Owners, are You
Hitting your Budgets?
May 04, 2023
From an owner’s perspective, building a new capital asset comes with a range of challenges and uncertainties. In most cases, the work required to build the asset – whether it’s an industrial plant, a datacenter, a bridge or a factory – will be performed by third parties and the owner’s ability to influence value creation diminishes rapidly once actual execution of the project has entered the execution phase (see Figure 1).
Figure 1: A project owner’s ability to influence value creation drops off once project execution begins, just when capital expenditures begin to accelerate.
Supply chain issues, materials shortages and escalating prices further erode predictability. Finally, many owners feel that they’re completely reliant upon contractor pricing to create their budgets.
When faced with so many obstacles, how can a project’s actual cost and duration come close to the baselines that were initially set prior to execution?
While it may appear that the odds are stacked against any entity desirous of building a new asset, many practical, pragmatic steps can be taken to eliminate surprises and create an air of project certainty.
First off, a disciplined “stage gate” approach can allow cost estimates, and ultimately the project’s budget, to evolve as the candidate project progresses from conceptual design to detailed engineering and ultimately into execution. The Association for the Advancement of Cost Engineering (AACE) provides guidelines for acceptable accuracy ranges for different classes of estimates. Commonly known as their Recommended Practice 18R-97, the table below summarizes their recommendations for cost estimates across pre-defined estimate classes.
|Class V||Rough Order of Magnitude||-50% to +100%||-25% to +50%|
|Class IV||Conceptual Estimate||-30% to +50%||-15% to +30%|
|Class III||Preliminary Estimate||-20% to +30%||-10% to +20%|
|Class II||Definitive Estimate||-10% to +20%||-5% to +10%|
|Class I||Final Estimate||-5% to +10%||-2% to +5%|
Of course, these ranges are suggestions, and many organizations have adopted their own terminology, acceptable percentages, and specific triggers which open (or close) the gate to the next level of detail for an estimate of a candidate project.
Synchronizing Costs for Better Outcomes
Another key element of a disciplined approach to creating reliable and predictable cost estimates is to keep cost estimates synchronized with changes occurring during the early design and engineering stages. By keeping design and engineering connected with the budgeting process, changes in scope, quantities and specifications can help the cost estimate evolve in real-time.
An advantage here is that owners can now pinpoint how design changes affect cost and can perform real-time “what if” scenarios for maximizing value for each dollar spent.
Many organizations have a treasure trove of historic costs and are beginning to be able to mine that data to help predict future costs. Norms databases contain productivity rate tables for commonly performed construction tasks, and these can be applied to current labor market rates to get an idea of what this work should cost, and how long the work should take. Benchmarks can be used to validate estimate assumptions, and can highlight areas of potential concern (e.g., when an estimate is outside of a specified percentage deviation from the statistical mean).
While a construction project can likely consist of tens of thousands of individual tasks, most organizations will follow the 80/20 rule when standardizing these benchmarks and historical costs: begin with the 20% of the work which is preformed 80% of the time and build a plan to capture the remaining 80% over a longer period.
Contracting strategy can also be a determinant in managing costs during project execution. When hiring a contractor under a Lump Sum agreement, one key may be to let the contractor manage their work, while paying close attention to situations which may result in costly change orders. Under a Time & Materials contract, it may be in the owner’s best interest to focus on the contractor’s daily productivity, resource utilization and overall efficiency of the workforce to be able to provide input to course correct early in the process if forecasts exceed budgeted amounts.
During execution, many successful organizations have found that Daily and Short Interval Planning can provide visibility into what type of productivity is expected from the workforce, which can be monitored in manageable packages. In many cases — especially during shutdowns, turnarounds and outages of existing facilities — time can be more important than money, so having budgets, productivity and schedules linked can provide greater visibility into the effects one of these elements may have on the others. As costs are being monitored, these can be categorized relative to a standard cost breakdown structure which can then be leveraged during subsequent estimating and budgeting cycles.
Reviewing the Past to Plan the Future
Post-mortem, it’s extremely important to have a dedicated wrap-up process, whereby lessons learned are shared and trailing actual costs along with all other loose ends are accounted for before project teams disperse and begin to work on new endeavors.
Organizations typically have varying levels of maturity and sophistication amongst project teams, and in many cases these teams are reliant on independent tools and processes project team members have utilized in the past. This can lead to discord within an organization as project teams may be budgeting and capturing data at different levels of granularity, by different structures and in different formats.
The use of an integrated project controls platform creates consistency in processes and data across project teams with varying levels of maturity, which allows for organizations to scale at a rapid pace.
The implementation of an integrated project controls platform has been proven to eliminate redundant, manual effort and allows for more streamlined sharing of data and procedures across many different business processes.
By highlighting issues outside of pre-determined threshold ranges, project teams can focus on those areas which need the most attention today, rather than crunching numbers and compiling data from multiple sources.
Ready to take a deeper dive? Schedule a one-on-one consultation to find out how InEight can help you succeed in your construction digitalization journey.
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