10 Checks to Control Construction Cost for Owners

And how modern construction companies take care of each of them efficiently

Let us look into some critical aspects, that might help us to keep construction costs under control. The key points are these.

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–   Calculate the budget before starting   –  Select contractor carefully; changing contractor midway is prohibitively costly  – Delays ultimately will loot everybody  –  Minimize changes  –  Pay right amounts to vendors at right time  –  Get rid of over-designs  –  Prevent quality reworks  –  Avoid claims, disputes and accidents

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Now, getting to the details of each of these:

One: Budgeted Cost

The first and foremost step towards cost control is to have a budgeted cost. It helps in many ways

(1)   To compare contractors’ quotes: Specifications used by one contractor may be different from another. Having a fair cost estimate ensures that we are not comparing apples against oranges.

(2)   To fix the terms of payment to the contractor: So that we don’t pay the contractor the right amount for each stage of construction.

(3)   To keep control of cost-to-completion at any time into construction.

(4)   To manage any unfavorable conditions such as bad contractor and material cost escalations

(5)   If the right amount of funds is not available in time, it increases the cost due to interest on borrowings and delays associated with cash flow.

(6)   If the project was under-budgeted, there is certainly cost over-run

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Steps taken by modern companies for this problem: Prepare quantity surveys, BOQ and fair cost estimates

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Two: Control the delay

Needless to say, delay in completion causes loss of opportunity, loss of business revenue and interest cost to the owner. If the owner has employed a site office and supervisors, overheads of the owner also increase.

Besides that, the contractor runs into a loss because overheads, supervisor salaries, machine rentals, scaffolding cost etc goes up. Sooner or later, unless the contractor is exceptionally magnanimous, they request to consider a price increase or deserts project mid-way, delivers poor quality or find loopholes in the contract agreement. If there are two or more contractors, in the construction, coordination between contractor is the owner’s responsibility and one contractor may claim loss due to delay from the part of another contractor. All these tactics of contractors, results in overall increase of cost to owner.

There are no winners in delay. Hence, the golden rule is to ascertain that not a single day of progress is lost.

Material cost escalations during the period of the project, is yet another challenge in delays.

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Steps taken by modern companies for this problem: Prepare Gantt chart schedules for the project, generate coordination plans and track progress, conduct weekly Progress Review Meetings to mitigate coordination issues and create accountability to each party.

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Three: Reliability of Contractor

Relations with vendors and contractors in projects are short-lived and lasts less than or equal to span of project. Unless project managers or owners are associated with a vendor or contractor for more than one project for quite long periods of time, an assessment of their reliability is difficult. Reliability is perhaps the primary desirable attribute among vendors, in being able to supply or execute the required deliverable at appropriate timing. Cooperation between contractors and clients is equally vital successful accomplishment of project objectives.

Moreover, most cases of cost over-run are apparent in projects that are impaired by terminated contracts. Contract terminations can be frequently traced to financial/technical weakness of contractors, although coercive and extortive behavior among contractors and clients are not uncommon.

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Steps taken by modern companies for this problem: Large companies ensure reliability of contractor with security deposits, bank guarantees and retention money. Smaller projects run on item-rate contracts, instead of lumpsum contracts, so that a contractor can be replaced with ease.

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Four: Changes in Design

Variations do emerge in projects on account of scope creep from the owner or due to site conditions or even unfortunate omissions in the contract agreement. The emergence of change orders after award of contract impairs the negotiating ability of the owner because there is no more competitive bidding. Besides, if the changes are executed on verbal instructions, without approved change orders, post-event bargains become all the more embarrassing.

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Steps taken by modern companies for this problem: Maintain log of design changes, change orders and variation notes.

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Five: Faulty Contract Agreements

Well defined contractor-client relationships are characterized by (1) clear scope of works explaining what works are or are not expected from the contractor, with what materials or facilities may be provided by the client or others, (2) the technical specifications and drawings based on which the works are to be executed and (3) special/general commercial conditions of contract, relating to the stage, procedures and quantum of payments. These clauses are usually drafted by contract managers in accordance with national and international guidelines such as FIDIC.

Oversimplified work orders or contractors offers are often wrongly used as contract definitions in specialized works. Risks associated with such contracts include hidden strings in the contractor’s offer (e.g., fine prints like ‘scaffolding shall be to client scope’). Later the contractor claims for a trivial input as out-of-scope can be surprising cost over-run to the owner.

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Steps taken by modern companies for this problem: Clear scope of works and specifications in contract agreement as per standard guidelines. For specialized contracts, Multi-Criteria Analysis and Technical Scoring is used.

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Six: Poor Negotiation and Over-Payments

Before the approval of contractor or suppliers payments it is necessary to make sure that all conditions are fulfilled satisfactorily. For instance, contractor rates for some main works (such as tiled floors) are usually inclusive of some subsidiary works (such as the supply of maintenance spares) according to the agreement. This is particularly significant during project closeout where a snag list of conditions needs to be cleared.

Over-measurements are also potential source of error in measurable contracts. For example, measuring along sloped roof areas.

 

Seven: Quality Reworks

Correction of errors is a major wastage of cost. Marking errors cause costly design changes, brickwork errors cost thick corrections in plastering, concreting errors cost huge amounts in water-proofing and so on. If there is a general contractor for the project, who is responsible for both materials and workforce, cost impact due to quality is the head-ache of the contractor. But still, it can impact the owner by loss due to delay, overheads of keeping additional quality supervisors, non-performance of construction, higher maintenance cost, etc.

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Steps taken by modern companies for this problem: The quality assurance plan (QAP) made before every action of construction agrees on the approved brands, methods of controls, checklists for routine inspections and the frequency of inspections.

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Eight: Over-Designs

Sometimes, the architect or engineer provide designs which is more than required (such as more quantity of steel, more length of wires, more acoustics and insulations). This is an unnecessary cost to the project.

From the perspective of the owner there are three types of designs: (1) Construction according to the regional standards, for example as per BIS Codes in India (2) Sub-standard construction, where owner deliberately reduces quality to save capital investment (3) Over-designed construction where more than required is provided.

For example, if as per standard a construction requires 50MT of Steel and a contractor claims Rs. 300 per sft for construction, effective pricing is Rs. 300/50 = Rs. 6 per sft per MT. A sub-standard construction that requires 20MT of steel for the same building, should not cost more than 6×20 = Rs. 120 per sft. Therefore, for this building, any design that requires more than 50MT of steel and any contractor quoting more than Rs. 120 per sft are uneconomical.

Nine: Risks of Safety & Health

Quality, litigations, health and safety issues at construction sites, are collectively called as Risks in the project. Any of these unfortunate events lead to cost over-run by compensation, losses, claims, arbitration costs etc.

Steps taken by modern companies for this problem: Before the commencement of each activity in the project, a method statement for the activity should be formulated. The method statement shall describe the proposed machinery, storage locations, processing methods, job flow patterns, access, work front, security, quality assurance plan and safe operating procedures. Safe operating procedures analyses potential safety risks and takes precautions and protocols such as PPEs, fencing and aids.

Ten: Risks of Disputes & Litigations

Last, although unlikely and not least, disputes and subsequent litigations among owners, land acquisitions, contractors, governments, politicians, breaching third-parties and local residents should be carefully avoided. These situations are mostly common in large projects, and included here for the same of completion.

 

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