APELI M.

COST CONTROL

N.B Throughout this section, unless otherwise stated, "Cost" means "Cost to the client".

IMPORTANCE OF COST CONTROL

The outlines of the present-day structure of the building industry were formed in the early
nineteenth century and many of the current practices in the industry were involved in the
same period. Consequently, today's sociological, economic and technological pressures place
a considerable strain on the industry's control system. In particular, these modern pressures
have made the control of building costs both more important and more difficult than hitherto.

The following headings illustrate the types of pressures involved:

(a) Pace of development in building is increasing

Because of the rapid development of society, the pace of development in building is

increasing. This increase in pace has led to time having a measurable value to an increasing
number of clients. These clients are less willing to tolerate the delay caused by re-designing
buildings when tenders are too high. It is important therefore, that buildings can be designed
and built within expenditure limits.

(b) Client's requirements are becoming more complex

A modern General Hospital for example, is a much more complex building than its 19th
Century equivalent. Not only does it comprise a much greater variety of departments but it
also requires a far greater provision of services and equipment. Thus, increasing technical
complexity of building means that there are many more opportunities for the cost of a project
to get out of hand. An effective system is therefore required for the strict control of costs
from inception to completion of a project.

(c) Client's organisations are becoming target

Client organisations have tended to increase in size through expansion, take-overs and public
ownership. Today, very few large building programmes are financed by one wealthy.
individual or company. The modern "client" is often a chain of stores, a large industrial
corporation, a nationalised industry, or a government department. These large organisations
are usually directed by a board or committee which draws on specialist staff

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For the examination of expenditure this has become necessary because of the volume of
business which is undertaken, and because the board or committee has to satisfy shareholders
or members of the public that money is being spent wisely. Therefore, future expenditure
must be forecast and controlled accurately.

The efficiency of the client organisations must be matched by the design professions and
especially by the project design team. This is particularly important in the field of cost control
where building expenditure must accord closely to estimated expenditure. The building
professions are therefore usually asked to forecast the cost of a building before drawings and
specifications are available, and are required to keep to their estimate by the client
organisations.

(d) Increased new techniques and materials

When traditional estimating techniques were developed, the range of buildings was much
narrower than in modern times. Many different types of buildings are now required for
different functions power stations, television studios, airports, laboratories and so on.
Similarly, in those days, the range of building materials was also restricted. How materials
such as plastics, pre-cast concrete, aluminium sheeting, roofing felt and plasterboard are
readily available for building purposes. Many new construction techniques are also available
e.g. pre-stressed concrete, lift slab construction and large unit pre-fabrication.

This increasing range of choice in materials and types of building has made the traditional
methods of costing less reliable and in addition, it has become increasingly difficult to
achieve a balanced design and to ensure value for money.

Question:

PURPOSE OF COST CONTROL

The purpose of a cost control system may be summarised as follows: -

(a) To give the client good value for money.

(b) To achieve the required balance of expenditure between the various parts of the building

(c) To keep expenditure within the amount allowed by the client.

Current cost control systems tend to concentrate on achieving (c) whilst still trying to satisfy
(a) and (b)

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PRINCIPLES OF CONTROL SYSTEMS

All systems of control are essentially very similar, because each relies on the same basic
principles.

The principles of a control system are illustrated in the following simple example.

A refrigerator is designed to keep foods or liquids at a low temperature to preserve them. This
is accomplished by controlling temperature within a specified range, normally with a
minimum of -5°C. This temperature limit provides a frame of reference for our control
system, 1.e. that the minimum temperature should be -5°C, imposes a set of conditions or
pattern of behaviour on the functioning of the refrigerator. If the temperature rises above -
5°C, the conditions will be broken, and the functioning of the refrigerator will not adhere to
the predetermined frame of reference keeping the temperature inside the refrigerator below -
5°C. If we assume the refrigerator to be functioning normally, then the temperature must be
kept below -5°C. This is achieved by a system involving measurement and feed-back. The
temperature is measured by a thermometer, usually incorporated in a thermostat and
information about rises in temperature is fed back to the motor which controls the cooling. If
the temperature rises above -5°C the feed-back system "warns" the motor, which is then
switched on, producing a drop in temperature.

To summarise all control systems, adhere to the following three principles: -

1. There must be a frame of reference or set of conditions which must be adhered to. lich

2. There must be a method of checking or a feed-back system.

3. There must be a means of remedial action.

BUILDING COST CONTROL SYSTEM

Building cost control systems apply the general control system principles as follows: -

PRINCIPAL 1,

Frame of reference

(a) Establish a realistic first estimate,

(b) Planning how the estimate should be spent among the parts of the building.

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When a client has accepted the realistic first estimate, this sum is considered as the cost limit
for the project. By cost limit, we mean the cost agreed between client and design team as the
amount beyond which the project may not be pursued.

The second part of principle one, establishing how the estimate is to be spent among the parts
of the building, entails splitting the cost limit into a number of smaller costs limits (usually
called cost targets), one for each part of the building. These parts of a building are usually
called ELEMENTS. An element may be defined as a part of a building with cost
significance, which always substantially performs the same function or functions
Irrespective of the building's construction. As an example, the functions of keeping out the
weather and insulating the top of a building are usually performed by the roof. Irrespective of
whether the construction is timber or felt, or concrete and asphalt, items forming a part of the
roof will always be analysed under the element roof. The most widely accepted "standard"
list of elements used in Australia is that published in the National Public Works Conference
(NPWC) Cost Control Manual.

PRINCIPLE 2: Checking

Cost targets are checked as work progresses. If a cost, check reveals a discrepancy then
remedial action should be taken.

PRINCIPLE 3: Remedial action

Remedial action ensures that expenditure is contained within the amount agreed between the
client and the design team, i e. the cost limit.

Ideally, remedial action should be taken before any damage is done and within the time
allowed for the project.

Occasionally, suitable remedial action is impossible, and additional finances must be

obtained to complete the project. In which case the client will generally be asked to supply
the necessary additional funds this is called belated remedial action. This implies that the
initial estimate was incorrect and will certainly be an embarrassment to the Design Team.
However, the presentation to the client of a carefully completed and detailed budget is the
most convincing argument available as to the necessity for additional funds.

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Summary of building cost control system

Cost limit

Cost target Cost target Cost target

Cost target

Remedial

action Cost check

Cost check Cost check Cost check

COST CONTROL FROM INCEPTION TO TENDER

Before discussing cost planning and control in detail, it is first of all important to agree on
some sort of model of the design and construction process. The reality of the design and
construction process is obviously highly complex and is not particularly amenable to
graphical representation. The accepted convention is to represent the process as simple linear
progression. The diagram below is extracted from Rawlingson's Australian Construction
handbook 1987. The diagram illustrates a linear design process with the corresponding cost
planning and cost control activities

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COST PLANNING PROCEDURES

Determine
inception approx. cost of
budget

Cost of

Design alternatives Cost studies

feasibility
Constructional systems

Standards of finishes and

services

Preliminary
Preliminary sketch
plans Cost of plan including
separate elemental
costs

Budget estimate and cost

Final sketch plans
plan

Including separate
elemental costs
Cost feed back
Details design Cost control

Continuing cost check and

Cost check
taking remedial action
where necessary to
maintain overall budget

Specification Final cost check

working drawings based on pre
tender estimate

Bill of quantities Final B.O

Pricing by O.S

COST ANALYSIS

tender

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INCEPTION

At the first stage of a building project, Inception, when the client first decides he/she wants a
building, the design team is not normally appointed, so there is no cost control function for
the design team. At the Inception stage, the client organisation is set up for briefing, the client
considers his/her requirements for the building, and appoints an architect.

FEASIBILITY

At the second stage, Feasibility, the design team is engaged by the client to provide an
appraisal and a recommendation so that the client may determine the form in which the
project is to proceed.

An effective cost control system must then be set up. incorporating the three principles of
cost control. The first principle to be incorporated into the system is the establishment of a
realistic first estimate, and deciding how to allocate this estimate among the elements. The
design team may be required to produce its own estimate which, when accepted by the client,
is effectively the cost limit. On the other hand, the design team may have to confirm that a
building can be completed within the client's previously stated cost limit.

In either situation, one of two possible methods can be used to determine an effective cost
limit, both of these methods rely on, and are related to the information available at the
feasibility stage on space standards and use; that e othe methods are related to the information
on the floor space of a building, the standard of accommodation provided and the function for
which the building is intended.

The first method is called the FINANCIAL METHOD because it is based on the finances
available for building. This method relies on the "developer's equation'. A developer
estimates the rent forthcoming from a building of given quality and size over its potential life.
The developer then deducts operating and maintenance charges for its potential life, and the
balance, when capitalised, represents the sum available for construction, professional fees to
the design team, and for the developer's profit. The balance then represents the absolute cost
limit. If this sum is exceeded in the estimate, the project may well not be pursued.

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In capitalising the balance, the developer finds from annuity tables how much would have to
be invested at an acceptable rate of interest, all annuity equal in value to his expected yearly
balance of rental over the expected life of the building

The second method is known as the INTERPOLATION METHOD. In this method, costs of
other buildings of the same type are studied, bear in mind the space and standards provided
by these buildings. The total cost of each of the buildings is generally expressed in a simple
form in a common unit such as cost per square metre. The total cost of a building being the
cost per metre square multiplied by the total floor space in square metres.

An example of part of a typical might be

Cost of building A (quality X, floor space 5,000 m2) is Kshs 40,000 per sq. metre.

Cost of building B (quality Y, floor space 5,500 m2) is Kshs 50,0000 per sq. metre.

From this range of costs an appropriate choice of cost limit can be made, bearing in mind and
making adjustments for differences in space, standards and use. Any major changes required
are thus made at this point. This method has been used extensively by design teams, and is
still in the process of refinement. The technique will be described later in greater detail.

By using either of these two methods, an effective estimate can be determined. This may be
the design team's own estimated cost limit for a building, or it may be used to confirm that
the building can be completed within a client's previously stated cost limit.

PRELIMINARY SKETCH PLANS

At the third stage, preliminary sketch plans, the brief is developed further, but there is still
insufficient information for cost targets to be prepared for separate elemental costs. Cost
allocations are made in broad terms among the major portions of the building. For example,
cost of Foundations, Structure and Services are calculated using a refined. Version of the
Interpolation method. The method consists of studying the cost allocations of similar
buildings based on historic cost data and from other sources.

These allocations are adjusted to take account of significant differences in the design of the
buildings and in the prevalent market conditions. From these figures, an accurate guide is
established to the broad cost allocation, solutions for the project. These broad cost allocations
are set out in an outline cost plan.

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Usually, as previously explained, the client is presented with a realistic first estimate or
confirmation of his own cost limit at the Feasibility stage. In certain projects, however, it may
be necessary to confine cost information at this stage to a range of costs, leaving the
preparation of a firm estimate until the completion of outline designs

SUMMARY
Feasibility Stage - Realistic First Estimate

SPACE STANDARD

USE

OPERATING AND Mantainance

charge deducted from estimated Costs of building of similar function
future rent studied

(The financial method) (The interpolation method)

Realistic estimate or cost limit

first part of principle one

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Outline proposals stage

Broad allocations of cost made for major portions of the building

Published sources and inhouse data base

Cost allocations of similar buildings

Allocations studied in relation to design and

market factors and adjusted as necessary

Realistic estimate confirmed

Clients cost limit confirmed and
and broad cost allocation
broad cost allocation presented
presented

Second part of principle one

developed I.e outline cost plan
prepared

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COST CONTROL DURING FINAL SKETCH PLANS

At scheme design stage, the brief is completed and the design team develops the full design
of the project, including planning arrangement, appearance, constructional method, outline
specification and cost. At this stage too, all necessary approvals are obtained (e.g. planning
approvals from local planning authorities). During this stage, final sketch plans are produced
and the cost plan formulated. This cost plan is a statement of how the design team proposes to
distribute the available money among the elements of the building, and is formulated so as to
postpone firm decisions on detail design and specification until a later stage.

The cost plan is not specific for a particular design and remains valid until a satisfactory
design solution is obtained, or until the design team decides to amend the allowance.

The distinction between the outline cost plan prepared during preliminary sketch plans and
the cost plan produced during final sketch plans is that the outline cost plan makes its cost
allocations on broad terms forming large groupings of elements as opposed to the detailed
breakdown at scheme design stage.

In preparing a cost plan a cost target is set for each element, basically the sum of the cost
targets should equal the cost limit. At this stage however it is available to make an allowance
for price and design risk to cover any unexpected changes in price level or design between
final sketch plans and receipt of the tender. This allowance is very important, as unexpected
wages rises or design difficulties and changes can sometimes make it impossible to keep the
final cost of each element within its cost target.

In general, therefore, the sum of the cost targets plus the price and design risk allowance will
equal the cost limit.

All members of the design team must participate in the formulation of the cost plan, because
in the design of a building project, the skills of each design team member are called upon and
each member may therefore be responsible for incurring expenditure. The nature of the
building project may require that specialist consultants should be included in the design team.
These consultants should be included in the design team. These consultants should co-operate
the formulation of the cost It would be unreasonable, otherwise, to expect them to accept a
cost target within their area of responsibility unless they had acceded to it during the
formulation of the cost plan

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COST CONTROL DURING DETAIL DESIGN

At the Detail Design stage, the emphasis changes from planning to action. At this stage final
decisions must be made on every matter related to design, specification, construction and
cost. Every part and component of the building must be fully designed and all designs must
be completely cost checked and remedial. action taken if necessary.

Detailed designs are prepared for each element of the building. All designs must be complete,
construction problems solved, and material, section, fixing, finish, etc., decided; before work
may safely proceed to the next stage of design working drawings.

The drawings prepared by the design team are not required to be Complete working drawings
for use on site. Pencilled dimensional sketches are sufficient, provided all design solutions
are complete. Since detail designs and specifications are available at this stage, the most
accurate and appropriate estimating technique is the Approximate Quantities method. The
Q.S. measures approximate quantities from the detailed designs for each element and prices
these quantities in the traditional way. The Q.S then informs the other members of the design
team of the estimates for each element, these estimates acting as a cost check against the cost
targets, if cost checking is not done then all previous work will be abortive.

If remedial action is required, then this must be taken within the time and budget allowance
so that the objective (keeping expenditure within the amount allowed by the client) is still
achieved. Once again, if this is not done, all previous work will have been wasted.

Consider the situation where cost checking reveals that remedial action is necessary. Two
remedial courses of action are open:

(a) If the cost of the element design is greater than a realistic cost target, the element design
should be changed so that it is within the cost target.

Alternatively

(b) If the cost check of the element design shows that the cost target is unrealistic. Cost
targets should be adjusted throughout the cost plan, thereby releasing surplus funds for the
element in trouble. This adjustment will not alter the overall cost limit, this being the whole
point of cost planning. The cost plan can be changed even at this stage. as long as the cost
limit is not altered.

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If the cost of the element design is just within the cost target, the design is confirmed in
writing as being suitable for the preparation of production drawings in the next design stage -
Production Information. If the cost is significantly within the target, then surplus funds may
be released for other elements.

Each element is treated in turn this way and any necessary action Is taken and completed.
Through experience it is known that certain elements are more likely to give trouble than
others, so the cost checks on these elements are completed first.

the design should product quality, the design team should ask if the wishes to release
additional funds. In this undesirable situation the cost plan is a powerful tool with which to
argue the case for more funds.

Once all the element designs have been cost checked, a final cost check is done. This ensures
that nothing has been overlooked and is therefore an important part of the cost control
procedure at the Detail Design stage. If this final check confirms that all is well, work goes
on to production dr quantities, tenders, etc. drawings, bills of 1

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Summary

Flow of design team work at Detail stage:

Detail designs prepared for each element

Designs cost checked by the

Cost of element design exceeds Cost of element design within cost

cost target target

If cost of element design is greater If cost of element design shows

than a realistic cost target the cost target is unrealistic cost
element design should be changed targets should be adjusted
so that it is within the cost target throughout the cost plan thereby
releasing surplus funds for the Confirm in writing as
element in trouble suitable for production
drawings

Final cost check

Design confirmed as suitable for production drawings

Production drawing etc

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COST CONTROL AT TENDER AND FINAL ACCOUNT STAGES

POST TENDER

In theory, if a cost control system is rigorously applied during the design stages, the tender
amount should not exceed the cost limit. In practice however, tender amounts have an
unfortunate habit of exceeding cost limits. remedial action has to be taken. In such a situation,
belated BELATED REMEDIAL ACTION (where tender amount exceeds cost limit)

Possible causes: -

(a) the cost plan is not realistic and is too low.

(b) the cost plan is realistic but the contractor's rates are too high. This may be due to market
conditions at the time of tender, 1.e. lack of competition due to an abundance of work in a
specific region.

(c) Bad choice of list of tenders, 1.e. contractors may not be suited to carry out the proposed
works.

(d) An unexpected increase in costs of labour and/or materials at or about the time of
tendering.

(e) One or more items in the bill may have been rated too highly due to a genuine error or
misunderstanding on the contractor's part.

Procedure

Build up as detailed picture as possible regarding the nature of the discrepancy. If the tender
is cost analysed and each elemental cost compared with the cost plan target costs, then the
genera) nature of the discrepancy should be revealed. It may. be confined to one or two
elements or it may be spread over many.

Action

Assuming that the tender is arithmetically corrected the contract price can only be reduced by
reducing the quantity and/or quality of the work, or by negotiation with the contractor in an
attempt to reduce his price, or by a combination of all three.

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(As a last resort the contract can be put up again for tender, but this a very desperate cause of
action.)

Whichever course of action is taken, the client must be taken into the design team's
confidence and kept fully informed.

FINAL

Another unfortunate occurrence is for the final account to exceed the tender amount. The
factors which lead to a final account figure exceeding the tender figure lie in three main areas
(a) Provisional work in the bill

(b) Variations

(c) Cost variations

There could of course be an error in the quantities in the bill which would have to rectified,
but assume for the moment that the basic bill is sound.

(a) Provisional work comprises: -

1. provisional and prime cost sums

11. Provisional quantities

The same general policy applies to provisional work whether it is a PC sum or a provisional
quantity.

1. Establish and list all the provisional parts of the bill, i.e. the 'soft' or automatically variable
parts of the bill.

2. Each provisional element (element not in the CP sense) should be finalised as soon as
possible and a running check kept on the spending associated with each provisional element
in order to keep the design team and the client well informed.

3. A balance of the savings or extras caused by the provisional elements and the mere fact
that a final figure for certain elements e.g. drainage) cannot be achieved until almost the end
of the contract is no excuse for not keeping a finger on the pulse of the general trend of the
final cost. It is vital to to let the client know quickly if serious

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