and enables every division to
exert subjective initiative.
 Major materials are purchased via tender offer
and adopt a JIT approach.
 Cost-effective analysis is adopted to decide
whether a cost could improve the value of a
product. If can, the cost is spent effectively and
otherwise it is ineffectively. By using the cost-
effective analysis, the company could avoid
every possible ineffective cost and spend their
money where it counts.
 Aggregate all the data of developing projects
into a cost pool. Data of excellently managed
projects could be set as standards to conduct a
feasibility study for new projects or guide the
development process of new projects.
Figure 1: How a closed loop for cost management is
formed.
2.3 Mode Advantages
 A closed loop of cost management is
established, which promotes the cost
management level to improve. (Figure 1)
 Is beneficial for the macro-control of the
overall group. The group could formulate
uniform rules which are executed strictly in the
development process of projects.
 Meanwhile, combined with some professional
real estate information analysis tools such as
UFIDA, a fast copy effect could be realized by
solidifying the group’s rules and defining
relative guidelines on project management in
the software. Therefore, software could be used
to help enterprises to guide their behaviours.
 The establishment of a cost pool makes the
feasibility study on new projects faster and
more effective.
2.4 Mode Disadvantages
This mode of cost accounting lacks precision, thus
limits the range of cost control.
2.5 Applicable Enterprises
The Vanke cost management mode could be applied
to pure real estate enterprises without affiliated
construction enterprises or enterprises that lack
actual construction experiences.
3 RESEARCH ON CHINA SEA’S
COST MANAGEMENT MODE
3.1 Enterprise Characteristics
Typical enterprises such as China Sea, Tiantai, etc.
adopt this cost management mode to focus more on
the management of real estate development. These
enterprises are all transformed from construction
companies so they are good at construction
management.
3.2 Mode Characteristics
This mode is characterized by an elaborate system
on cost management and control, specific as follows.
 A unified budget management system for the
overall group is established to control the whole
process of project development. This system
sets up corresponding budgets for every
specific item according to the categories and
standards for budgets.
 Budgets are assigned to specific departments’
specific activities according to their separate
division of labour. Correspondingly,
supervising and inspecting system, together
with performance evaluation system is then
deployed to reduce the costs of every division,
and enables every division to exert subjective
initiative.
 Budget control concerns the following aspects:
making a contract, changing certificates,
settling a contract, paying for a contract, and
non-contractual expenditures
 Annual capital plan and monthly capital plan
are drawn up by project and functional
department. Approved capital plans strictly
control the payment flow of projects.
 Budget control is as detailed as to every
department and every item.
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 Budget pre-warning. This system supports an
early warning for the execution of budget
control. For example, if an early warning mode
is pre set, as long as a user overruns his or her
principle project by 80%, the early warning
would prompt out.
 Bill of quantities is need when concluding a
contract.
 Project schedule is formulated according to bill
of quantities and tasks. Periodically, actual
accomplished work amount will be confirmed.
Besides, the bill of quantities will also be
referred to when paying for a project.
 Comprehensive material management. Strategic
cooperative partnership with major suppliers is
established to reduce purchasing costs
drastically. Material requisition list is required
when employing materials. For oversupplied
materials, deductions are applied using
progressive rates or excess progressive rates,
and deduction threshold as well as mark-up
percentage is set to guarantee the maximum use
of materials.
3.3 Mode Advantages
 A complex and volatile project management
process can be changed into a controllable
process by establishment management, task
decomposition, contract management, progress
confirmation, and payment flow.
 By using budget management, capital plan and
tender offer management, the company could
integrate limited resources so as to improve the
effective utilization rate of resources.
 In the process of the project, by utilizing
investment estimation management, project
cost management and dynamic cost projection,
the company could timely evaluate the input-
output relationship about the project.
 The goal of standardizing project management
work, optimizing management procedures, and
realizing overall control could be attained with
the help of information tools. The level of
project management could be therefore
improved because information is more
visualized, procedures are more transparent,
and motions are more standardized.
 Coordinate and manage overall project
resources from a group’s view. These resources
include financial resources, human capital
resources, supplier resources, project
development management experiences and so
on.
 Scale duplication of project development
management.
3.4 Mode Disadvantages
Among all the cost management modes in real estate
enterprises, this mode characterized by an elaborate
system has the highest requirement for professional
cost management. Apart from the necessary cost
analysis skills, project skills and financial skills for
development enterprises, construction techniques are
also needed.
3.5 Applicable Enterprises
This mode could be applied to real estate enterprises
with higher level of project management experience
and construction experience.
4 RESEARCH ON PEARL
RIVER’S COST
MANAGEMENT MODE
4.1 Enterprise Characteristics
Typical enterprises such as Pearl River would prefer
this cost management mode, which focuses more on
real estate development and management, and
contracted their construction work to affiliated
construction companies.
4.2 Mode Characteristics
This mode is characterized by a moderate flexible
target cost control system. This system emphasizes
on the details of a project, especially the control of
certificate changes.
 A target cost management system is
established. Meanwhile, in order to reduce the
period for a project, construction work is doing
while budgets are still making.
 Dynamic cost accounting. Dynamic costs are
computed in the following situations: making a
contract, changing certificates, settling a
contract, paying for a contract, and non-
contractual expenditures. By adopting dynamic
cost accounting, the latest happening in the
project could be reflected in time. Besides,
company can frequently check whether it is
beyond the target cost.
 The principles concerning the distribution of
costs among different regions/time include: a.
RESEARCH ON THE COST MANAGEMENT MODE OF CHINESE REAL ESTATE ENTERPRISES
347

Benefit Principle, which allocates costs
according to benefits; b. Equal Principle, which
allocates costs equally among all the regions; c.
Territorial Principle, which allocates costs to
where the project is located. (Table 1)
 Since Pearl River is listed in Hong Kong, it
accepts various methods of cost apportionment,
such as Chinese accounting rules, Performance
Requirement for Hong Kong Listed Companies
etc.). This is beneficial for different purposes of
management. (Table 1)
Table 1: Examples of various cost distribution principles
under different accounting rules.
Projects
Internal
Control
Assessment
Chinese
Account-ing
Rules
Performance
Requirement
for Hong
Kong Listed
Companies
“Municipal
Planning
Road
Project”
Benefit
Principle
Benefit
Principle
Territorial
Principle
 A quota system (benchmark price) is
introduced according to the types of products.
Generally, products from the same regions are
applied with the same quota. Quota added by
indicative data could quickly result in an
initial version of target costs, which is
beneficial for a quick feasibility research
decision.
 Regional companies employ a capital demand
plan based on their actual demand for
operation and management. This capital plan
includes annual capital plan and monthly
capital plan.
(For example, an annual capital plan is formulated
according to the following procedures: Every
November, the company would draft next year’s
capital plan based on the market forecast, sales
targets and project progress. The Project Sales and
Planning Department would put forward next year’s
sales plan, other operating revenue plan, selling
expenses budget and operating expenses budget. The
Financial Department would predict next year’s
sales revenue actual collection plan. The Project (or
Regional) Development Department proposes the
capital demand plan; The Project Engineering
Department comes up with next year’s progress plan
and capital demand plan. The Project Office raises
next year’s administrative expenses budget. When
drafting out corresponding plans and budgets, each
department should communicate adequately and
reach consensus with regional functional
departments. Approved by company’s general
manager, all these budgets and plans could become
the basis for the Financial Department to formulate
the “Annual Capital Plan”. )

 Approval authority is strictly controlled in case
that out-of-control risk breaks out.
 Every month, the quantities of work are
evaluated in a simplified way. Pearl River
estimates the overall quantities one at a time,
while Vanke and China Sea aggregates every
specific project’s quantities in to the overall
quantities.
 Project Development Life Cycle is relatively
flexible. For example, projects planned to be
completed in first phase may be postponed
many times. Besides, two or more projects
could be combined into one phase to complete.
4.3 Mode Advantages
 This mode forms a stratified central
management of information resources for
headquarter, regional companies, and project
companies.
 This mode unifies each piece’s accounting
system and operating procedures, so that the
group management could conduct a real-time
data inquiry to strengthen their supervisory
force.
 This mode enhances company’s capital
management, enabling it to reflect real-time
capital account information to control the
payment flow.
 The adoption of the quota system is beneficial
for new projects’ feasibility research.
4.4 Mode Disadvantages
Due to the lag behind between target cost and actual
business, this mode has the disadvantage of limited
target cost control force.
4.5 Applicable Enterprises
This mode could be applied to real estate enterprises
with moderate flexibility.
5 RESEARCH ON COUNTRY
GARDEN’S COST
MANAGEMENT MODE
5.1 Enterprise Characteristics
Typical enterprises such as Country Garden would
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prefer this cost management mode, which focuses
more on real estate development and management.
Meanwhile, this mode covers all the cycles in real
estate development, including design, construction,
decoration, gardening, hotel, school, tourism and so
on.
5.2 Mode Characteristics
This mode is characterized by a unified capital
management and material supply concentration
system.
 Low land price with large-scale investment
strategy. Companies using this mode always
choose second-tier and third-tier cities as their
base areas, with an average land price of RMB
174 per square meter. Correspondingly, the
ratio of land cost to average sales revenue is
maintained at 7 to 8 percent.
 Design cost is controlled. Take Country
Garden as an example, it owns a special design
institute with hundreds of houses. For example,
they have as many as 100 classic town houses.
Taken into consideration local climate and
custom, their design covers all types of houses.
Their blue prints contains sufficient
information such as the location of a switch
which enables the client to touch more
comfortably, or the most reasonable wide of a
gap between a door and a wall, and also how a
ceramic tile could be paved. All these means
that Country Garden could simply enter into
construction procedures just according to their
blueprints with few adjustments or even no
adjustments.
 Materials supply management is centralized.
Bulk commodities are bought through Group
purchasing centre to reduce material costs.
 Low cost results in high turnover rate. Project
price is normally half than other comparable
projects, average daily batch sales rate is as
high as 78%, and average annual stockpile rate
is only 2.5%.
 Low sales price also effectively reduces sales
expenses. In the first half year of 2007,
settlement revenue is increased by 48% while
sales expenses only increased 45%, and
marketing expenses only increased 36%.
 The business chain of Country Garden is
perfectly integrated. Not only product design,
but also building construction, estate
management and hotel management are all well
considered. These large buildings always take
up more than thousands of acres, which could
significantly reduce purchasing cost and realize
a large-scale duplication.
 The centralized management of capital enables
the company to monitor the movement of
money more effectively. By utilizing
information tools, the company could check its
capital situation cross banks and cross
departments could know the real-time balances
of its accounts, could have fast control over
every subsidiary’s capital flow, and could also
monitor major capital movements so as to
automatically supervise abnormal situation.
These functions enable the company to form an
overall management of capital.
5.3 Mode Advantages
 The Country Garden Mode covers all the
possible cycles in real estate development,
including project orientation, house design,
construction and building material, decoration,
marketing and estate management. Profits
from every link in the value chain are seized
to reduce costs and improve development
speed.
 Fast duplicating and scaled manufacturing are
realized through this mode.
5.4 Mode Disadvantages
Since this mode covers every connecting and
interacting cycle in the real estate development, it is
rather challenging for a company to manage and
control.
5.5 Applicable Enterprises
This mode would be very suitable for enterprises
that have business on all the process of real estate
development.
6 CONCLUSIONS
With the increasing competition among companies
and the current economic situation, real estate
companies should adopt scientific cost management
approaches to improve their cost management
quality. Additionally, they should take advantage of
cost management methods to bring benefits and
effectiveness to themselves. Only by this way, can
real estate enterprises successfully go through the
current crisis and enjoy a healthy sustainable long-
term development.
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REFERENCES
Zhongwei Wang, 2006. Cost optimization control for real
estate development project. Development and
Construction.
Zhenhua Chen, 2006. Discussion on how Chinese real
estate enterprises could shape their core
competitiveness. Science and Technology of Overseas
Building Materials.
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