Wednesday, 22 July 2009

AN OWNER’S PROJECT COST CONTROL STRATEGY FOR BUILDING PROJECTS

The construction industry plays a vital role in any country’s economic growth, both developed and developing ones. Construction cost control did not consider being a major concern as developers rushed to capitalize on the booming market, as what was happened in Vietnam in the years 2006, 2007 and the beginning of 2008.

However, in the late 2008, the world economy as well as in the Southeast Asia sank into recession. Thus, project cost control became a critical issue for the developers as well as the construction companies in managing construction projects. A significant number of projects in the world had suffered cost overruns as the prices of materials are spiraling with no signs of abating in the near future.

Cost control is the activity which compares cost performance against the cost plan, adjusting one or the other dynamically by reference to the changing circumstances in the project's financial environment. It is a process that should be continued throughout the construction period to ensure that the cost of the building is kept within the agreed cost limits. The cost control can be divided into three major areas: the control of cost during the design stages, the control of cost during the tendering stages and the control of cost by the client once the construction of project has started.

In many large projects, professional construction consultants or senior quantity surveyors play a critical role in estimating construction costs, scheduling construction activities and implementing various techniques to complete the projects. During the current economic recession, the cost of construction tends to exceed the budget. This is one of the major problems that need to be addressed by clients, construction management consultants and contractors. To minimize cost overruns, client, project management and contractors need to improve their skills and abilities in dealing with project cost control. Recessions and poor economic times have put pressure on the average company for better cost control.

Mr. Nguyen Dang Thong Nhat made a case study on “An Owner’s Project Cost Control Strategy for Building Projects” to identify the key components of cost control. How the owner in construction industry can become more efficient and respond better to the current economic recession with non-stop prices increase of material and labor cost.

His other objectives are to (1) identify the problems in cost control in an observed case study in Vietnam’s building project and (2) develop a framework for owner’s project cost control strategy that covers the entire project life span, from the conceptual stage to the construction stage.

Based on his study, there are three components that caused project costs overruns. These were (a) incomplete specifications and drawings; (b) requirements of the owner and; (c) changes from contractors. Although the project management team tried to coordinate all requirements and solve the above problems, there were several factors that made overruns inevitable and certain factors were beyond their ability and responsibility.
According to his research, no matter how good the cost and control system is, problems might occur. Below are common causes of cost problems:
• Poor estimating techniques and/or standards, resulting in unrealistic budgets
• Out-of-sequence starting and completion of activities and events
• Inadequate work breakdown structure
• No management policy on reporting and control practices
• Poor work definition at the lower levels of the organization
• Management reducing budgets or bids to be competitive
• Inadequate formal planning that results in unnoticed, or often uncontrolled, increases in scope of effort
• Poor comparison of actual and planned costs
• Comparison of actual and planned costs at the wrong level of management
• Unforeseen technical problems
• Schedule delays that require overtime or idle time costing
• Material escalation factors that is unrealistic

His conclusions for Owner’ Project Cost Control

Design Stage - the project owner did not define the (a) project scope which is a crucial first step towards making the project a success; and (b) failed to set realistic expectation at the design stage.

He did not know how to manage expectations before going to the designer, consultant and contractors. And it became a struggle when he needed to meet changes along the way. Since he wanted to reduce the fees for architects and engineers, their input became limited and insufficient specifications subsequently caused many problems during construction. Also, he did not give the project management team, designer and consultants the authority. When the contractors suggested changing the amount of materials to be purchased and to import some materials that are out of stock, it resulted to project cost control problem and delayed schedule.

Tendering Stage - the project owner did not conduct face-to-face interviews with the bidders. As a result, the project bidders did not discuss directly with the project owner the changes that were made. A lack of understanding on the owner’s expectations also hindered the process. He did not have any chance to negotiate price and costs with contractors as well.

Construction Stage – the project owner did not give some authority and responsibility to the project management team, designer and consultants. Therefore, they needed to get his approval before sending and approving any change orders.

The project owner did not establish project objectives and project expectations clearly and carefully from the beginning of project. He wanted to reduce the fees for architects, designers and engineer resulting to limited input, insufficient specification, and incomplete detailed drawings and project specifications. In addition, he did not understand clearly the benefits of investment license and he did not hire a third party to evaluate the design drawing to check the quality of site works as required by Vietnamese construction law.

Mr. Nguyen Dang Thong Nhat’s recommendations for owner’s cost control management improvement are:

Project Management - The project owner must work with the project management team to detail five major project issues with a comprehensive list in the project definition phase such as: (1) programming/functional needs of a facility; (2) site questions and concerns; (3) building systems requirements; (4) construction schedule; and (5) project budget.

The owner and the project management team have to make sure that each issue needs to be reconciled with the others and updated frequently. If any issue is ill-defined, there is a chance that the project will go out of control.

Project Change Control - When changes must be made that will change the plan, the project manager must control and track them. The guidelines for controlling changes are as follows:

1. Changes can be requested by anyone associated with the project, but submitting the Project Change Request Form to the project manager and the project change committee will start the change process.

2. Project change requests must be evaluated to determine the effect of a request.

3. The project manager and the team must estimate the effort, dependencies, and resources required to institute the project change.

4. The project manager must communicate the impact of proposed changes in terms of cost, scheduling, and performance to the customer.

5. If a change is approved, the signatures of the client and the project manager authorize the project team to make the requested change.

6. The project plan must be revised after the change has been approved for implementation.

7. The project manager must inform the project team of all approved, unapproved, and deferred changes.

8. The Project Change Request Form must be logged, regardless of its approval or denial.

Cost Control

1. Cost control should be approached as an application of Pareto's Law, which essentially states that 80 percent of the outcome of a project is determined by only 20 percent of the included elements. Thus in establishing a cost control system, the idea is to isolate and control in detail those elements with the greatest potential impact on final cost, with only summary level control on the remaining elements. The greatest variable in the final cost of a construction project is usually the labor cost. Most of the other cost elements in the project are materials, labor, equipment, and overhead.

2. Cost control is a process that should be carried out for all types of construction stages and activities. Comparison with a cost standard method is complicated and expensive but it is more accurate than other methods. Subdivision by detail is a method that is not expensive but risky operation, involves little or no control of cost. The integration with other functions method has to take into account other functions and not as a separate entity and control is kept on the functions combined.

3. Cost Control problems come about for many reasons including incorrect estimating techniques, predetermined or fixed budgets with no flexibility, schedule overruns, inadequate WBS development, and so on. Good project management planning techniques during the planning processes may prevent cost problems later in the project. At a minimum, proper planning will reduce the impact of these problems if they do occur.

4. Cost Control, like many of the other Controlling processes, is concerned with monitoring project performance for variances. As the project owner, we try to keep a close eye on the factors that cause variance to keep their impacts to a minimum. An important thing to remember is that Cost Control makes certain all appropriate parties agree to any changes to the cost baseline. This process is ongoing and continues to manage cost changes throughout the project.

5. It is important to have formally cost control system for contractors. It helps project owner to understand and control project costs easier and faster.

6. Using Computers: It’s hard to imagine a project, especially larger projects, moving forward without the use of computers. Project managers can rely on project management software and spreadsheet programs to assist them in calculating actual costs, earned value, and planned value.

Which Cost-Control Strategies Work Best?

The choice of project delivery method depends on variables like funding, time constraints, and project objectives. This view from the experts substantiates that, regardless of delivery method, effective cost controls depend on a commitment to thorough planning, good communication, and rigorous monitoring of a project from start to finish. Building professionals and owners should find it easy to borrow and incorporate many of these cost-control strategies into their practice (Written by Mary Maher, University of Wisconsin – Madison Department of Engineering Professional Development).

His thesis abstract is copied and posted.

ABSTRACT

Nowadays, the construction industry plays a vital role in the healthy growth of the economy of many countries, both the developed and developing ones. Construction cost control did not use to be a major concern as developers rushed to capitalize on the booming market, as was what happened in Vietnam in Year 2006, 2007 and the beginning of 2008. However, in late 2008, the economy of the world and Southeast Asia sank into recession. Project cost control became a critical issue for the developers as well as the construction companies in managing construction projects. A significant number of projects in the world had significant cost overruns as the price of material was spiraling with no signs of abating in the near future.

Cost overruns had been a problem during this period and the use of good project cost control procedures has become a concern of project investors and construction companies in the current world since the recession of the late 2008. Project managers and developers are now aware that the failure of a cost control system or use of a poor system can lead to project failure. Project cost control methods need to be improved to ensure that owners and contractors manage construction costs and meet project goals on time and within budget.

Effective management of construction projects has been a major research subject due to the importance of the construction industry and the amount of investment it attracts. A significant issue facing construction managers is that of inefficient cost control procedures, particularly in developing regions of the world, such as Vietnam. The cost control system is the most important function that facilitates construction organizations in accomplishing profit maximization.

In this study, project cost controls will be examined. These procedures will be researched and it will be illustrated how the project cost control procedures can be applied to the construction industry in Vietnam to increase the awareness of contractors, consultants and client of the functions of cost control in the execution of construction projects.

1 comment:

Anwar Ahmad said...

hello.currently im doing my research about cost control strategies. according to this post, seems it helps me alot about my topic.can i have the published version of "AN OWNER’S PROJECT COST CONTROL STRATEGY FOR BUILDING PROJECTS" as i can make it as reference for my research.