BUILDING COST PLANNING:
PRINCIPLES OF COST PLANNING:
-The ability to design and build to a budget is one of the key success factors of any construction project
-Cost planning is an essential skill
-Cost planning commences at design stage when information is limited and continues throughout the design stage as details are added and assumptions are removed.
-Cost Planning can continue during construction phase of the project Performed by a PQS either client side or for the Contractor.
-Cost planning can make a project memorable or one that you would rather forget!!
-Examine the building development process.
-Examine the construction industry.
-Examine the design framework in which decisions are to be made in cost planning.
A thorough understanding of the above including any known trends will guide and inform the QS/Cost Planner when undertaking their work
Aim is for you to:
-obtain a good understanding of the design development process and costing interface.
-Identify and understand the participants in the process.
Financial control of building and construction at the design stages of a project is the main focus of this introductory topic.
Characteristics of the construction industry
-Complex supply chains, procurement routes, contracts
-Often gets bad press: Horror stories e.g. Sydney Opera House, Wembley Stadium in London, Scottish parliament in Edinburgh, desalination plant in Wonthaggi, Perth Arena, Millenium dome in London – cost blowouts
-Much more success than is actually documented by the media – bad news sells.
-Australia as a whole, the construction industry is efficient and successful.
-Why do failures occur? Multiple causs. Effectiveness and performance of Clients and professionals at all stages of development? Part of the story.
Cost reference materials
-Australian Bureau of Statistics publish quarterly and annual reviews of the industry.
-Rawlinsons /Cordells cost guides (Most common).
-The Building Economist – from the Australian Institute of Quantity Surveyors.
-Make sure with any of these that you review the full scope and coverage of the document. That is, the definitions, classifications, basis of valuation,seasonal adjustments, reliability of the estimate and all other terms used.
Summary of Introduction
-An excellent understanding of industry is very important to the Cost Planner. Experience is the key here.
-Industry has a poor image of management, tendering systems, indirect costs.
-Focus on the development process, the participants,environment in which the activity is taking place.
-Important to acknowledge requirements of your Client and their budget constraints. Know your Client‘s sector! Design to budget!
-Concepts of cost, value and price – Vital.
-Cost Planner will provide direct advice to Clients and members of the design team, and is expected to provide well - informed, current, accurate advice and insight re- costs
-Sources of information for costing - it is incumbent on the Cost Planner to keep up to date with changes and updates within the industry
-A cost planner is only as good as the information at hand.
Cost, Value, and Design
Important project Issues:
-Clients and their aims - time, cost, quality??
-The construction market
-End users and value
-Adding extra value through more effective design team activities
-What is the building to do?
-Or what are the people to do within the building?
Buildings are only a means to an end – criticality of Client brief (critical starting point).
-For feasibility purposes: criticality of land value, running costs, maintenance costs, repairs and rehabilitation – life cycle approach
-Cost Planner – early involvement to balance cost, time and quality (and risk!) for optimal success
-Capital costs are the most important to majority of Clients, but be aware of building value for projects such as hospitals, schools etc. – lifecycle.
-In a final analysis, the Cost Planner may provide a comprehensive report detailing capital costs, life cycle cost forecasts, any other cost data to the client and the designer to inform or respond to design decisions.
-Costs will be dependent on development type, quality, location, time, procurement route, staging, risk profile and client (sector).
-Good results are achieved when all professionals acknowledge the roles of others, work together as a team for the same outcomes, getting a greater understanding of the task at hand
-Not always a strong relationship between price and cost
-Design team must recognise that design decisions are to be made within a cost framework – the constraint of budget!
-Private clients want to develop the most suitable type of project at the right price. It can be a risky gamble for some but should be driven by informed decision making
-All must be aware that project cost is subject to market fluctuations and external influences
-Irrespective of costs for a project, full recovery can be made,and even attract a premium if market demand is high.
-Australia 1990 – 1993 recession, demand for major construction was lower than the rate of inflation and construction prices decreased by 5% - 15% across the states.
-Similar happened at end of 2008 but a very quick recovery occurred. What will happen tomorrow?
-Simple economics – effect of supply and demand.
-Risks associated with development are significant. Cost planner must be aware of all project issues and externalities so that advice reflects the current market conditions.
Statistics and Publications
-Each publication provides slightly different cost information.
-They detail costs facts between similar projects and their costs over time.
-They are really a cost planners ‗best friend‘ in some cases.
-They can be very detailed and are reasonably accurate and indicate movement in various sectors over time.
Weaknesses in the Construction Industry
Separation of design development and construction
-A plethora of small builders and Sub-contractors (Fractured industry and supply chains)
-Patterns of conflict – contracts are based on adversarial relationships and not co-operation or sharing of joint objectives (partnering?).
-All parties seeking to make a profit (including consultants)
-Public image not good based on illegal tendering practices, union issues, bribery and corruption 1980‘s experience in UK – bid low, claim high
-Inefficient and outdated practices tend to reduce the potential for improvements in productivity
-A poor quality finished product? 80% job good enough?
-Separation of design and construction – causes an immediate risk(Design & Construct procurement?)
-Are delays caused by factors which are within the control of the design and construction teams? Many are, some may not be (weather?, insolvency?).
-Cost overruns (some attract media attention as they involve public money – Wembley Stadium, Wonthaggi desal plant) - political.
-Government – Public Private Partnerships vs Public Sector Comparator Poor marketing and client relations.
-Inefficient organisation of sub-contractors- a fractured industry in comparison to centuries ago (master builders employing trades directly, one stop shop).
-Lack of attention to public relations i.e. noise, nuisance, danger, environment (OH&S) – Melbourne wall collapse Union issues
-High product costs.
-High construction costs
-Training? Unskilled operatives – hard to police (‗cowboys‘).
-Time delays, lead times etc… (how dealt with in contract?)
-Organisation, co-operation and experience of the design team Constructability?
-Poor (or no) risk assessment and risk management Solutions?
-Multi-skilling of trades so that disputes between unions and trades are reduced.
-Integrated approaches to design and construction services for clients (procurement route development).
-Better education of construction managers and practitioners
-Pre-qualification criteria for consultants, contractors and sub-contractors – very common these days.
-Minimum standards for registration and business operations
-Adoption of benchmarking for productivity and Australian standards in quality management and documentation
-Strategic alliances, and project partnering to establish longer term relationships between client and contractor to the benefit of both parties (alliancing, partnering, gain share/pain share)
-But what happens when bottom line impacted – profit??
-Transport projects – grade separations – time/disruption benefit
-Better marketing of construction services, especially by the larger contractors
-May lead to improved penetration of overseas markets
-All doom and gloom………………?
-Quite a harsh view of the construction industry - a good cost planner needs to be aware of the industry pitfalls and needs to be able to maintain and improve on good industry standards
-Overall, industry is actually very healthy and although there are problems, conversely there are many success stories.
-each Client‘s business and needs are different
-designer tries to find appropriate balance between site characteristics, number of rooms, environmental issues, insulation, size, shape, based on budget available.
-designer needs to interpret and translate client needs to create optimum spaces and deliver the required design aesthetic
-designer needs to be a good communicator and collaborator to develop a robust and correct design brief
-aesthetic quality is a main driver of price difference and needs to be allowed for in the budget.
-clients are generally a lot more informed nowadays than they used to be, and therefore a lot more demanding of their consultants (Coles? Toys R Us? Aldi? – internal design and PM units)
-clients want a consultant team with a proven record they can trust, and may be prepared to pay a small premium
-Consultants can specialise in a sector if they do a good job
Consideration of the Architect
-Architectural quality v‘s marketability (high end apartments).
-Marketability can be achieved by a good design.
-Architect must ultimately strike the balance between cost and quality. Usually with the help of a Quantity Surveyor.
-The value of any building is related to the long term income of it, rather than its basic costs‘ – lifecycle approach – Client as investor/developer Reputation - critical Sector specialists – repeat work
CONCEPTS OF VALUE, COST AND PRICE
-Value = arguments for and against value being the intrinsic worth of a good, that is; It cannot be measured in monetary terms. See ‗The Castle‘! Also ,artwork, archaeological finds. Value of Sydney Opera House or the Pyramids??
-Scarcity affects value.
-Usefulness of a good also affects value.
-Value is the power to service peoples needs or desires. Some of these will be subjective, differing from one individual to another.
-Cost = Simple cost of a commodity like a piece of timber or complicated such as the cost of a building.
-Costs (fixed or variable), capital or ongoing/recurrent (CAPEX and OPEX)
-Fixed costs – remain the same over a large range of output
-Variable costs – change with every adjustment of output.
-Price = The amount of (money usually) that someone is willing to pay for some particular good.
-Determined by – supply and demand of current market situation or may be fixed by entrepreneur or authorities.
-There is not always a strong relationship between price and cost.
Price, while in some way linked to value when it is
originally set, becomes largely unrelated to value when
the forces of supply and demand operate on it – buying a
-The money paid by the client to the contractor is the contractor‘s price for providing the project.
-The same money represents only the cost of the project to the client who must also include other costs in the larger scheme of things.
-Other costs include – land, professional fees, fitting out, general occupation costs (real estate).
-The contractors costs are the payments that it incurs while erecting the building i.e. wages, salaries, plant, materials, interest on monies paid out but not yet received from the client.
-Only a few contractors have an accurate picture of what their costs are – hence it‘s a risky business for some, depending on variables and the contractor‘s management skills.
-A true picture of costs may only become apparent to a contractor late in a project – claims?
Sydney Opera House – value?
A report released today as part of the Sydney Opera‘s House (SOH) 40 year birthday celebrations puts a dollar figure on the value of the cultural icon —$4.6 billion to be exact. Louise Herron, CEO of the Sydney Opera House, summarised the report‘s findings by saying, ―here is the number, here is what we‘re worth, don‘t take us for granted!‖
The figure, calculated by Deloitte Access Economics, includes ticket sales, the digital activities of the institution and the ‗value of the SOH experience‘ but over half of the Opera House‘s worth is said to come from its ‗iconic value‘. In a 3000 person survey commissioned by Deloitte it was found that the SOH is a major drawcard for tourists and is regarded by Australians to have an intangible cultural value, regardless of where you live in Australia. ―The Opera House is worth far more than the money it directly generates,‖ says David Redhill, Chief Marketing Officer at Deloitte, adding that the study looked at ―its [the SOH‘s] value to our national identity and self esteem as a country.‖
―You don‘t put up a map of Australia, you put up a picture of the Opera House as the most effective means of communicating what is Australia,‖ says Louise Herron.
Sydney Opera House – estimates v outturn costs
Completion and cost
-The Opera House was formally completed in 1973, having cost $102 million. H.R."Sam" Hoare, the Hornibrook director in charge of the project, provided the following approximations in 1973:
-Stage I: podium Civil & Civic Pty Ltd approximately $5.5m.
-Stage II: roof shells M.R. Hornibrook (NSW) Pty Ltd approximately $12.5m.
-Stage III: completion The Hornibrook Group $56.5m.
-Separate contracts: stage equipment, stage lighting and organ $9.0m.
-Fees and other costs: $16.5m.
-The original cost and scheduling estimates in 1957 projected a cost of £3,500,000 ($7 million) and completion date of 26 January 1963. In actuality, the project was completed ten years late and more than fourteen times over budget.