BSc Hons. Quantity Surveying And Construction Management

PRE-CONTRACT COST PLANNING AND PRE-CONTRACT CONTROLLING

By

BALARABE SAGIR MOHAMMED(12/S/SL/BSc/21)

On

COST STUDIES(26-6017-006)

SUBMITTED TO MODULE LEADERMr. Nihal Lokuliyana

21st July, 2013.

ContentsAbbreviations3Introduction4Pre Contract Cost Planning and Cost Controlling5Principles of Pre-contract Cost Planning5Purpose of Pre-contact Cost Planning5Cost Control6Aims of Cost Control6Principles of cost control6Cost Planning and Cost Controlling process with respect to RIBA (2007) plan of work stages8Budget Distribution Techniques11Value Management (VM)14Elements of Value Management15Benefits of a Value Management Study are:15Advantage of Value Management16Disadvantages of Value Management16Value Management Strategy16Value Management Techniques18Life Cycle Costing and Value Management20Advantages of Life Cycle Costing22Disadvantages of Life Cycle Costing23Conclusion24

AbbreviationsRICS Royal Institute of Charted SurveyorsRIBA Royal Institute of British ArchitectsVM Value ManagementLCC Life Cycle CostingFAST Functional Analysis and System TechniqueQS Quantity Surveyor

IntroductionStudents are expected to write a report in order to: Explain the term Pre-contract Cost Planning and Cost Controlling Explain Pre-contract Cost Planning and Cost Controlling process with respect to RIBA work plan Explain the term Value Management Explain Value Management strategy Explain Techniques used in Value Management List advantages and disadvantages of Value ManagementThe report should reflect on the following Key points Purpose of Pre-contract Cost Planning Pre-contract Cost Planning activities/practices involved with relevant stages of RIBA 2007 Principles of Cost Planning and Cost Controlling Cost Limit, Cost Targets and Cost Checking Budget setting techniques and distribution techniques Concept of life cycle costing and advantages and disadvantages Quantity Surveyors role as a cost manager, in pre contract cost planning and cost controlling

Pre Contract Cost Planning and Cost Controlling

Pre-contract Cost PlanningRoyal Institute of Charted Surveyors (1982) defines Pre-contract Cost planning as the technique by which the budget is allocated to the various elements of an intended building project to provide the design team with a balanced cost framework within which to produce a successful design.(RICS 1982)Cost planning, as part of a cost management framework is a total system that requires commitment from inception to the completion of a project.Principles of Pre-contract Cost Planning

There is a standard framework reference available for each identified part of the building The cost planning can be adjusted to design requirement. It allows the costs checked as the design develops with the amount allocated. It allows the designer to take necessary measures or actions before any decision on the final design is made. It takes into account contingencies cost and design reserve. It enables costs to be presented in a logical and orderly way for clients from time to time during the design process. Purpose of Pre-contact Cost Planning To see if the project is affordable / test business case Set a budget or limit for design direction Cost planning informs the owner exactly when finance instalments will be needed, so he would keep with billing Ensure that clients are provided with value for money Serves as a guide to designers to arrive at practical and balanced designs within budget. Integrate costs with time and quality. To keep expenditure within the amount, or limit, allowed by the client.

Pre-contract Cost ControlPre-contract cost control is the total process which ensures that the contract sum is within the clients approved budget or cost limit.(RICS 1982)Cost control ensures that resources are used in the best possible way. for any construction projects cost control commences inception and continues until the issues of the final certificate.Aims of Cost Control To limit the clients expenditure to within the amount agreed. Simply the tender sum and the final account should approximately equate with the budgeted estimate. To achieve a balanced design expenditure between the various elements of the building. To provide value for money, this will probably necessitate the consideration of a total cost approach.Principles of cost controlThe process of cost control, using control systems, involve the establishing the following Frame of reference (cost limit) Method checking (cost target) Means of remedial action (cost check)Frame of Reference Having a frame of reference in a cost control system consists of two stages, while the first stage is when the client approved a realistic first estimate (cost limit), the second stage involves the break down of how the estimate is to be spent on the various parts, or elements, of a building. This entails dividing the total cost limit in to a number of element cost limits called cost targets with one cost target for each element of the building.Method CheckingCost targets are checked as the design advances. The sum of individual cost targets should be controlled to within cost limit. The cost planner, in conjunction with all members of the design team, must detect and measure variances from the cost targets previously established. Accordingly, the cost limit (or estimate) is checked (or spent) as it was originally established. Remedial ActionThis involvolve taking remedial action to counter any cost overruns which has become known by the project team. This should be done ideally at the earliest stage to ensure that the total project expenditure is contained within the cost limit.ResultAction

1. Cost check = Cost target Cost target is confirmed

2. Cost check < Cost target1. Surplus fund subsidise element in situation2. Elements upgrade3. Surplus kept as reserve

3. Cost check > Cost target1. Use surplus fund in element 22. Redesign lower the standard3. Request for more fund from the client

Possible remedial action

Cost Planning and Cost Controlling process with respect to RIBA (2007) plan of work stages

The RIBA Outline Plan of Work organises the process of managing, and designing building projects and administering building contracts into a number of key Work Stages. The sequence or content of Work Stages may vary or they may overlap to suit the procurement method. The selection of procurement route has a significant influence on how the different work stages proceed. It isworth notingthat the exact way in which different stages are conducted within the overall project programme needs careful consideration at the outset. The2007 RIBA Plan of Workbelow describes the key work stages and activities in construction projects from appraising the client's requirements through to post construction. However, as required by the task, only the pre-contract cost planning and cost control stages will be explained, ie stage A to H

RIBA 2007 plan of work

Pre Stage (A) Appraisal (Budget Setting)This is a preliminary stage where functional requirements are given emphasis. Questions like, is building the solution to the clients problem? are raised. Though there are no detailed cost studies, by given due consideration to the client requirements. This is then traced through the remaining design stages using a different set of techniques focused on distributing this budget. Project budget is established at this stage using any of the following Floor area method Functional unit method Elemental cost estimate based on costs/squaremeter (if required information is available)

Budget Setting TechniquesDifferent techniques are employed in establishing budget, in traditional method, the following are considered at this stage.i. Developers BudgetWhich is also called the residual analysis method is an estimating method where the allowable building cost is determined by deducting cost of site (with its related charges) from the anticipated income derived from the proposed. Express thus:Allowable building cost B = V- L+F+P+M, whereV= valueV =Value, income or revenue derived from the proposed development;L =Land costs and associated expenses;B = Building costs, allowances and fees;F =Finance costs on land and buildings;P = Developers profit (management costs or risk).M = Marketing costsIt can be used at any stage of the dev. As it does not require any form of drawings. ii. Functional unitThe unit method estimating consists of choosing a suitable standard unit and multiplying by floor area = Standard units of accommodation X Cost/Unitiii. for example:iv. Schools: costs per pupil placev. Hospitals: costs per bed placevi. Roads per kilometrevii. Car parks costs percar spaceThe technique is based on the fact that there is usually some close relationship between the cost of a constructionproject and the number of functional units it accommodateiii. SuperficialThis estimate is the approximate cost obtained by using an estimated price for each unit of gross floor area. Most popular and most commonly used at project early stage.

iv. Storey enclosureMeasuring the area of area of external walls, floors and roof areas and multiplying by an appropriate weighting factor. Because of its lengthy calculation its rarely adopted.v. Cube MethodThis is where estimate is drived by volume of a building, where length and breadth of walls are measure are measured externally and hight is taken from top of foundation to a point midway in the case of unoccupied pitch roof or to a point of the pith where its occupied.

Budget Distribution TechniquesElemental methodThis method can be adopted with adjustments at all stages. It helps design team to determine the financial implication at a very early stage. it allows for comparison and adjustment between projects and between elements.Approximate Quantities MethodThis method can only be adopted at the production information stage in the case of RIBA 2007 plan. This is because it can only be used when there is a detailed design and specification for their accuracy.

Stage (B) Design Brief: This is the first stage where indicative cost of the project to the client is established. This is achieved by giving consideration to clients outline needs in the design brief. The indicative cost serves as the target cost which is used for feasibility and planning purposes. The aim is to establish an initial budget for the client, or if already prepared, to confirm or reject the feasibility of the budget. Value for money framework is established. Availability of finance may also be investigated. It provides the opportunity for a life cycle cost (LCC) which will be discussed later

Eg. breaking down cost limit to cost targets

DesignStage (C) Concept: This involves the implementation of the design brief and preparation of additional data. According to the RIBA 2007 plan, Concept Design including outline proposals for structural and building services systems is prepared as well as outline specifications. The cost planner with the other design team evaluates comparative cost of various outline proposals and prepare initial cost plan. The initial cost plan can be established using cube, superficial, storey enclosure or approximate quantities methods of estimate. Initial cost plan is also Cost-checked against the cost target.Stage (D) Design Development: Development of concept design to include structural and building services systems, updated outline specifications and cost plan. Completion of Project Brief. The first detailed elemental cost plan (comparative cost plans) is prepared. The cost plan is based on the first detailed proposals and this confirms the cost limit. Cost checks are done against the initial cost plan for comparison.Stage (E) Technical Design: The design team prepare final proposals for the project to permit the co-ordination of all component parts and elements of the project. Elemental approximate estimate drafted at this stage. It represents a confirmation of the cost limit for the project. Checks of the design against cost plan.Pre-constructionStage (F) Production Information: At his stage, the RIBA 2007 plan is characterised by preparation of production information in sufficient detail to enable a tender or tenders to be obtained. Final cost checks of pre-tender estimate to ensure that cost of each element does not exceed its cost targets and cost limit. Elemental approximate quantities method is used at this stage and the cost consultant to price tender documentsStage (G) Tender Documentation: This stage in the RIBA work plan is for preparation and/or collation of tender documentation in sufficient detail such as the Bill of Quantities. The cost consultant to price tender documentsStage (H) Tender Action: Post tender estimate by using cost analysis technique

Value Management (VM)

The Australian and New Zealand Standard AZ/NZS (1994) defines Value Management as a structured, and analytical process which seeks to achieve value for money by providing all the necessary functions at the lowest total cost consistent with the required levels of quality and performance.Norton (1995:11) describes Value Management as a systematic, multi-disciplinary effort directed towards analysing the functions of projects for the purpose of achieving the best value at the lowest overall life cycle costs.

In a Value Management study, the object is not to reduce cost but to improve value. This means cost is just one element relative to value on a construction project. Two other important aspects are time and function or quality. It is necessary to achieve a proper balance between all of the important aspects, which contribute to a project design.

The value management process as illustrated by ICE 1996)

Elements of Value Management There are three major ways to improve value by applying VM. (Norton1995:14))1. To provide for all the required project functions but at a lower cost2. To provide additional functions without increasing the cost3. To provide additional functions and at the same time to lower the cost

Elements of Value (Kelly 1993,159)

Benefits of a Value Management Study are: A better understanding of needs and the functions necessary to meet those needs A better definition of program or project objectives A better definition of quality and performance standards Clearer briefs Reduced wastage of resources Capital funds savings Improved operational efficiencies Team building and strategies which

Advantage of Value Management VM creates a clearer focus on the project objectives VM works towards arriving at a more effective design Identification of alternative methods of construction Discovery and discussion of project issues, constraints and risks involved Clearer project brief and decision making Identifies and removes unnecessary costs associated with the project VM deals with lifecycle costs also, not only initial project cost and provides an authoritative review of the project in its totality and not just a few elements. All options, alternatives and innovative ideas are considered Over specification is addressed and an improved building programme can be developed leading to time being saved and ultimately savings in cost If properly implemented it can identify possible problems early on in the project

Disadvantages of Value Management

It is time consuming and therefore not suitable for projects with time constraints VM workshop team must requires a high technical expertise with sufficient work experience Extra cost on the client for professional fees Disruption of project teamValue Management StrategyThe structured approach of the typical VM Job Plan is intended to provide a systematic project review that is efficient and consistent. The VM Job Plan consists of six distinct phases of activity that encompasses most of the VM study effort. The VM Job Plan phases are:

Value management strategy phases

Information Phase: This is the stage where required relevant information available about the projects background requirements and costs is drawn. A significant part of this first phase should therefore be spent on coming up with answers to the questions: what does it do? and what else does it do? A FAST diagram is a tool used to analyse, structure and answer these questions above or by the use of construction cost models

The creativity/speculation phase: After the FAST diagram and/or cost models have been completed, the VM Team should begin to generate ideas for each of the poor value basic functions. The objective of brainstorming is to generate as many ideas as possible that could conceivably be developed into alternatives to the original concept. The typical brainstorming session consists of the VM Team spontaneously producing ideas related to the performance of the required function.

Evaluation or Analysis Phase: The ideas generated during the creativity stage are here critically analysed for their feasibility. The objective of the Analysis Phase is to cull or filter the brain stormed ideas down to the most viable ideas. The ideas that pass the Analysis Phase will be carried forward to the development phase.

Evaluation matrices are used to evaluate a range of solutions to a particular problem

Development Phase: The basic objective of the Development Phase is to determine if an idea is both technically and economically feasible. If an idea has been determined to be not feasible during the previous evaluations, it will not be further analysed during this phase.

A properly developed alternative idea will have been evolved to a level of detail sufficient to permit the review board to determine its disposition in an expeditious manner. The Review Board must be able to determine if the alternative will work and if it is more economical than the original design on a life-cycle basis.

Presentation phase: The objective of this final phase is to assist the communication of the results of the VM study to the decision makers and the original design team. The refined ideas supported by drawings, calculations and costs are presented by the team to the body that commissioned the VM workshop.

Implementation Phase: A Value Management will have no value if the proposed and accepted recommendations are not implemented, or if implementation is delayed until few proposals are feasible. The Review Board must quickly decide the disposition of a VE proposal and direct the responsible staff to implement the accepted proposals.

Value Management Techniques

There are a number of techniques and tools employed in value management, here only the more fundamental and operationally important techniques. a. Function Analysis

Function analysis is one of the original techniques used during the early development of the value methodology. A function Analysis is developed to demonstrate the logical relationship between the functions.

The function is first defined in order to seek its alternative solution. A function is expressly defined by two words, active verb and measurable noun terms which together defined an object. The verb answers the question of "What does it do?" The noun answers the question of "What does it do to it?" The verb should be in an active tense such as: divide, interrupt, transmit, collect, prevent, and so forth.

Functions can be subdivided into primary or basic and secondary. Primary functions are those without which the project would fail or the task would not be accomplished, whereas secondary functions are a characteristic of the technical solution selected for the primary function and may be non-essential, although both need identifying to fully understand the problem.

b. Function Analysis System Technique, or FAST DiagramsIn essence, Function Analysis System Technique (FAST) is a method of stimulating organized thinking about any subject by asking thought-provoking analytical questions. These questions all begin with a key word such as how, why, when, where and what. Functions, expressed in the usual verb-noun format, are examined by asking questions about the item and arranging the answers in diagrammatic form so that the relationship of functions becomes apparent. The diagram thus formed is called a FAST diagram. FAST diagrams, then, are graphic representations of functional logic developed by in-depth investigation of the item under study.

Nadine et al. (2007 p4) This diagram represents a FAST Diagram

Life Cycle Costing and Value Management

What is Life Cycle Costing?Flangan and Norman (1983) defined the life cycle cost of an asset as the total cost of that asset over its operating life, including the initial acquisition costs and subsequent running costs, Norman (1990) aptly defined the life cycle cost of an asset as the present value of the total cost of the asset over its operating life including initial capital costs, occupational costs, operating costs and the cost or benefit of the eventual disposal of the asset at the end of its life.Life Cycle Costing phases are: Planning Design Construction Start up Operational/use Renewal Recycle, Reuse or Disposal

Phases of life cycle cost (LCC)

In Value Management the life cycle costing is used as an evaluative tool. It can assess competing design alternatives, consider costs of ownership over the economic life of each alternative etc. all expressed in present value. The concept of economic analysis, which is used in life-cycle costing, requires that comparisons be made between things similar in nature. In value engineering all alternatives can be compared using life-cycle costing because the alternatives for each project component are defined to satisfy the same basic function or set of functions. When the alternatives all satisfy the required function, then the best value alternative can be identified by comparing the first costs and life-cycle costs of each alternative.

Advantages of Life Cycle Costing Useful to control programs. Making effective equipment replacement decisions. Making a selection among the competing contractors. Useful in reducing the total cost. Comparing the cost of competing projects.

Disadvantages of Life Cycle Costing

Time consuming, Expensive and Doubtful data accuracy.

ConclusionCost management to project and for the employer is vital from its earliest stage to the practical completion. Most importantly when establishing budget to project certain aspects and stages need to be completed. Thats where the RIBA introduced the working out line for the architects and quantity surveyors to proceed with the project while having a proper knowledge of the working stages and their requirement. According to the RIBA outline plan, initially by doing an approximate estimate client could have an idea of the cost requirement for the project. By following the pre contact cost planning process, from the inception to tender stage, making changes to the elements of the project can arrive with a much more reliable cost estimate to bid. Value management (VM) as service which maximizes the functional development from concept to completion, through the comparison and audit of all decisions against a value system determined by the client or customer. The discipline of value management is currently attracting more and more attention in the construction industry. Clients are increasingly enquiring and demanding that it is used during the key stages of their construction projects. It is not difficult to see why. There exists even greater competition in the market place than ever before, therefore it is vital that resources are applied as efficiently as possible and waste in any form reduced to a minimum.

Life cycle costing (LCC) is very important as general method of economic evaluation which takes into account all relevant costs of a building design, system, component, material, practice or project over a given period of time, and adjusting for differences in the timing of those costs.13 Life-cycle costing models can be used to track the costs of development, design, manufacturing, operations, maintenance, and disposal of a system or project facility over its useful life. These models relate cost components as a function of some independent or explanatory decision variables.

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