A NEW APPROACH TO COST MANAGEMENT FOR CONSTRUCTION WORKS. By Kenneth Poon

Transcription

1 A NEW APPROACH TO COST MANAGEMENT FOR CONSTRUCTION WORKS By Kenneth Poon

2 The Practice of quantity surveying is believed to have originated in 1666 at the time of the Great Fire of London

3 Because of the magnitude of the new construction works required, tradesmen began to be paid per task and not per day thus the origins of the Bills of Quantities.

4 This was the first cost management tool - by paying per task and not per day, the client could be more sure of the total cost at the end of the project.

5 The Bills of Quantities became the common language between estimators in the construction industry. e.g. when we say 1m3 of reinforced concrete Grade (1:1:2), we know the gross volumn has been measured without deducting for the space occupied by the rebars nor any allowance made for wastage.

6 The quantity surveying profession grew on the back of the Bills of Quantities and we extended our services to cost planning, tender preparation, contract administration and specification writing etc.

7 Up to date, the role of the Quantity Surveyor is still generally as follows : PRE-CONTRACT Estimates B.Q. Tender Documents Tender Analysis POST-CONTRACT Interim Payment Contract Administration Claims Assessment Final Accounts Valuations

8 We are responsible for costing matters and can be very good at explaining cost differences : upgraded designs; market fluctuations; extra work; site difficulties; under-allowances; delay in program; contractor s claims etc.

9 We give clients warnings of cost over-runs but normally they are too late for effective rectification actions.

10 In today s sophisticated construction industry, the Bills of Quantities has become a stone aged cost management tool.

11 Successful projects but with disastrous cost management : Sydney Opera House Commenced in 1958, completed in Total 15 years Cost exceeded initial budget 10 times

12 Scottish Parliament, Holyrood Commenced in 1999, completed in Total 5 years Cost exceeded initial budget 10 times

13 The Sagrada Familia Commenced in 1882, still not finished. Cost unknown!

14 Construction costs are getting so high that budget over-runs, no matter what valid reason there may be, are becoming unacceptable both economically and

15 politically

16 And some clients have restricted budgets that cannot be increased no matter what the reason! E.G. Self-funded organisations Private Equity Funds Private Owners Restricted Bank Loans We owe them a responsibility to avoid cost overruns.

17 We need new and better cost management tools and techniques to do our job well.

18 Recent trends already taken in this direction : Cost plans broken down in specific manner to facilitate direct comparisons e.g. cost of kitchens, master bathrooms and secondary bath rooms for residential apartments.

19 A.I.P. (Architect s Instructions Pre-approvals) are required on more and more projects. System being misused by Clients and breaking down the initial purpose for its establishment.

20 Value engineering workshops. Partnering arrangements supposed to bring-in the experience and capability of the Contractor to make the project progress more smoothly.

21 What else needs to be done?

22 1. Re-position ourselves

23 The cost of a project would have largely been set in the early concept stage. Cost Potential for change Resistance to change Cost of change The value zone Concept Design Construction/ installation Use Time

24 Once the concept design is fixed, we would have missed the golden opportunity to influence the cost of the project. All future adjustments in the detailing would have relatively minor cost significance.

25 To achieve the greatest effect, we should therefore act before the Architect comes up with his concept

26 By : Assist the Client in writing the design brief (e.g. in Design and Build Contracts). Analyse designs in design competitions. Jin Mao Building, Shanghai CCTV, Beijing ICBC Data Centre, Beijing

27 Use market norms to guide the architect when finalising his concept design. e.g. net/gross floor area ratio elevation/floor area ratio mass/floor area ratio

28 Such re-positioning puts us in a pro-active role as compared with the reactive role we normal see ourselves in.

29 2. Maintain a holistic view of the cost

30 Why do we have so many exclusions to our estimates? 1. Professional fees 2. Statutory charges and levies 3. Removal of underground obstructions 4. Utility connections 5. Fluctuations in construction cost from date of estimate to date of tender

31 All cost relevant items should be covered to arrive at the TOTAL COST for the project. Some items are, traditionally, not estimated because they are outside the normal scope of quantity surveyors but, if not by the quantity surveyor, then by who?

32 If we lack certain skills to estimate the cost effect of certain items acquire it!

33 Example : Prediction of future cost escalations We have been experimenting with alternative methods to predict future trends of tender prices. Factors taken into consideration include : - Workload Economic Factors Economic Cycles

34 Results for the past 5 years (+)20% (+)15% (+)10% (+)5% (+)0% (-)5% (-)10% DLS Prediction at beginning of year Actual fluctuation in that year

35 The Cost is not complete until we consider also future operational and replacement costs.

36 These costs are more significant than what many people think. Replacements Repairs 11% 27% 7% Others 9% 16% Energy Regular Maintenance 30% Initial Construction Costs Typical whole life costs for a commercial building

37 Establish the Total cost concept introduce Life Cycle Costing in the cost planning stage

38 3. Assess the risk at all times

39 Wider use of statistical prediction techniques and risk analysis methodology should be applied in our work

40 In the Pre-Contract Stage The setting of the allowance for contingencies is normally done by rule of thumb. This can be done more scientifically taking into consideration the status of the design drawings, the market conditions, the contract arrangement etc.

41 In the Post-Contract Stage Design changes is the most significant item responsible for cost over-runs after the construction contract is awarded Quantity Surveyors normally assess design changes and variations as they are issued and draws down additions against the contingency allowance included in the construction contract.

42 No alarms are raised until the contingency allowance dries up. Variations will not stop after the allowance dries up.

43 The quantity surveyor can apply risk assessment techniques to re-assess the appropriate contingency allowance at pre-determined milestone dates.

44 Such technique will greatly bring forward the warning time for potential budget over-runs. Gives more time to take measures to rectify the situation.

45 4. Strategic planning of the procurement process

46 Apart from just managing the cost, we should try to create platforms to achieve better value for the project

47 Procurement (tendering) should be tailored to suit the prevailing conditions of the market and the project to obtain the best value for the client. The Client s condition, the prevailing cost trend in the market, other risk factors etc. should all be taken into consideration and the procurement strategy tailored for the project.

48 Example 1 : In China, what form of contract should we use? HKIA modified FIDIC MoC Standard Form NEC

49 Should we select the one we know best OR Select the one the tenderers know best?

50 Example 2 : Which type of contract arrangement should be used? Lump Sum Fixed Price Prime Cost plus fee Design and Build

51 In the recession years of , we dropped the conventional Lump Sum Fixed Price arrangement for a major residential project in Hong Kong and adopted a Prime Cost plus fee arrangement

52 Reason : We believed that costs from subcontractors will fall over the construction period, leading to savings. Total construction cost was 6% - 10% lower than the initial budgets for all 3 phases of the development.

53 No more take for granted conventional system attitude

54 5. Change in mentality - the quantity surveyor should own the Budget

55 Unless told that the Budget has been increased, we must treat it as if it CANNOT be increased. Work towards making sure it is not exceeded.

56 We need : Establish effective communication with the design team. Active participation in discussing items affecting cost. Lead meetings to focus attention on cost.

57 You get attention only if you make enough noise

58 A new level for Quantity Surveyors

59 Change our name? No longer bean counters! Measurement of quantities is just one of our basic skills, like : draughtsman : architects book-keepers : accountants measurers : quantity surveyors

60 We need to establish a wider vision of cost. Establish holistic cost management from the inception of the development to its operation stage.

61 Effective cost management makes us good project managers for institutional and investment type projects. Comprehensive knowledge of cost and contract enables us to work closer with financial institutions on financial arrangements for the real estate market.

62 Are you ready for change?

63 Thank you all for listening