Independent Trusted Cost Advisors: The Best Way to Manage Cost Risk on a Project

Martin Grace, MRICS, explains how property owners protect themselves by engaging with top cost consultants.


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For an Owner undertaking a development, their goal is to complete a successful project. Typical expectations are desired quality, construction to schedule, cost within budget and completion with limited disputes or litigation. To achieve this, good planning and management is essential. In these current lean and challenging times, sound financial and managerial decisions are more crucial than ever in order to impress potential financiers, investors and end users, otherwise the project may never get off the ground. One of the most important aspects of any project is the budget, yet many projects fail because the cost management duties are not handled by an expert such as a cost consultant (estimator). How can this and other crucial decisions be addressed? Read on!

Key Independent Personnel

Owners should hire key personnel with experience and a proven track record for their type of development. All disciplines should be handled by qualified experts and this extends to cost management. The cost management duties of a project extend from the preconstruction (design) to the construction stages and are known as the “hard” construction costs. These costs on average amount to 70 percent of the total budget. The remaining 30 percent of the budget are the project costs known as the “soft” project costs. With such significant levels of funding involved, you would think an owner would employ a cost expert to manage this risk as part of their trusted advisory team. Does this commonly happen? The answer is “no.” In the United States, typically independent project managers or architects’ project managers organize and manage the cost management process. In most cases they do this by employing a cost consultant who is under the architect’s wing as part of the design team. While in many cases this arrangement can be successful due to good management during the preconstruction stage, there are other instances where this arrangement fails for a variety of reasons. The main reason for failure is because cost consultants are not actively employed to provide key cost advice at the crucial decision making stages of projects and in some cases not at all. These projects can encounter budget busts, time lost due to redesign and in some instances a canceled project. The arrangement of employing a cost consultant as part of the design team is flawed. Why? Simply because the cost consultant does not have the powers to manage the design cost. The architect is effectively the manager of this process and is free to choose whether or not he implements the cost consultant’s advice.

A better option is to employ a cost consultant independently as part of the owner’s trusted advisory team. It is in the owner’s best interests to have both a project manager and a cost consultant who are both independent from the design team. This arrangement can be more effective allowing the project manager to handle the overall management and planning of the project and leave the cost management duties to the cost consultant. An ideal project framework for this arrangement is illustrated in Figure 1.

As a trusted advisor, the cost consultant has greater powers to manage the cost process to benefit the owner. It is recommended the cost consultant is engaged to handle all “hard” and “soft” costs from “cradle” to “grave” to steer the owner in the right direction. Under this arrangement the cost consultant has a central role in dealing with the parties involved in the development (such as lawyers, financiers, etc.), the project design team and the construction build team.

It is highly recommended that the owner brings the cost consultant on board after the project manager is engaged and before the design team is selected. The first task should be to review or calculate all budgets. This ensures strict cost management is applied immediately and efforts are not wasted pursuing design options that are not economically viable.

Is this arrangement going to cost the owner more money? The simple answer is “no.” The owner can save money on other consultant fees as well as reduce the risk of budget increases and claims by stricter cost management.

Credibility

The recent tightening in lending restrictions has now emphasized the need for an owner to have a more solid business plan and requires the owner to provide more collateral to get funding. To alleviate this greater risk, it is even more crucial for an owner to have the correct team in place in order to move forward with a project. An owner’s trusted advisory team including a cost consultant provides the owner’s plan with greater credibility which will appeal to Financiers and Investors.

Project Development Costs & Budget Management

A cost consultant is ideally placed to assist the owner by managing the total project cost. This includes all project “hard” and “soft” costs. A failing with many owners’ budgets are that they are optimistic and unrealistic, therefore, it makes sense to utilize an expert to assist. The cost consultant can ensure strict cost management is implemented and ensure realistic costs are established for construction costs and project costs such as land, financing, fees, commissions, insurances, bonds, legal, taxes, levies, operational, fittings, fixtures, equipment and contingency costs.

Preconstruction Cost Planning

For effective design cost management, the best method to adopt throughout the preconstruction period is a cost plan. In the United States, cost plans are based on Uniformat II Elemental Classification for Building Specifications. This method, set up by the cost consultant, prepares a framework which provides the design team with an effective cost management mechanism for the project design. The cost plan is prepared at the concept design stage and updated at the schematic, design development and pre-bid/contract documents stages.

Nearer to bid stage, the preconstruction estimate should also be prepared in Masterformat 2004. This method enables reconciliation or comparison with the general contractor’s bid. However, it is important to identify that this method is not effective for design cost planning even though it is used by some owners. In some cases, other owners undertake the design process with effectively no cost management methods in place and may rely simply on a ballpark estimate from a general contractor as their method of cost planning. Owners are taking a risk by relying on the general contractor’s estimating accuracy, particularly if the provider is not being compensated for this service. The estimate may be either inflated or unrealistic.

During the design process, the cost consultant will closely monitor the building size, design and material selection by undertaking various studies. This will include evaluating various design options and value engineering. As part of the value engineering process, alternates are a good way to maintain the owner’s requirements. In most cases alternates identify a reduced cost, but if the budget allows, the owner may want to know the cost to increase scope. It is good practice to build into the design cost control measures such as alternates or phasing as options, in case the project encounters budget problems. It also allows the owner to have the flexibility to make quick decisions to ensure the project stays on budget if an issue is encountered and to avoid delays resulting from redesign.

Contract Documents Preparation

It is crucial that the owner obtains as much cost information from the general contractor at bid stage prior to signing a contract. This will make it easier to analyze the bids and to identify alternative costs should the bids be over budget. This also establishes that cost management measures are in place for the construction phase. The cost consultant can assist in ensuring that the information sought is implemented in the bid documents. Typical information will include a bid divisional summary subdivided into trades, alternates, phasing costs and various items for change order analysis including; labor hourly rates and general condition/overhead/fee percentages.

Obtaining this information provides the owner with greater negotiation powers and reduces risk. From a budget standpoint, the trade breakdowns provide information needed to review the general contractor’s cash flow and ensure the owner will not be overbilled for the early trades. Overbilling at the beginning of a project is typical among general contractors and places risk on the owner particularly if the general contractor is declared bankrupt before the job is completed. Next, obtaining all cost data before a contract is signed with the general contractor is crucial. Once the contract is signed the general contractor will be less willing to offer a fair and competitive rate and that makes things more difficult to negotiate change orders. Lastly, the bid documents should consider requesting any cost breakdowns that the owner may need to provide to the end users, particularly if there are multiple buildings, tenants or purchasers. From a budget standpoint, it makes more sense for the owner to obtain these costs from the general contractor to ensure any cost splits are accurate.

Building Life and Efficiency

Smart owners are not just interested in the initial “capital” cost of the building; they want to know the total life cost of the building so they can see the long term return on their investment. The cost consultant can prepare a life cycle cost analysis which includes the capital, operation, maintenance and replacement costs together with any LEED® initiatives. This enables the owner to make key decisions particularly in relation to design and cost. The current upsurge in upgrading or fitting out existing buildings due to restrictions in the financial sector could well lead to owners evaluating the life of their existing buildings. RElifing® initiatives developed by Rider Levett Bucknall identify to the owner the potential extended life and value that can be achieved from an existing building, something they may not have previously considered.

General Contractor Procurement

The selection process for the general contractor is crucial to the owner and needs to be implemented correctly, otherwise it could cost the owner a great deal of time and money and may result in dispute or litigation. The cost consultant is able to advise the owner of the advantages and disadvantages of different procurement routes and identify if an option carries a cost premium. Good examples are when you limit competition by single sourcing general contractors, subcontractors and suppliers by narrowing the choice. Another example is Cost Plus contracts, where there is less incentive for the general contractor to be efficient. In the case of Fast Track projects, in order to manage the risk created in meeting the owner’s schedule, a higher amount of cost contingency will be required to deal with the errors that this process creates.

When you consider other procurement routes such as Design Build, Construction Manager/General Contractor (CMGC) and Construction Management at Risk (CMAR) that bring the general contractor on board early on in the preconstruction design phase, cost management needs to be closely looked at. While it can be good to utilize the general contractor’s expertise, an audit of the general contractor’s estimate and final bid/price by a cost consultant is crucial to ensure the owner is receiving value for money. The auditing process is a mandatory procedure with many public organizations and something many organizations, particularly in the private sector, do not do and should consider as part of their due diligence.

Building Information Modeling (BIM)

The technological evolution in the construction industry continues with Building Information Modeling (BIM). BIM offers a faster design process utilizing computer programs that generate information quickly. This extends to being able to produce quantities for building components in an effective manner. The danger with BIM is that parties such as owners may think they do not need a cost consultant at all to prepare estimates. While there is no doubt that BIM speeds up the preconstruction process, a cost consultant is the only qualified professional with a full appreciation of the variables of pricing in relation to the project.

Contract Selection

Many projects fail because of the selection of non-standard industry contracts for the agreement between the owner and the general contractor. These contracts are widely interpreted as unfair due to the intent of an owner to transfer the risk to the general contractor, which can lead to costly disputes. An owner’s contract can also attract a cost premium in the general contractor bids meaning the owner is, in reality, paying for this risk. Therefore, it is recommended the owner selects a standard industry contract containing clauses which clearly deal with every eventuality and has alternative mechanisms to handle disputes in a timely and cost effective manner. From a legal standpoint, a standard industry contract is more likely to have set precedence that is familiar to the legal profession. It is also important the general contract selected is thoroughly reviewed before implementation. The owner’s trusted advisors can work with a legal expert in regards to this, to ensure the owner’s position is protected. The cost consultant can review the contract has the mechanisms to deal with all aspects of cost management.

Contract Documents Review

Many projects get into financial difficulty because the contract documents are not vetted for buildability, errors and omissions before going to bid. Failure to do this can expose the owner to greater risk and result in a greater number of claims being received from the general contractor during the construction phase. There is also an increased risk to the owner of disputes or litigation. Also worth noting, if the construction bid documents are poorly assembled or unclear, the owner may well pay a premium up front when the general contractors’ bids are received. The cost consultant can assist the owner’s team in vetting through these documents to ensure this risk is minimized. It is also recommended that the owner’s trusted advisors work with an independent review team during the design process, with a final review of contract documents before going out to bid.

Construction Phase

It is standard practice in the United States to utilize the services of a cost consultant at the preconstruction phase of projects. However it is less common to utilize a cost consultant during the construction phase. This role generally lies with the project manager who is not a cost expert. It is recommended the owner utilizes the project manager to administer the contract but allows the cost consultant to continue the cost management role. The cost consultant will ensure that mechanisms implemented in the contract to control costs are continued and will handle processing of the general contractor pay applications, claims, change orders and final account.

Conclusion

There are many financial risks to the owner in developing a project. The owner can guard against these risks by ensuring his team of trusted advisors includes a cost consultant. It will pay dividends. •