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Avoiding Cost Management confusion to deliver a quality project
Effective cost management depends on everyone using consistent language at the right time.
As a property developer, you may find yourself bombarded with an array of technical jargon when talking to advisors about your projects. When it comes to managing a construction project, one of the most important tools we must have as professional consultants, is the ability to communicate clearly.
Whether it’s project management, cost management or any other professional service, if people aren’t using the right terms at the correct points in the project timeline, confusion will reign supreme!
A great example of this is the variety of terms used in the end-to-end cost management process of a development. It’s important to fully understand the various cost stages of a development in order to be confident that you are getting the information you expect at any given time.
During a construction project you are likely to hear these terms:
- Initial appraisal
- Order of cost estimate
- Cost plan
- Pre-tender estimate
- Tender pricing documents
This is a quick guide to the terms and what they mean at a high level.
An initial appraisal is undertaken without the benefit of a project design. It gives a high level indication of the costs for design and construction and forms part of the brief development stage. Because the appraisal extends beyond solely the construction costs, the client’s financial team will usually need to be involved, as it will include elements that won’t feature in later cost plans.
Initial Appraisals require input from the client or developer together with an experienced cost manager who can draw on their knowledge of similar projects. It will allow the client to decide what scope of the project costs will be monitored by the appointed cost consultant, and what will be managed by their own team.
As an example initial cost appraisals might include:
- Assumptions about the nature of the project and identify variables.
- Inclusions and exclusions.
- Location and site constraints – for example Central London will attract a premium.
- Ground conditions and proximity of neighbouring buildings.
- Adjustments for market conditions.
- The proposed function of the building and facilities will influence design loadings.
- An assumed procurement route.
- Land costs and purchase prices.
- Book value.
- Legal and agent fees
- Site investigations and surveys.
- Consultant team fees including expenses and unusual items such as models.
- Fixtures, fittings and equipment.
- Planning fees.
- Building control fees.
- Void costs.
- Funding costs.
- Inflation escalation.
- Operational and whole-life cycle costs.
- This list is far from exhaustive but gives you a feel for the level of information you should expect.
Order of Cost Estimate
The order of cost estimate serves as a tool to assess the affordability of the proposed development on behalf of the client.
An order of cost estimate is set out according to the New Rules of Measurement (NRM) applicable to the type of project; either NRM1 – capital building works; or NRM3 – building maintenance works.
The NRM1 definition of an order of cost estimate is. “the determination of possible cost of a building(s) early in design stage in relation to the employer’s fundamental requirements. This takes place prior to preparation of a full set of working drawings or bills of quantities and forms the initial build-up to the cost planning process.”
In order to prepare an order of cost estimate, information will be required from different project parties as follows:
- Site information including location and availability
- Sie and use of the building
- Refurbishment requirements
- Initial project/design brief
- Details of required enabling works
- Outline programme
- Site condition information
- Budget and associated constraints
- Procurement options
- Likely lifespan of the building
- Schedule of areas
- Legal constraints and considerations
- Initial risk register
If other consultants have been appointed they may also be required to provide relevant information.
A typical order of cost estimate will comprise;
- Facilitating works
- Building works
- Contractor’s preliminaries
- Contractor’s overheads and profit
- Construction cost
- Other related costs
- Risk allowances
Cost plans are developed by an appointed cost consultant – usually a qualified quantity surveyor (QS) – and comprise three stages. The cost plan considers purely the construction of the building, excluding other cost factors that were included in the initial appraisal.
Formal Cost Plan 1 is produced during Concept Design (RIBA Stage 2) and establishes the preliminary approximate estimate.
Formal Cost Plan 2 is produced during Developed Design (RIBA Stage 3) and typically provides a cost check prior to the scheme being submitted to town planning.
Formal Cost Plan 3 is the final stage which sees the cost plan cross-checked to the final design details at Technical Design (RIBA Stage 4) to ensure that project can be delivered within the cost plan. Formal Cost Plan 3 is normally applicable on traditional procurement routes where the design detail is developed prior to tender.
During this process, your QS will be able to provide advice and guidance of ways to manage costs, avoid overspending and achieve maximum value for money from the project. They will always be looking for opportunities to simplify details without compromising the design, in order to reduce the tender sum.
The pre-tender estimate (PTE) is the final estimate for the cost of the project as described in the tender documents, which are prepared in order to invite tenders from suppliers. The PTE itself will not be included in the tender documents.
In addition to ensuring sufficient funding is secured for the project, the PTE enables the client to assess and compare tenders when they are returned. In the event the PTE exceeds the client’s budget an explanation should be provided to allow the client to consider their position and make appropriate instructions.
According to the NRM, the PTE should be prepared following a standard approach defined by the NRM.
Tender Pricing Documents
The purpose of the tender pricing documents is to allow a like for like comparison between tenders and the PTE and includes*;
- Quantified schedules of work;
- Unquantified schedules of work;
- Quantified Bill of Quantities (BoQ);
- Unquantified BoQ; and
- Tender stage cost plan.
*These will be explained in another article.
Using these documents, Cost consultants can assess where the value lies in competing tenders and, in turn, assess the value for money offered to the client. Whilst it follows the format of the cost plan, some sections may be broken down into greater detail.
Where there are significant pricing differences between tenderers, it serves to ensure the design has been correctly interpreted and helps to identify opportunities to achieve savings through further negotiations during the competition process.
For design and build contracts there would usually be a contract sum analysis instead of a tender pricing document, and this should be prepared by the contractor, although in practice this is usually created by the cost consultant so tenders can be assessed on an “apples with apples” basis.
As you can see, the varying terms and different information used within each cost stage of a development, leave the door wide open to considerable confusion if used interchangeably. This can result in a lack of clarity around what is expected and what will actually be delivered at any given point.
The good news is, that by engaging knowledgeable and experienced cost consultants to support you and your development project, you will have someone on hand to ensure this confusion doesn’t arise in the first place.