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Controlling Project Costs — 2

The previous commentary in this series dealt with the control of design costs. This one addresses the management of construction costs, the largest component of most building budgets.

Construction Costs

The construction cost projections presented to us by the general contractor include (a) the cost of the proposed building materials, fixtures, and equipment, (b) the cost of the labor required to assemble these items into a finished building, (c) the management cost to supervise this labor and to coordinate both onsite and offsite project activities, (d) a prorated portion of the contractor’s office overhead expenses that support all of the company’s project work, and (e) a figure for project profit. The profit figure includes a base amount to maintain a steadily growing business and an amount that reflects the degree of financial risk that the contractor assigns to your project relative to others that he has completed.

There are four key areas upon which I believe that you can focus to control cost: (1) the use of realistic, not optimistic, cost figures throughout the work, particularly in its early stages, (2) the generation of as much accurate construction information as is possible during the design phase of the work, (3) the frequent monitoring of construction activities and mounting costs, and (4) the type of working relationship developed with your contractor.

One of the reasons that we hear so much about cost overruns is that the initial estimates to do the work were not realistic or carefully developed. The desire to make a project appear financially attractive to owners, business colleagues, and lenders can be an intoxicating stimulus for all the parties who wish to see the work go forward. It is not unusual to find instances where developers have lowered what were more probable cost figures to have a more appealing “bottom line,” or where design professionals have suggested overly optimistic square foot costs to eager clients, or where families have relied upon the lowest cost figures for “similar” projects that they have heard from contractors to feel more comfortable about moving forward with their own project work.

As a first step in building cost control, taking a more conservative view of the cost of the project in its early stages makes sense. Assume that the project will have a number of special design challenges, needs, and desired refinements beyond the “norm” (note, there is no such animal), and that the construction process will not be problem-free. Such an approach will lead to more probable cost estimates that will serve as better financial frames of reference over the course of the work. Contingency amounts should be included in all projections to help cover unexpected costs.

A second reason why cost estimates may be inaccurate, even those of conscientious contractors who have carefully studied the construction documents, is that the information on the drawings and in the specifications is incomplete, inaccurate, unclear, or in conflict with other information. While the industry and the legal standard for the quality of the information on drawings is not “perfection,” if the pricing of the work is to be correct, the design information on which it is based must be as complete and precise as is reasonably possible.

To best assure attaining this goal, your architect and engineering consultants require sufficient time and compensation to do thorough, detailed work. (Repeat that ten times!) Every major aspect of the building design and many small but critical details need to be studied to select the best design alternative. Further, the needs and preferences of various consultants must be properly integrated as the design work proceeds. A contractor should not be placed in the position of needing to try to design anything to complete his estimate. While a set of minimal construction documents may be adequate to obtain a building permit at times, it is seldom sufficient to pin down construction costs with much confidence.

If the base cost figures used for an estimate have been realistic, and if the information on the construction documents is reasonably complete and properly coordinated, you will likely have reliable cost data on which to proceed with the work. This information will be of little cost control value, however, unless both you (or your architect) and your contractor continually monitor the project’s mounting expenses and changing conditions. Actual costs and time expenditures must be frequently compared to previous projections, and differences should be noted. Undesirable trends can be spotted before they become major financial problems. Design, construction, or management solutions can then be proposed to address the immediate difficulties and minimize the financial impact on later parts of the work.

As a final element in project cost control, you should consider the type of working relationship that you maintain with your contractor. Generally, the technical complexity and the management logistics of most building work are sufficiently difficult for contractors to complete the work as scheduled and budgeted. If they also have to expend large amounts of additional time and energy dealing with ill-timed and excessive client changes or demands, the smooth flow of the work upon which initial cost estimates have been predicated will be destroyed.

The adversarial relationship that can slowly develop in such circumstances, rather than the highly cooperative one needed by both parties to remain alert for potential cost problems and mutually solve them, will almost always cost an owner more money in the long run. Contractor change order costs will be higher to reflect the additional management and labor time being given to the project. The occasional unexpected material or labor cost savings that becomes available may not be passed along to you. Construction worker morale will not be as good as needed to produce the work with your best interests in mind, i.e., as efficiently as possible while maintaining high quality.

Demanding owners can be among the most rewarding people with whom to work, but requests should occur at the appropriate times in the design-build sequence. The impact of every request should always be considered in the context of the overall project budget and schedule goals that your contractor is being asked to meet.

John McLean, Architect
San Francisco
(415) 777-9767