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Utilize Cost Management Throughout the Planning, Design, and Development Process

by the WBDG Cost-Effective Committee

Last updated: 04-28-2008

Overview

Throughout a project's planning, design, and construction phases, Cost Management is employed as a means of balancing a project's scope and expectations of quality and budget. The approach can be summarized as requiring the following three steps:

  1. Define the scope, the level of quality desired, and the budget
  2. Ensure that the scope, quality, and budget are aligned
  3. Monitor and manage the balance of these three components throughout the life of the project

Cost Management encompasses more than cost estimates however—it includes Risk Management and in the federal arena in particular, can include Earned Value Analysis. Risk Assessment and Management are important as identified risks on construction projects are typically financial in nature. Therefore early in the project an assessment of risk is crucial to establish the budget parameters within which the project must be completed. The calculation of project contingencies should be based on an assessment of the risk surrounding the project (site issues, availability of bidders, method of procurement, general market conditions etc). As risks are mitigated (site investigation is done, market survey completed, program finalized, design started, and so forth) then contingencies can be reduced and the range of estimated final cost narrowed.

The firm charged with managing the costs of the project should ideally be hired directly by the owner, early in the process, and should be independent of both the architect/engineer and the construction contractor.

Planning Phase

Cost Management differs from Building Economics in that it is typically concerned with the initial costs—or first costs—of accomplishing new construction or renovation projects. A project must start right in order for it to finish right, so the establishment of an appropriate budget is critical. Early in the planning stages, both building owners and designers must agree on an anticipated cost of the project at bid award. This is a critical stage in the cost management process—an inaccurate budget can doom a project to continual stress and compromise, with neither the owner, end-user nor design team being completely satisfied at the end. A common mistake at this stage is to take a program of areas and apply those to historical costs without making adjustments for the myriad factors which affect construction costs—size of the project, renovation versus new, location (has a market survey been done?), price increases since the date of the data used, method of procurement, overall quality of the space envisioned, etc.

Preliminary Estimates are employed in the early planning phases of a proposed project to match an owner's needs, expressed as written programmatic requirements, with budget constraints in order to establish its overall scope (size) and quality expectations.

The method of procurement selected should be identified at this stage. The options available today are more numerous than in the past—Lump Sum, Construction Manager as Constructor (CMC) (also known as CM at Risk), Design/Build and so forth. Each method has pros and cons relative to cost and risk, so the method selected should also be factored in to the project budget.

Value Engineering should also be considered at this stage. Any changes to the program at this early phase have very little, if any, impact on schedule and A/E time and redesign costs, but the benefits in terms of solidifying the program and establishing project goals can be huge.

Design Phase

Photo of Chesapeake Bay Foundation Philip Merrill Environmental Center-Annapolis, MD

Chesapeake Bay Foundation Philip Merrill Environmental Center—Annapolis, MD

Once an initial budget has been established, the scope set and the quality expectations documented, it is important to monitor the estimated cost of the project by employing a series of increasingly precise cost estimating techniques that coincide with further development of design and construction details.

Intermediate Estimates are employed at various stages of project design development as part of ongoing cost management, and as a means of evaluating competing alternative construction assemblies, systems, and materials. On large projects it is common practice for an owner to employ a construction manager or professional estimator to continually update project estimates and provide feedback on budget impacts of decisions on major design elements. The drawings and specifications should also go through a constructability review, wherein an independent review team analyzes the construction documents for completeness, coordination between disciplines, cost-effective design solutions, and general code compliance. The specifications should also be reviewed to ensure that the General Requirements included in division 1 are not overly restrictive (e.g. working hours, noise restrictions and so forth) and that the use of proprietary materials is minimized. A market survey should be carried out on sizable projects to determine where the bidders will come from—is the local market sufficiently large to accommodate the project, or will the major subcontractors be at capacity and therefore likely to bid high, if at all?

Earned Value Analysis is a useful tool in cost management, in that costs for each component of the project (in a Work Breakdown Structure, or WBS) can be tracked against the initial budget, and adjustments made to ensure the overall budget is on track. Movements between components are common; however, without tracking where costs are changing, the budget is in danger of being exceeded leading to re-design or extensive value engineering. Similarly future cost planning can be improved by the use of Earned Value Analysis, by tracking where the money really goes in a project.

Construction Phase

At the bid stage, the drawings should be 100% complete; however, in many instances this does not happen, leading to addenda being issued to clarify details, resolve conflicts or to complete the design. Often the estimate is not adjusted to account for these design changes, leading to a so-called final estimate that really does not represent the scope of work being bid. The estimate should therefore be adjusted during bidding to reflect the same information the bidders receive. Also a read of the market at bid stage is still useful, and can be included in a risk assessment to determine a range of bids expected. In a particularly volatile market, the use of bid options may allow the owner some flexibility in achieving the budget on bid day.

The preparation of the bidding documents is also crucial in an overall cost management strategy. Consideration should be given to contract clauses that govern changes in the work and how they will be valued (e.g. by reference to a published price book or trade manual); allowable mark-ups on changes by the various levels of contractors and sub-contractors; notice requirements for delays; the use of unit prices for changes and any other clauses that may affect the final cost of the project.

During construction the focus shifts from predictive cost estimating to reactive cost management of any changes in the work. Changes arise from a number of different sources—unforeseen conditions, owner-generated changes, drawing errors and omissions, code issues or contractual claims. Also changes can arise from on-going proactive cost management, either generated by the design team or the general contractor, where one of the parties proposes a better-value substitution (sometimes known as Value Engineering Change Proposals or VECPs). For all reviews of changes the owner should first establish the ground rules as delineated in the contract documents, agree a format with the general contractor, and require the general contractor to first review change proposal from subcontractors before compiling and forwarding to the owner. Changes should also be reviewed by the design time for entitlement—is it really a change to the scope and are there any credits due? Then the agency Construction Manager or independent cost consultant should review the pricing against the contract and industry norms, leading to an independent government estimate for presentation to the general contractor.

Earned Value Analysis is often used in this phase to determine at any given point in time the likely financial and schedule outcome of the project.

Post-Occupancy Evaluation

To provide data for future cost management, an evaluation is often carried out to prepare a detailed cost analysis of the completed project and to develop lessons learned to inform future design decisions.

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