Owner’s Project Cost Management Approach

Based on the reports from the local media, most projects which first applied in Vietnam and performed by Vietnamese organization were delayed, had cost overrun or not financially vital due to lack of appropriate cost management approach. Nguyen Sinh Khang made a case study which was expected to provide the respective project owner especially the company which is performing the first underground oil storage cavern project in Vietnam with sound cost management approach. The objectives of the were to:

1. study the issues in cost management of construction project especially of underground oil storage cavern project in Vietnam

2. provide recommendations on how the problems can be managed and the frame work for owner’s project cost management approach covering whole span of the project from pre-contact stage to post-contract stage

Conclusions

For the project especially for the large-scale and complex project like underground oil storage cavern, the cost overrun shall occur due to three reasons such as: incomplete and inadequate drawings and specifications, the Owner’s change to project requirements and changes from Contractor. In spite of the efforts made by Owner, Owner’s Consultants and Contractors, there are considerable factors that made cost overrun inevitable and numbers of the factors are out of their responsibility and ability.

The followings are the Owner’s common factors that cause the problem in cost management of the project:

1. Lack of management policy on report and control practices;

2. Improper estimating techniques and/or standards leading to impractical budget;

3. Fault sequence commencement and completion of activities and/or events;

4. Unexpected material cost escalation;

5. Poor scope of work definition or inadequate WBS (Work Breakdown Structure)

6. Selecting Contractor with the lowest tender price;

7. Improper planning system resulting in ineffective action or cost;

8. Improper comparison of  actual cost and planned cost;

9. Unexpected and unplanned technical issues;

10. Delays and disruption resulting prolongation cost.

The conclusions of this study are as follows:

1. For Owner’s Cost management of pre-contract stage:

   i. The Owner normally selects Consultant or Contractor who proposes lowest bid regardless of experience, quality or expertise;

   ii. Scope of work of Consultant or Contractor is poorly planned and defined;

   iii. Low accuracy is inherent in the approved cost estimate;

   iv. Tight approved budget is included in the overall scheme;

   v. Value engineering (VE) is not carried out during design phases especially in the initial phase of the project.

2. For Owner’s procurement strategies:

  i. Traditional method of procurement based on the clear separation of design and construction is deployed.

   ii. Price-based, lump-sum and specification contract in which Contractor is required to estimate the quantities and subsequently to calculate tender sum based on the owner’s drawings and specifications is deployed.

   iii. Risk access is not carried out for decision making especially in selection of project delivery system.

3. For Owner’s Cost management of post-contract stage:

   i. Owner’s cost-management and monitoring procedure  lacks the following characteristics:

   ii. Cost is not forecasted before decision making ;

   iii. Cost-recording system is not cost-effective to operate;

   iv. Actual cost is not subject to variance analysis;

   v. Time and quality do not implicate in the cost.

   vi. Change management – Valuing variations:

   vii. The proper recording system for changes is not established and applied;

   viii. Traditional method of valuing variation which is based the valuation on the rates or prices specified in Bill of Quantity (BofQ) or schedule. Normally, those rates or prices were quoted at the time of tender.

   ix. Changes to the project arise due to:

        a. Inadequate briefing from the owner;

        b. Inconsistent and late instruction from the Owners;

        c. Incomplete design;

        d. Lack of careful planning at design stage;

        e. Lack of coordination of specialist design work;

        f. Late clarification of complex details;

   x. Claim management:

  xi. The delay claims on extension of time and cost of prolongation from Contractor is not solved effectively and in amicable way. 

   xii. The Contractor often submits the claims due to the main following reasons :

       a. Inadequate time and planning before project commencement;

       b. Inviting the tender on incomplete drawings;

       c. Introducing extensive changes to the project;

   d. Inadequate site investigation – deep basement; pilling, earthwork, tunneling or unforeseen ground condition;

      e. Extensive changes to contract standard form;

      f. Owner’s inference with the timing and sequence of construction.

Recommendation for management improvement

For the project with the similar condition as one in the case study, the recommendations are as follows:

1. Value-for-money mechanism should be in place to evaluate quality and price of the bid.

2. For any contract, the scope of work should be clearly defined.

3. Proper methods with the different degree of accuracy for each stage of the project shall be used.

4. The budget should be used positively to ensure that the design stays within the scope of the original scheme.

5. The factors to be considered during cost estimate shall be:

a. Land acquisition including legal fees;

b. Owner’s organization cost allocated to the project;

c. Site investigation;

d. Insurances;

e. Consultant’s fees including engineering;

f. Equipment procurement and installation;

g. Construction cost;

h.Taxes;

i. Contingencies and risks;

j. Financing and legal cost.

6. Comprehensive value management (VM) should be in place all the time.

7. Design and Build shall be deployed.

8. Price-based bill of quantity (BofQ) with milestone payments is applied.

9. Sound risk management procedures should be in place all the time to access the risks so that unacceptable risks could be transferred to relevant Contractor or Insurer by contractual commitment. Who-life costing technique could be used where possible.

10. Costs should be forecasted before decisions are made to allow consideration of all possible actions;

11. Cost-recording system should be simple and cost-effective to operate;

12. Actual costs should be subject to variance analysis to determine the reasons for any deviation leading to cost overrun;

13. The costs implication of time and quality should be incorporated into the decision making process.

14. Parties should keep comprehensive and detail records of the factors relevant to the variation.

15. Change consequences shall be mitigated by:

a. Setting up clear project objectives;

b. Timely change instructions;

c. Practically-completed design;

d. Adequate planning at design stage;

e. Adequate coordination of specialist design work;

f. Timely clarification of complex details.

16. The variation valuation procedure in which the parties need to have skilled negotiation and be prepared to adopt a give-and-take attitude in order to bring a satisfactory claim settlement.    

17. Parties should keep comprehensive and detail records of the factors relevant to the variation.

18. The variation valuation procedure in which the parties need to have skilled negotiation and be prepared to adopt a give-and-take attitude in order to bring a satisfactory claim settlement. 

19. Owner’s project management team should be equipped with knowledge of construction technology, construction law, term and conditions of the contract, contract administration, project-planning system and negotiation skill.

20. The following actions shall be required to avoid the claims:

a. Adequate plan made by competent Owner’s engineer and/or Consultant;

b. Availability of verified and completed drawings and specifications prior to bid;

c. Minimize and eliminate the unnecessary changes to the project;

d. Application of Value Engineering and/or Whole-life Costing and/or Risk Access techniques to analysis the changes to project;

e. Comprehensive site investigation in which the scope of site investigation shall be given by Consultant or Engineer who use site investigation data for engineering works;

f. Usages of relevant contract standard form set forth by recognized organization such as FIDIC, ICI ..etc.

g. Relevant Coordination procedure between Owner and Contractor.

Abstract

As the same context of the projects which were first applied technology, construction methods or project size in the developed countries, the project of this kind or the likes in Vietnam cannot meet or exceed the stakeholder expectations due to many unforeseen reasons.

The role of the organization performing project of this kind of project is of great importance because its performance could bring the success or failure to these projects. In Vietnam, the regular phenomenon is that project planning and control of this kind of project is always under expectation due to the lack of project management competence from the organization performing project especially lack of appropriate cost management approach. Those shall have bad consequences to the direct or indirect stakeholders. Therefore, to be equipped with the most adaptable project planning and control system for this kind of project is required by and from the organization performing project and project team member also.

As mentioned above, the need of workable cost management approach for the project of this kind is critical. This report shall therefore address this development by underlining, prioritizing and specializing some aspects of owner’s construction project cost management approach and shall give some recommendations on or suggest some guidelines for this kind of project and specific project as descriptions in case study.