Process and Procedure for Effective Pre-Contract Cost Control

Keywords: New Rules of Measurement 1, RIBA Plan of Work 2013, Cost Forecasting, Cost Planning

Introduction

Pre-contract cost control is defined as the systematic process of ensuring that the contract sum
remains within the client’s approved budget by planning and controlling the costs of building
throughout complete duration of the construction project (RICS 2016). The process start with a budget
development through the Order of Cost estimate and is the controlled through Cost Plans by allocating
cost limits to various element of the intended construction project. This provides design team with a
balanced cost outline within which the design should fit (RICS 1982). Value Management must form
part of the process as it ensures a mutual understanding between the client and the design team.
Hence the needs and expectations of each parties is concurrently met thereby providing a
methodological base for decision making throughout the pre-contract stages, all with the aim of
delivering value and function. Pre-contract Cost control must therefore be a continuous process so
that the current estimated final cost are continuously known and is considered in terms of
approximate estimates and cost plans (Hackett and Robinson 2003).

Cost Estimating and Forecasting

In order to ensure effective pre-contract cost control, deliverables must be established from the
beginning of the project and in order of importance. This is known as cost forecasting. It is the process
of allocating cost to a building project on basis of the information available and done in consecutive
stages. The first step of cost forecasting is the Order of Cost Estimate produced during Stage 0-1 of
the RIBA POW 2013 in accordance with the NRM 1-Part 2 (RICS 2012). These estimates provides the
starting point for project development along any project life cycle to enable developers to ascertain
the financial implication of their project prior to the devisal of detailed designs (Skitmore 1988; Abou,
Lewis and Alzarooni 2004). This is dependent on the type of project involved, and the level of precision
will be dependent on the complexity and amount of alterations required which may compromise the
certainty of the budget forecast (RICS 1982)

There are 3 main Cost estimating techniques and these are dependent on the availability of design
details available at that time and are used at the initial stages;

(1) The Functional Unit method is based on a single price rate method extracted from a similar
projects and is on basis of functional Unit obtained from Cost Analyses- BCIS1, Price Books;
Spon’s Price Books2 or Firm’s Own Library,
(2) This functional method is relatively similar but is expressed on basis of GIFA3 x cost/m2 GIFA
and,
(3) The elemental cost estimate provide the basis for setting cost of the elements that will be
referred to as the design develop and cost plans are prepared.

The accuracy of the procedure is dependent on the assumptions made by the consultant that must be
confirmed on basis of its appropriateness with the design team. Cost based or unconfirmed
assumption may have subsequent financial consequences at later stages (Hackett and Robinson 2003).
Once cost estimates are established, these must be presented in the form of formal reports explaining
the methodology adopted for reaching the estimates and must include drawings/sketches used,

1
BCIS-Building Cost Information Service
2
Spons Architect's and Builder's Price Book
3
GIFA- Gross Internal Floor Area
sources of costs information indicating any adjustment made for location, inflation and date of
estimate and assumptions & exclusions (Benge 2014). Cost estimates must be carefully planned as it
sets the budget for the project and forms the initial build up for the cost planning process that would
be subsequently used for cost/budget control purposes.

Risks Associated in Cost Estimating

The process of cost estimating is undermined by various levels of risks, uncertainties and is dependent
on the levels of information available for the project. It is also dependent on the expertise and level
of judgement of the professional working on the cost forecasting exercise (Abou et al. 2004). A
functional unit rate must be methodologically appraised with respect to the source and parameters
from which the rate was generated. Similarly any assumption and exclusions must be appended to the
cost estimate (RICS 2012). Rates must be adjusted to suit the project including the Location Index to
suit the project, an allowance for the date of the estimate amongst various other considerations. For
instance adjustment on the source of the cost information, the BCIS has excluded cost of external
works in an estimate sand usually take average prices. This may increase the cost of the estimate
which may be unrealistic. Hence, careful consideration must be undertaken in the adjustment of the
rates on a case to case basis, e.g the extra cost for high quality finish must be added on a similar rates
to ensure a correct estimate. The first step of the pre-contract cost control procedure requires
judgment and experience to understand and adjust rates from previous analysis in order to reach an
effective and realistic budget for the project (Cartlidge, 2009). If the estimate is out of the client
budget then major review must be done to either trim down cost by changing the initial project scope
or by proposing the phasing of the project.

Cost Planning

The cost planning stage may only begin once the budget is signed-off from the cost estimate and the
design team has devised specifications, sketches, plans and more detailed information that meet the
client requirement. The cost plan will provide the cost control points for the developing budget that
bring design and cost together at the pre-tender stage (Cartlidge, 2009). This will ensure that the client
is receiving value for money and make the design team aware of the cost implication of their designs.
This enable a balanced and practical design that fits within the budget and provide a base for decision
making by the client (Section 3.2.2 NRM 1 RICS 2012). It breaks down the estimate to allocate the cost
to various elements through the devisal of Cost plans 1, 2, 3 hence assisting the design team in both
controlling the building cost and ensuring the best use of the employer’s funds.

In order to prepare cost plans it is important to break down the building in separate levels as laid by
the NRM 1-Section 3. Each element will be dependent on the design and specification that will
determine the selection of the material and design factors related to the element. It must hence be
considered in isolation as laid by Section 3 until design, specification and costs are approved prior to
the examination of its impact on other elements

The 1st Formal cost plan is prepared at Stage 24 when the scope of the project is defined but no detailed
design is available. This will provide the basis of the Cost Plan 2 which is a progression of the previous
plan and is done when the design development is complete. At Stage 45, upon completion of the
technical designs, specifications and detailed information, the Cost plan 3 is prepared. Each cost plan
evolves from the previous plan and is taken as a base to be refined as more design information are
available. As design evolves, more detailed measurement can be made and cost accordingly revised

4
Stage 2- Concept Design RIBA POW 2013
5
Stage 4-Detailed Design RIBA POW 2013
and allocated as required. The accuracy of the Cost Plans will be dependent on the source of
information and cost analysis adopted. It is advisable that cost analysis from relatively similar projects
are used and adjustments made for differences. While a number of possible designs can be considered
for each elements, these must be laid on the cost plan to demonstrate how design affect cost (Hackett
and Robinson 2003). As the design develops and detailed information are available updated Cost Plans
must be reported to the client. It must clearly detail the assumptions, limitations and critical aspects
considered for the devisal of the cost plan. Where there are consequent impact on elements cost,
corresponding inverse changes must be made to other elements if the project cost is to be maintained
within the approved cost. This systematic cost monitoring and control through earned value ensures
that the project remains in line with the budget(Cartlidge 2009). All relevant members of the team
must accordingly be informed as timely communication is key.

This methodical cost control procedure evolves as more design information is available6. The
effectiveness and clarity of this process requires that the client validates each cost plans on completion
of the respective RIBA stages7. Each stages must be signed-off prior moving to the next. In the event
that agreed budget is likely to be exceeded or reduced, without any change to the brief, the client
must be informed and instructions requested. This as results will confirm the cost limits approved by
the client (Hackett and Robinson 2003) at proceeding cost plans. Likewise, In the event of elements
going out of budget, comparative cost plans must be called for and is carried out as part of the value
engineering exercises that allows alternative design options to be considered; steel v/s pre-cast
concrete frame, life cycle costs of cladding options; aluminium v/s steel . This allows for informed
decision of economical alternatives with the aim of meeting the client’s set limit for the building cost.

It is of critical importance that the pre-contract cost procedure be done in a systematic manner
ensuring effectiveness and efficiency. As reviewed the pre-contract cost control procedures must go
through respective processes having their distinct deliverables that would be a prelude to the next
stage. As reviewed the starting step is the Order of Cost Estimate that will set the limit of the budget
and is followed by the devisal of the Cost Plan, 1,2 and 3 that would allocate cost to the respective
elements of the buildings, the relative levels and development of the cost plans are based on the RIBA
work stages and are dependent on design and development, specifications and information obtained
from the design team. The effectiveness of the procedures is dependent on the communication,
frequency of the meetings and mutual understanding of the deliverables. The process also depends
on the skills, experience and judgement of the person administering the process so that necessary
adjustments are made to the rates to reflect the design.

6
NRM 1-3.2.5
7
RIBA Plan of Work 2013