PRE-CONTRACT COST CONTROL IN CONSTRUCTION

PRE-CONTRACT COST CONTROL IN CONSTRUCTION

PRE-CONTRACT COST CONTROL IN CONSTRUCTION
 PRE-CONTRACT COST CONTROL IN CONSTRUCTION
 
 
 
Process and Procedure for Effective Pre-Contract Cost Control  
Keywords: New Rules of Measurement 1, RIBA Plan of Work 2013, Cost Forecasting, Cost Planning

Introduction  

Pre-contract cost control is defined as the systematic process of ensuring that the contract sum remains within the client’s approved budget by planning and controlling the costs of building throughout complete duration of the construction project (RICS 2016). The process start with a budget development through the Order of Cost estimate and is the controlled through Cost Plans by allocating cost limits to various element of the intended construction project. This provides design team with a balanced cost outline within which the design should fit (RICS 1982). 
 
Value Management must form part of the process as it ensures a mutual understanding between the client and the design team. Hence the needs and expectations of each parties is concurrently met thereby providing a methodological base for decision making throughout the pre-contract stages, all with the aim of delivering value and function. Pre-contract Cost control must therefore be a continuous process so that the current estimated final cost are continuously known and is considered in terms of approximate estimates and cost plans (Hackett and Robinson 2003).

Download Also:

Cost Estimating and Forecasting

In order to ensure effective pre-contract cost control, deliverables must be established from the beginning of the project and in order of importance. This is known as cost forecasting. It is the process of allocating cost to a building project on basis of the information available and done in consecutive stages. The first step of cost forecasting is the Order of Cost Estimate produced during Stage 0-1 of the RIBA POW 2013 in accordance with the NRM 1-Part 2 (RICS 2012). 
These estimates provides the starting point for project development along any project life cycle to enable developers to ascertain the financial implication of their project prior to the devisal of detailed designs (Skitmore 1988; Abou, Lewis and Alzarooni 2004). This is dependent on the type of project involved, and the level of precision will be dependent on the complexity and amount of alterations required which may compromise the certainty of the budget forecast (RICS 1982)

There are 3 main Cost estimating techniques and these are dependent on the availability of design details available at that time and are used at the initial stages;  (1) The Functional Unit method is based on a single price rate method extracted from a similar projects and is on basis of functional Unit obtained from Cost Analyses- BCIS[1], Price Books; Spon’s Price Books[2] or Firm’s Own Library,(3)The elemental cost estimate provide the basis for setting cost of the elements that will be referred to as the design develop and cost plans are prepared.  
 
The accuracy of the procedure is dependent on the assumptions made by the consultant that must be confirmed on basis of its appropriateness with the design team. Cost based or unconfirmed assumption may have subsequent financial consequences at later stages (Hackett and Robinson 2003). Once cost estimates are established, these must be presented in the form of formal reports explaining the methodology adopted for reaching the estimates and must include drawings/sketches used, sources of costs information indicating any adjustment made for location, inflation and date of estimate and assumptions & exclusions (Benge 2014). Cost estimates must be carefully planned as it sets the budget for the project and forms the initial build up for the cost planning process that would be subsequently used for cost/budget control purposes.

Risks Associated in Cost Estimating

The process of cost estimating is undermined by various levels of risks, uncertainties and is dependent on the levels of information available for the project. It is also dependent on the expertise and level of judgement of the professional working on the cost forecasting exercise (Abou et al. 2004). A functional unit rate must be methodologically appraised with respect to the source and parameters from which the rate was generated. Similarly, any assumption and exclusions must be appended to the cost estimate (RICS 2012). Rates must be adjusted to suit the project including the Location Index to suit the project, an allowance for the date of the estimate amongst various other considerations. 
 
For instance adjustment on the source of the cost information, the BCIS has excluded cost of external works in an estimate sand usually take average prices. This may increase the cost of the estimate which may be unrealistic. Hence, careful consideration must be undertaken in the adjustment of the rates on a case to case basis, e.g the extra cost for high quality finish must be added on a similar rates to ensure a correct estimate. The first step of the pre-contract cost control procedure requires judgment and experience to understand and adjust rates from previous analysis in order to reach an effective and realistic budget for the project (Cartlidge, 2009). If the estimate is out of the client budget then major review must be done to either trim down cost by changing the initial project scope or by proposing the phasing of the project.

Cost Planning

The cost planning stage may only begin once the budget is signed-off from the cost estimate and the design team has devised specifications, sketches, plans and more detailed information that meet the client requirement. The cost plan will provide the cost control points for the developing budget that bring design and cost together at the pre-tender stage (Cartlidge, 2009). This will ensure that the client is receiving value for money and make the design team aware of the cost implication of their designs. This enable a balanced and practical design that fits within the budget and provide a base for decision making by the client (Section 3.2.2 NRM 1 RICS 2012). It breaks down the estimate to allocate the cost to various elements through the devisal of Cost plans 1, 2, 3 hence assisting the design team in both controlling the building cost and ensuring the best use of the employer’s funds.
In order to prepare cost plans it is important to break down the building in separate levels as laid by the NRM 1-Section 3. Each element will be dependent on the design and specification that will determine the selection of the material and design factors related to the element. It must hence be considered in isolation as laid by Section 3 until design, specification and costs are approved prior to the examination of its impact on other elements
 
The 1st Formal cost plan is prepared at Stage 2[4] when the scope of the project is defined but no detailed design is available. This will provide the basis of the Cost Plan 2 which is a progression of the previous plan and is done when the design development is complete. At Stage 4[5], upon completion of the technical designs, specifications and detailed information, the Cost plan 3 is prepared. Each cost plan evolves from the previous plan and is taken as a base to be refined as more design information are available. As design evolves, more detailed measurement can be made and cost accordingly revised and allocated as required. The accuracy of the Cost Plans will be dependent on the source of information and cost analysis adopted. 
 
It is advisable that cost analysis from relatively similar projects are used and adjustments made for differences. While a number of possible designs can be considered for each elements, these must be laid on the cost plan to demonstrate how design affect cost (Hackett and Robinson 2003). As the design develops and detailed information are available updated Cost Plans must be reported to the client. 
It must clearly detail the assumptions, limitations and critical aspects considered for the devisal of the cost plan. Where there are consequent impact on elements cost, corresponding inverse changes must be made to other elements if the project cost is to be maintained within the approved cost. This systematic cost monitoring and control through earned value ensures that the project remains in line with the budget(Cartlidge 2009). All relevant members of the team must accordingly be informed as timely communication is key. 
 
This methodical cost control procedure evolves as more design information is available[6]. The effectiveness and clarity of this process requires that the client validates each cost plans on completion of the respective RIBA stages[7]. Each stages must be signed-off prior moving to the next. In the event that agreed budget is likely to be exceeded or reduced, without any change to the brief, the client must be informed and instructions requested. 
 
This as results will confirm the cost limits approved by the client (Hackett and Robinson 2003) at proceeding cost plans. Likewise, In the event of elements going out of budget, comparative cost plans must be called for and is carried out as part of the value engineering exercises that allows alternative design options to be considered; steel v/s pre-cast concrete frame, life cycle costs of cladding options; aluminium v/s steel . This allows for informed decision of economical alternatives with the aim of meeting the client’s set limit for the building cost. 
It is of critical importance that the pre-contract cost procedure be done in a systematic manner ensuring effectiveness and efficiency. As reviewed the pre-contract cost control procedures must go through respective processes having their distinct deliverables that would be a prelude to the next stage. As reviewed the starting step is the Order of Cost Estimate that will set the limit of the budget and is followed by the devisal of the Cost Plan, 1,2 and 3 that would allocate cost to the respective elements of the buildings, the relative levels and development of the cost plans are based on the RIBA work stages and are dependent on design and development, specifications and information obtained from the design team. The effectiveness of the procedures is dependent on the communication, frequency of the meetings and mutual understanding of the deliverables. The process also depends on the skills, experience and judgement of the person administering the process so that necessary adjustments are made to the rates to reflect the design.

[1] BCIS-Building Cost Information Service  
[2] Spons Architect's and Builder's Price Book  
[3] GIFA- Gross Internal Floor Area  
[4] Stage 2- Concept Design RIBA POW 2013  
[5] Stage 4-Detailed Design RIBA POW 2013  
[6] NRM 1-3.2.5  
[7] RIBA Plan of Work 2013

Realated Topics:

                                                           Yashwant Tohooloo MRICS
About:
Operations and Contracts Manager currently working for FairStone Construction Ltd forming part of the Evaco Group. Possesses past experience in Building and Civil Engineering, Mechanical Engineering, Sugar Engineering and Structural Steel Buildings with projects in Mauritius and over Africa. Possesses previous experience as Contracts Administrator, Quantity Surveyor in building & civil engineering works and as a Project Manager in Structural steel and Metal Works. Passionate about Operations and Contracts Management and hands-on proactive risk management in contracts.  
Possesses an utmost collaborative attitude and skilled in negotiation and conflict resolution. Strong education professional with 2 BSc (Hons), an MSc in Quantity Surveying and currently doing an LLM. I am also a Chartered Quantity Surveyor (MRICS) from the Royal Institute of Charted Surveyors (RICS).  Self-motivated, determined and charismatic, with an unquestionable passion for the Industry. Excellence belongs to those who have an unraveling focus and an undoubted will to make it happen.

Post a Comment

Previous Post Next Post

Comments