Standards of Practice Course COST MANAGEMENT. Welcome © Construction Management Association of America. Do Not Duplicate or Reproduce. Agenda - Introduction.

COST MANAGEMENT

© Construction Management Association of America. Do Not Duplicate or Reproduce.

Agenda - Introduction & Overview

- Project & Construction Budget

- Cost Management System

- Cost Estimating

- Cost Compliance Monitoring

- Design Phase Monitoring

- Bid & Award Phase Cost Management

- Construction Phase Cost Management

- Bid & Award Phase Cost Management

- Additional Information

- Q&A, Conclusion

Cost Management Objectives- Control Cost - Deliver within Budget

Cost Management Basics- Realistic project budget within Owner’s limitations- Most economical way

CM’s Role in Cost Management- Cost Management Plan (CMP), aka Project Money Plan- Deliver within Budget • Financial forecast • Control project costs and cash flow

Failure will lead to cost overruns



The Purpose of Cost Control - Control the project budget

- Help deliver the project within the accepted project budget

Almost all projects have limited budgets, so: - The CM must create a system and implement all

necessary processes and procedures to control cost

- The CM must control cost growth

Two Types of Estimates: - Conceptual

- Detailed


Project Team: Interaction / Relationships - The Owner is “first among equals,” but often lacks

expertise in cost control

- The Designer is typically more concerned with

technical aspects and aesthetics

- The Contractor is typically concerned with completing work

within its budget (unrelated to the owner’s budget), and

maximizing profit

- The CM, by default, is in sole possession of the cost control role


Cost Control Responsibilities - All communications must include the CM

- The CM must attend all meetings

- The CM must report accurately and regularly to the Owner

- The CM must ensure that the project is delivered in the most

economical way, and conforming to the project requirements


Cost Control Stages

Pre-construction Phase - Gather cost information

- Provide cost estimates

- Employ “value analysis”

- Guard against cost growth

Construction Phase - Play a role in the payment process

- Manage the Change Order and Claims process


Project Inception - Unlimited funds (ideal world!)

- Owners are looking for positive ROI

Preliminary Cost Investigation - ALL project participants review and approve

Success Requires Buy-In - All participants must be working toward delivery within

the approved CMP and budget


Conceptual Budgeting - Project definition and project scope

- Project location / timeframe

- Conceptual estimates • Analagous Estimating (top down)

- Actual results of previously performed projects

• Parametric Modeling

- Project characteristics in mathematic equations (ie, cost per sq ft, megawatt

cost, etc)

• Bottom-Up Estimating

- Individual project components

• Computerized Estimating

- National cost databases


Interpreting Conceptual Budgets - Conceptual budgets are based on conceptual estimates!

- What is the degree of accuracy / reliability?

- No single accepted variance • Ritz suggests +/- 25% to 30%

• AACEI refers to conceptual estimates as an “order of magnitude” and

defines accuracy at +50% to -30%

• Other authors or organizations use different percentages


Integrating the Owner’s

Conceptual Budget - Meeting of the minds

- Critical point of the life of a project • How much will it cost?

• Can I afford the project?

- ROI versus regulations


Cost Analysis - Owner may require “conceptual design alternatives”

- Each will require conceptual estimates

- Different project locations • Utilities, site access, soils, topography, market conditions, etc.

- Other studies • Life Cycle costs

• Energy studies

• Preliminary cash flow


Development of the Project and its

Construction Budget - Develop estimate of “cost of construction” as well as

“total project cost”

- Total Project Cost = Initial Project Budget • Land acquisition

• A/E, CM & other consultants (plus contingency)

• Financing

• Owner management

- +/- 10-20% at this stage, plus 15-20% for design contingency

- Budget change at this point is inevitable


Owner Project Objectives - CM must clearly identify the Owner’s project objectives

- CM must draw out as much detail as possible, ie: • Interior finish quality

• Energy utilization and efficiency

• Life cycle costs

• Architectural aesthetics

• Return on investment (ROI)

• Expansion capabilities

- CM must determine what the Owner REALLY expects


Project and Owner Constraints - Constraint = Restraint = Restriction on the project & activities

- Caused by external factors

- Examples: • Financial constraints (cash flow, contract date, etc)

• Time-to-market (ie, must begin production by….)

• Schedule (ie, must take occupancy by…)

• Seasonal / weather constraints (ie, rainy season, frost, etc)

• Work tine (ie, work during evenings, not able to start before X o’clock, etc)


Procurement Strategies - Procurement Strategies = Budget Implications

- Types of procurement strategies: • Design-Bid-Build

• CM at Risk

• Agency CM

• Design / Build

• Owner-Furnished, Contractor Installed

• Firm Fixed Price / Lump Sum

-Damage clauses / Incentive Fees / Cost-sharing

• Cost Reimbursement Contracts

- Cost Plus (plus a fixed fee / plus an incentive fee / plus an award fee)

• Unit Price

- Blanket purchase / Time & materials / Job order contracts

- Legal and/or financial requirements


Resource Availability, Productivity,

and other Factors - Local conditions / constraints

• Labor

- Availability / Cost

• Climate-related productivity factors

• Location

- Infrastructure

- Foreign payments

- Tariffs


Project Conditions Impacting the Budget - Other factors for conceptual budgets:

• Allowances (for known but undefined requirements)

• Contingencies (for unknowns)

• Cost escalation factors

• Field and general conditions costs

• Foreign currency fluctuations

• Market conditions for materials and equipment


Organizing the Budget - Standardized format

- Work Breakdown Structure (WBS) • Define work components, packages

• Arrange in a hierarchical structure

• Identify every activity through a coding system

• Uniform communication

- All budgets should be reviewed for: • Completeness

• Compatibility with cost limitations

• Attainability (managing the owner’s expectations)

- Be sure to list exclusions / assumptions • (ie, no significant OT costs, no concrete pours during winter, single tower

crane, etc)


Contingency in the Preliminary Phase - Soft costs are difficult to quantify

- National standards versus concrete values

- Risk analysis • Expected monetary value of risk = probability of risk event X value of risk

event

- DO NOT overstate the likely cost of probability of risk events

- Overstating = artificial inflation = meaningless


Summary - Failures often result from inadequate initial project budgeting

- A realistic budget contains: • Considering the Owner’s goals and objectives

• Reasonable procurement strategy

• Identified project constraints

- It is a challenging task!


Purpose and Objectives - Ensure project completion within budget

- Two areas: • Cost of project resources

• Effects of project decisions on project cost and life cycle cost

- There is a cost to construct / cost to maintain


Development and Implementation - Several processes

• Resource planning

- What resources are needed

- What quantity of resources are needed

• Cost Estimating

- Approximate cost of the resources needed

• Cost Budgeting

- Allocation of the estimated costs to project elements or activities

• Cost Control

- Controlling the changes that impact an accepted budget


Understanding cost planning concepts - Scope definition

- Good resource planning / cost estimating inputs: • Land acquisition and access costs

• Design costs

• Labor costs

• Equipment costs

• Material costs

• Furniture, fixtures, and equipment (FF&E) costs

• Management cost

• Other costs


Basic inputs to resource planning • Work breakdown structure (WBS)

• Scope of work

• Historical information

• Resource pool description (market survey)

• Organizational policies

- Identify, then estimate the cost of each resource

- Outcome = project cost plan

- Owner’s acceptance of the project cost plan = project budget


Project feasibility studies - Determination of capital costs to test the

project’s business practicality • ie, target rental rates, target production unit prices

- Screening estimates = conceptual estimates

- Commercial versus public feasibility: • Commercial – business model

• Public (regulatory) – cost effective project delivery

• Public (non-regulatory) – amount of funding necessary for

project delivery (ie, municipal bond council)


Conceptual Estimate - Owner’s approval

Cost Plan - Owner’s approval

Project Approval - Cash flow

• Projected rate of expenditure, when incurred, not awarded

- Owner’s approval


Project Cash Flow - Projected rate of which the Owner’s cash is expended

(ie, taking the fast lane to the poor house)

- Allows the Owner to reinvest funds until needed

- Develop a borrowing schedule


Developing a Cash Flow Schedule - Items needed:

• Cash flow analysis

• Conceptual project schedule

• Conceptual estimate

- Time versus $$ • Typical “S” curve

- Straight Line analysis versus Bell Shape

- Font-end loaded / back-end loaded • Equipment buy out / installation


Typical “S” Curve for Cash Flow


Typical “S” Curve for Cash Flow


Cost Model for Monitoring Costs - Monitoring / reporting on costs and variances

• Planned versus actual: (simple and straightforward)

- Cash flow • Planned versus actual: dependence on creation / approval of cash flow curve

- Cost-trending (estimate at completion) • EAC = Actual costs of work to date + remaining costs

• EAC = Actual costs of work to date + remaining budget


Cost Model for Monitoring Costs, continued - Earned value calculations

• Measure planned versus actual cost and schedule performance in order

to “trend” how the project is doing

- Schedule Variance (SV) = Earned Hours or $$ - Budgeted Hours or $$

- Schedule Performance Index (SPI) =

Earned Hours or $$ to date / Budgeted Hours or $$ to date

- Cost Variance (CV) = Earned Hours or $$ / Budgeted Hours or $$

- Cost Performance Index (SPI) =

Earned Hours or $$ to date / Actual Hours or $$ to date


Impact of External Economic Factors - Time to Market

• Productivity available / lead time

- Taxation laws • Pollution control equipment, energy savings equipment

- Funding restrictions • Fiscal year end / start

- Advance Commitments by Owner

- ROI

- Calendar restrictions • School construction


Method of Project Funding - Typically the Owner’s responsibility

- The CM can impact • Cost management plan

• Feasibility study / ROI calculation (may determine whether the Owner can

fund project)

- The CM must understand early on how the project will be funded


Impact of Project Funding Method

on Cost and Schedule - Method may impact Cost Management Plan and Cash Flow Plan

• Government grant funding

- Under construction within _____ months

• Construction Financing versus Permanent Financing

- Need to convert to permanent financing no later than _____ for the ROI

to work out

• Expiration of Land Options

- Sale must close no later than _____


Summary - Helps establish and manage the Project Budget

- Provides the tools necessary to manage and monitor budget, ie: • Feasibility studies

• Cash flow schedules

• Cost Models

- Helps ensure the project is delivered within budget

- Helps to manage the budget from inception to completion


The Cost Management Plan is based on

a reliable cost estimate Selection of estimating techniques Identifying factors for conceptual estimating Parameters for cost estimating Concepts of range estimating Quantity survey based cost estimates and

procurement strategies


Selection of Estimating Techniques - Application of quantity surveys to cost estimating

- Accurate prediction of the project cost

- The estimate should be neither optimistic nor pessimistic

- CM should set forth all relevant cost assumptions • Contracting plan, labor productivity, etc.


What is a Cost Estimate? - A predicted cost of constructing the project

- Level of accuracy is dependent upon the quantity and the

quality of information available to the estimator

- Is it an art, a science, or both?


Types of Estimates and Accuracy

RitzEstimate Type Accuracy

Feasibility +/- 25-30%

Appropriation +/- 15-25%

Capitol Cost +/- 10-15%

Definitive +/- 5%

AACEIEstimate Type Accuracy

Order of Magnitude +50 to -30%

Budget +30% to -15%

Definitive +15% to -5%


Understanding the Risk - Owner interprets the CM’s estimate as a “warranty”

- Owner tends to focus on a single number rather than a range

- Solutions: • Use qualifying language to accompany the estimate

• Continually manage the Owner’s expectations

• Work with the Owner to establish a realistic contingency


7 Steps for Effective Cost Estimating: - Knowledge (experience, education)

- Study (documents, the site, the schedule)

- Visualize (how to build, site operations)

- Organize (by operation / division)

- Analyze (measure the price)

- Check (for accuracy; perform a comparison)

- Finalize the package (best information, mark-ups)


Available Techniques: - In-house estimating data files

- Outside estimating software data files

- Outside estimating services

- Standardize cost indexes

- End-product “unit method”

- “Scale of Operations” method

- “Ratio” or “Factor” methods

- “Physical Dimensions” method

- “Quantity Take Off” method


Factors for Conceptual Estimating: - Minimum information required to perform a conceptual estimate:

• Project Type (heath care, commercial, etc)

• Project size or capacity (square footage, # of hospital beds, etc)

• Project location

• Project schedule

- Reliability of the estimate increases with more information

Parameters for Conceptual Estimating: - Parameters are defined as a set of physical properties whose

value determines the characteristics or behavior of something


Parameters for performing a

conceptual estimate include: - Design phase costs

- Construction phase costs

- Plans and specifications

- Construction and procurement strategies

- Site Information

- Engineering

- Quantity take-offs

- Labor

© Construction Management Association of America. Do Not Duplicate or Reproduce. September, 2006

Parameters, cont: - Materials

- Equipment

- General Conditions

- Home Office Overhead

- Miscellaneous Costs

- Schedule

- Inspection and Permits

- Bid alternates & allowances

- Mark-ups


Market Survey - A market survey is conducted by the CM to determine the

current costs and availability of labor, materials, plant and

equipment costs, current and future bidding climates, and

other related factors.


Used for negotiating change orders or

settling claims or disputes Not subject to competitive bid conditions Often “independent” or “check” estimates Incorporates a combination of analysis,

simulation, and speculation to determine the

probability of cost overruns, and maximum

possible deviation from the target estimate


More European than American A/E or CM does complete take-off of all

elements or units of the project Establishes the list of bid items Classic “unit price” contract As units increase or decrease, so does the

contract cost Requires a “final adjustment change order”


Applications to Cost-Estimating: - Based on history, this allows a very accurate database

to be developed and maintained

- Can be modified based upon indexes or location factors

- An excellent estimating tool


Objectives of the Cost Management Plan - Capture and monitor cost from the onset

- Variances happen!

- Need a pro-active response to these variances • Is it a major variance or a minor one?

- Setting the decision-making process

- Delivery of the project within the approved budget


Developing a Project Contingency - Funding “set aside” to cover the unknown / unexpected

- Contingency lien items should be in every estimate

- Suggested contingencies: • Preliminary estimates: +50%

• Budget estimate: +30%

• Design and bid: +15%

• Construction (new): +10%

• Construction (renovations): +15%


Project Contingency


The Internet and Cost Monitoring - Becoming more predominant

- Current project cost data can be posted

- Costs can be continually monitored, decreasing the

likelihood of surprises

- Multiple users: reports utilized as needed

- Free flow of information


Summary - Recommended Cost Monitoring Techniques

- Developed early in the project

- Covers: • What is to be monitored

• How to monitor

• Plan of action

- Developed prior to incurring cost variances


Estimating Cost and Budget Impacts

During Design - Proactive and not reactive

- Uniform framework throughout the design phases

- Design phases include: • Schematic design

• Design development

• Construction documents

• Bid set and addenda


Estimating Cost and Budget Impacts, cont. - Ideally, the CM should participate in the design process

and provide timely cost advice

- The cost estimate should be on a unit price basis

- Dig into the “boiler plate”

- Determine cost impacts

- Escalation


Recommended Estimates - Program estimates (performed @ planning completion)

• Can the plan be delivered within the approved budget?

- Completion of schematic design • Parametric (may obtain approximate quantities)

- Completion of design development

- In-progress final design / construction documents • Quantitative

• Varies between 30-90%

- Completion of bidding documents • An estimate may be required in order to bid


Evaluating the level of design detail - Guard against cost growth

- Report the level of under-runs and over-runs

- Dependent on the situation • Bring the project back under budget

• Modify the project budget (if so, by how much?)

- Cost growth without owner or project team

knowledge / approval = NOT an option


Value / Analysis Program - Value engineering / value analysis

• Multi-disciplined, systematic, and proactive function to optimize value

• Least life-cycle cost, or provide the greatest value, while still meeting all

functional, safety, quality, operability, maintainability, and durability established

for the project

• Good for “designing to cost”

• About to go to construction

• During construction

- CM should take an active role


Trade-off Factors in Value Analysis - Fully documented with recommendations

- Factors to consider • Construction cost versus life-cycle cost

• Capital cost savings versus operations and maintenance (O&M) cost

• Current space savings versus future space needs

- Avoid the trap: • Up-front cost savings versus life-cycle cost


Summary - Cost management must be started early in the project

planning and design

- Costs must be managed throughout the entire life of the project

- Largest changes are likely to be made during pre-construction

- Change must be monitored and reported


Bid evaluation, review, and contract award - Follow established Owner procedures

- Evaluate and analyze the bid: • Completeness

• Responsiveness

• Technical / references

• Math errors

• Alternates

- Compare to budget

- Recommend action


If over budget, possible options include: - Reject all bids; redesign and re-bid

- Negotiate with the apparent low-bidder

- Use bid alternates

- Increase the project budget to allow award


Problems with unbalanced bids: - Mathematically unbalanced buds are possible on

unit price contracts where: • The contractor needs monies early in the project in order to help finance the

job, or

• The contractor has reason to believe that the estimated quantities in the

bidding documents are in error, and a potential significant profits possible due

to quantity overruns / under-runs


Problems with unbalanced bids, cont: - The Owner may be faced with over-paying for work if the bid is

front-end loaded, resulting in problems if the contractor defaults

- The Owner may over-pay for change-order work

- Suggested remedy: include language in the instructions to

bidders allowing the Owner to declare the bid non-responsive if

the bid appears unbalanced


Summary - The CM traditionally assumes the primary responsibility for

cost control

- Bid review and analysis is a key function of the CM

- Define and report ALL irregularities, both minor and major,

to the Owner for decision


Surprise: it starts during the design phase Contract documents must specify: - Schedule of values

- Earned value information

- Payment application procedures: form and frequency

- Use of resource-loaded CPM schedule and updates

- Requirements for certified payrolls

- Submittal of unit costs for equipment, general conditions,

or daily delay


Contingency Management - Theoretical during planning and design

- Accounts for inevitable change

- What is the average contingency? From the mid 70s-80s: • Building Research Board 5.7-11.5%

• Veterans Administration3.9-8.8%

• US Census Bureau 2.2-10.0%

• Average: 5.0-10.0%

- Current recommendation: 10-15%


Schedule of Values - Required when the contract is bid and awarded on a

lump sum basis

- Defined as: “A statement furnished by the contractor to the

owner reflecting the portions of the contract sum allotted for

the various parts of the work….used as a basis for reviewing

the contractor’s application for progress payments.”


Schedule of Values, cont. - Must be reviewed and agreed upon by the contractor, CM,

and Owner

- Required X days after issuance the notice to proceed (NTP)

- Must be detailed enough to evaluate contractor’s pay requests

- Must not be front-end loaded!

- Must be balanced

- Promotes prompt payments to the contractor to avoid

interest or penalties


Cost Loaded CPM Schedule: Key Provisions - Avoid front-end loading

- Assign maximum value to any one activity

- Discrete “schedule of values” is useful in change order

and claims negotiations

- More cumbersome to manage than a traditional

schedule of values

- Benefit: ties progress payments to schedule updates


Controlling the Change Order System - Change in inevitable – it will happen

- Controlling change orders during construction is not

as easy as during design

- During construction, change orders often arise from situations

beyond the control of the CM (3rd party delays, differing site

conditions (DSC), etc.


Controlling the Change Order System, cont. - The role of the CM is to mitigate damages by administering

the change order process promptly, and in accordance with the

terms and conditions of the contract documents

- Opportunity for real leadership from the CM!

- Management techniques: • Written notice requirements

• Written change order requirements

• Project warranties

• Delegation of authority

• Change control board

• Change order policy

• Budget contingency


Factors covering cost changes: - Once agreed that a change order is required,

the following are necessary:

• Have a thorough understanding of the scope of the changed work

• Important: obtain supporting documentation as proof of additional costs

• Determine fair and reasonable adjustment to both cost and time

- The CM should prepare an independent estimate listing the

anticipated labor, materials, equipment, subcontracted work,

contractor’s overhead and profit, and any justified impact costs

- The independent estimate allows for a better review of the

contractor’s proposal


Factors covering cost changes, cont: There are two ways to price change orders:

- Forward pricing • Done prior to performance of changed work, and with the agreement of all

parties

- Actual Cost pricing • Also called “time and materials” or “force account”


Factors covering cost changes, cont: - In Forward pricing change orders, the CM should recognize

some special factors, such as: • Statutes and condition of the work

• Size and complexity of the change

• Climatic conditions

• Learning curves

• Additional supervision


Factors covering cost changes, cont: - Other items to consider:

• Value of salvaged material

• Odd lot sizes

• Special delivery costs

• Higher cost for proprietary items

• Cost escalation from the bid opening

• Storage costs

• Bond and insurance premiums

• Changes in the sequence of the work

• Premium time

• Congestion in work areas

• Mobilization and demobilization

• Loss of efficiency or productivity

• Extended general conditions, field overhead, home office overhead


Productivity and efficiency, using

man-hour analysis: - Useful for productivity studies, impact analyses, and

efficiency losses

- Assumes use of resource-loaded CPM schedule by the

contractor

- Use the accepted “as-planned” schedule to determine what

productivity level has to be achieved in order to meet the plan

- Monitor field activities to calculate actual productivity



man-hour analysis, continued: - If the contractor is at or above the planned productivity = OK

- If not, the contractor is likely behind schedule, and corrective

action may be required

- This is also useful for change order and claim analysis

concerning lost productivity and lost efficiency



man-hour analysis, continued: - Provides actual data from the project in lieu of generic

“national studies” often provided by contractors

- “Measured mile” technique: compares a non-impacted portion

of the project with the impacted portion; also allows an

“earned value analysis” to determine the productivity impacts

of change orders


Cost Evaluation System for Potential Claims - CM typically charged with leading the settlement actions on

behalf of the owner

- Same techniques as for change orders

- Advantage: typically work is already complete

- Burden of proof is on contractors to substantiate entitlement

and damages

- Include audit provisions in the contract


Summary - Must establish and manage a realistic contingency

- Must determine a fair schedule of values

- Process payment applications, change orders, and

claims promptly

- The CMs primary role during this phase is an aggressive and

timely resolution of change orders issues

- Independent estimate of change order costs

- Two methods: forward pricing and actual cost pricing

- Be aware of factors impacting change order costs


Project Close Out Release of Liens Release of Retainage Final Cost Accounting Final Closeout Report


Conclusion - The CM plays a key role in Cost Management during all

phases of a construction project: planning, design, bid/award,

construction, and closeout

- The CM is the cost professional on the project

- Cost management must be established and implemented at

the outset and continued throughout the project

- CMAA procedures intended to help the CM with this role

QUESTIONS?

Standards of Practice Course COST MANAGEMENT. Welcome © Construction Management Association of America. Do Not Duplicate or Reproduce. Agenda - Introduction.

Documents

cost estimates

cost information

megawatt cost

cost control responsibilities

purpose of cost control

cost growth construction

project participants

accepted project budget