Assignmen t

Module 9 - Project Planning and Management Processes: Construction Cost Management

BCN 3027 PRINCIPLES OF CONSTRUCTION MANAGEMENT

Lecture Outline

• Introduction to Construction Cost Management

• Cost Estimation

• Cost Control

Project Success Factors

Construction Project Success depends on carefully balancing the following three objectives:

Quality

CostTime

Meeting contract requirements and satisfying building codes • Quality Assurance • Quality Control

Minimizing construction cost Cost Estimation Cost Control

Minimizing construction time Planning and scheduling Schedule updates

Construction Cost Management

What is the cost of construction? • Construction cost should cover all the items needed to complete building the facility, e.g.

material, labor, equipment, safety equipment, inspection …etc.

• Depends on who is asking the question: owner, contractor, construction manager, subcontractor …etc.

• The actual cost of construction is only known at the end of the project construction phase and sometimes even later.

• Management of construction costs has two main phases: ➢Cost Estimation (preconstruction)

➢Cost Control (during construction)

Construction Cost Management

Construction Cost

Direct Cost Indirect Cost

All costs that can be entirely and directly attributed to the construction work. Typically to a single item, e.g. cost of labor time or material needed to paint a wall.

Other costs necessary to complete the work but cannot be entirely and/or directly attributed to a single work item, e.g. the salary of the project superintendent or the rent of temporary office.

Material Labor

Equipment Subcontractors

Supervision and Administration

Temporary Facilities

Building Services and Cleanup

Safety and First Aid

Inspection and Quality Control

Bonds and InsuranceEstimation vs. Control?

Construction Cost Management

Markup Contingency

(to cover risks)

Contractor’s Fee

(profit)

Contractor’s Price (Bid Proposal)

Construction Cost

Direct Cost Indirect Cost

From a contractor’s perspective:

Construction Cost Management

From an owner’s perspective (not an inclusive list):

Building Cost

Design Cost Construction Cost

To design the building and prepare the contract documents.

Contractor’s Price (accepted Bid Proposal) to construct the facility.

Maintenance Cost Other Costs

To operate and maintain the building in good upkeep.

For example: land, financing, feasibility studies, insurance …etc.

Construction Cost Estimation

• Typical Project Development Phases: o Idea / Need

o Feasibility Study / Financing

o Design

o Procurement (Solicitation of contracting services)

o Construction

• At which of these phases do we need to estimate construction costs?

o In all the phases, what changes from one phase to the other is the method used to estimate the construction costs.

o The scope of work is better defined as the project progresses and there is more information available in the later phases compared to earlier ones.

Construction Cost Estimation

• The definition of Units changes and becomes better identified as the project proceeds:

o Idea/Need Phase. Units might be the type of building and its capacity (e.g. 200-bed hospital or 300- vehicle parking garage) or area (e.g. 3000 S.F. house).

o Feasibility Study/Financing Phase. Units are better defined and might now include land, height, rough definition of quality …etc.

o Design Phase. Alternatives for design are introduced and units might include major building components such as foundations, floors, walls …etc.

o Procurement Phase. Units are much more detailed based on bidding documents.

o Construction Phase. Actual number of units and actual costs are gathered over time.

Construction Cost = Units × Unit Cost

Construction Cost Estimation

Construction Cost = Units × Unit Cost

Construction Cost Estimation

• Conceptual / Square-foot estimates o Bid based on an average cost per square foot or per unit (e.g. hospital bed)

o May be adjusted for: building height, building perimeter … etc.

• Parametric estimates o Bid based upon the statistical relationship between building components

o May include: square footage, number of floors, length of perimeter, percentage of the building that is common space … etc.

• Assembly estimates

o Bid by groups of components (assemblies)

o For example, a wall partition would include: studs, insulation, 2 faces of drywall

• Detailed estimates o Determines the quantity and cost of everything required for the project, including: materials, labor,

equipment, insurance, bonds, overhead … etc.

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2

3

4

Construction Cost Estimation

Other conceptual methods include estimating construction cost per linear foot, cubic feet, unit …etc.

Square-foot Estimates

Construction Cost Estimation

Assembly Estimates

Construction Cost Estimation

Cost Adjustment (based on location and historical indices)

Construction Cost Estimation

Detailed Estimates Requires two basic skills: plan reading and mathematical background

Construction Cost

Direct Cost Indirect Cost

Material Labor

Equipment Subcontractors

Supervision and Administration

Temporary Facilities

Building Services and Cleanup

Safety and First Aid

Inspection and Quality Control

Bonds and Insurance

To Bid or Not to Bid?!

Decision based upon:

• Type of construction

• Location

• Size of project

• Bonding capacity

• Architect/engineer

• Work in progress

• Availability of equipment

• Availability of qualified personnel

Planning the Estimate

• Time available for bid preparation is limited (2-4 weeks)

• When will the work be done

• Who is responsible

• Bar chart schedule may be used

The Estimating Process

• All cost estimates, regardless of the method used, depends on historical data.

• It is imperative to have reliable and accurate databases

• Contractors have their own databases that represent how they do business

• Historical data should always be adjusted to the current job conditions

Site Investigation (Visit)

• Access

• Utilities

• Drainage

• Transportation facilities

• Required protection or underpinning

• Local material and deliver pricing

• Subcontractor availability

• Road conditions to the project

• Housing

• Banking

• Storage and equipment location

• Soil conditions

• Local ordnances

• Permits

• Licenses

• Local labor and union rules

Specialty Contractors

• Advantages:

o Less direct-hire craft personnel

oReduced risk

oNeed for licensed contractors

• Disadvantage:

• Less control

Specialty Contractors

Quote should include:

oMaterial cost

o Freight

o Taxes

oDeliver time

o Terms of payment

Cost Control

• Once the construction project starts, the contractor needs to monitor the expenses in order to make sure the job is performed at or under budget.

• During cost estimation, approximate data was gathered from different sources: o Contractor’s database of previous projects

o Subcontractors and vendors

o Published databases …etc.

• During the construction phase, actual costs are paid to different parties: o Contractor’s own personnel (on the job site and in home office)

o Subcontractors and vendors

o Permits, insurance, bonds …etc.

• Challenge is to keep track of where, when, and for what the money is spent

Cost Accounts

• Each contractor have their own cost accounting system

• The breakdown of the system depends on many factors: o The company size

o Type of work they do

o Reporting needs …etc.

• The cost accounting system should include a well-designed coding method

• The coding should be comprehensive and flexible in order to be used effectively in all projects

• The project coding is not only used for cost accounting but for other purposes such as scheduling

• The most accurate actual costs are accumulated by the accountant

Cost Control

• Cost reports are generated in order to monitor how the project is performing

• The frequency and details of the cost report depend on who will read it: o Project Manager might read detailed reports every week or two

o Company executives get less detailed reports every one or two months

o The company’s board, in case of big corporations, get abstract and aggregate project data once or twice a year

• Project cost reports generally have the following data for individual accounts and for the project in general: o How much work was scheduled so far

o How much work was completed so far

o How much was spent on the work completed

• Analyzing these numbers give a snapshot of how the project is performing in both time and cost and help identify any actions that should be taken

Project Control

Under Budget

Ahead of Schedule

Over Budget

Ahead of Schedule

Under Budget

Behind Schedule

Over Budget

Behind Schedule

Over BudgetUnder Budget

Ahead of Schedule

Behind Schedule

Keep the same performance

Speed up the work in a way that does not exceed the budgeted cost

Find ways to reduce the cost of future expenses without affecting quality or time of work

Major actions needed