Construction Cost Management

Introduction

Anyone proposing to construct a building or engineering structure will need to know in advance the probable costs involved in the works. These costs include the costs of the works to be carried out on site by the contractor, professional fees, and any taxes that may be due to the government. Throughout the design and construction process, quantity surveyors are required to advice the client on any cost implications that may arise such advice is especially crucial during the project’s inception (Ashworth and Hogg, 2002, Ferry et al. 1999). At the project’s inception, the cost advice given needs to be as reliable as possible so that clients can proceed with the greatest amount of confidence. This is because “[t]he initial estimate of the cost of a building often carries the burden of being the cost limit for the project” (McCaffer et al., 1984, p. 415).
Construction is a major capital expenditure which clients do not commence until they are certain that there is a benefit (Myers, 2004, Potts, 1995). The early estimate is particularly important as it influences the client’s brief and can determine the viability of the entire project. Most clients are working within tight predefined budgets that are often part of the larger overall scheme. If the budget is exceeded or the quality not met then the scheme could fail (Tyler and Smith, 1995). Pre-tender estimating sets the original budget and forecasts the likely expenditure to the client (Potts, 1995). Within this context, “[t]he establishment of the cost limit is important in determining a project’s viability, and so [the] initial estimate carries a burden disproportionate to its reliability” (McCaffer et al., 1984, p. 415).
It has been suggested that contractors may determine the price they will submit for a tender by ‘gut reaction’ rather than determine the cost analytically. If this is the case then, how can an accurate forecast of the probable cost of a building be prepared by a consultant Quantity Surveyor? With reference to relevant examples, this paper discusses this statement. In discussing this statement, the role of the consultant quantity surveyor is briefly outlined. This is followed by a section describing several methods used by quantity surveyors to prepare a forecast of the probable cost of a building. The paper concludes with a discussion of how quantity surveyors ensure the accuracy of the estimates, and the role of ‘gut reaction’ in this process.

The Role of the Consultant Quantity Surveyor

Quantity surveyors are the professionals recognised within the construction industry as cost and value consultants (Ashworth and Hogg, 2002). A quantity surveyor prepares bills of quantities, to measure work done and to prepare valuations for certification (Ashford, 2004). He or she also consulted to provide cost information, examine amendments to conditions of contract, and assess commercial risks (Brook, 2004).
The consultant quantity surveyor is one that carries out work on behalf of a client organisation and this is the type of quantity surveyor discussed in this paper. In the UK, quantity surveyors usually carry out the pre-tender estimate. There is no separate charge fee for preparing the pre-tender estimate as the consultant quantity surveyor is generally engaged for the whole of the construction project, providing services to the client from initial feasibility planning through design development, bidding and contract administration (Skitmore and Picken, 2000).

How do Consultant Quantity Surveyors Prepare Cost Forecasts?

There are always two questions asked by a client considering an investment in construction: “How much?” and “How long?” (Smith and Jagger, 2006). Estimating responds to the first question. Very few projects can go forward before the cost of the construction has been determined (Tyler and Smith, 1995, McCaffer et al., 1984).
The purpose of pre-tender estimating, otherwise called pre-tender building price forecasting, conceptual or detailed estimating, or tender price prediction (Skitmore and Picken, 2000), is to provide an indication of the probable cost of construction (Ashworth, 2004). A pre-tender estimate is produced for various reasons, including budgeting reasons to determine whether the project should proceed as envisioned, reasons of cost control in which case the estimate serves as a cost control mechanism throughout the design process, or for reasons of comparison in which case the estimate serves as a basis for the evaluation of different design solutions (Ashworth, 2004).
In discussing how quantity surveyors prepare cost forecasts, estimate classification is outlined briefly, followed by a description of several methods of preparing estimates. Estimating is a distinct function in the construction management field, and the quantity surveyor’s primary focus is costs. The estimate is a summary, based on the best information available, of probable quantities and costs of materials, labour, equipment, and subcontracts to complete a project, including taxes, overhead, and profit. The cost plan is the instrument or document that brings design and cost together at the pre-tender stage (The Aqua Group, 1992).

Types of Estimates

The amount of information available regarding the project will dictate the type of estimate that can be prepared. However, all estimates are not equal – the less information available, the less accurate the estimate. Three types of estimates are discussed here: conceptual, preliminary, and detailed estimates (Ashworth and Hogg, 2002). Conceptual estimates are often called ‘ballpark’ estimates. Typically there are no drawings available at all and so conceptual estimates are often used when the project is in the idea or concept stage.
At this stage the client does not know if their idea is economically feasible or not, and they do not want to start spending money on design until they know that the project is at least possible. An experienced quantity surveyor can help out in a situation like this by offering a rough order of magnitude (ROM) estimate. These estimates are based upon a cost per primary unit for the facility. For example, for hospitals, the primary unit of measure would be beds, and the proposed number of beds is multiplied by the appropriate unit cost to come to an ROM estimate. For a school, the calculation would be cost per pupil; for a highway, the estimate would be based on a cost per mile.
The next level of estimating is based on a preliminary set of drawings with overall dimensions. Preliminary estimates provide a somewhat higher level of accuracy and may be used to establish initial budgets and preliminary financing scenarios. However, these estimates should never be used to commit to a contract price. There are still too many factors that can influence the reliability of the numbers. Although there are numerous preliminary estimate methodologies, the most common is probably the square foot method. In its simplest form, the estimator calculates the area of the floor plan and multiplies that number by a unit price. There are various levels of skill and detail that can be applied to the square foot estimating method, and the degree of accuracy increases with each step up, as will the time it takes to calculate the price.
Finally, when the client has a complete set of plans and specifications, the quantity surveyor can carry out a detailed estimate. Quantities and costs are calculated for every aspect of the project, and this is by far the most reliable estimate if the contractor is being asked to give a firm bid on a project. Detailed estimates are the most accurate. Throughout the rest of this paper, detailed estimates will be the type of estimates being discussed.

Methods of Preparing Estimates

There are several ways to estimate the cost of a building in the pre-tender stage. Brook (2004) notes that five methods of estimating are used primarily today. These are divided into single-rate methods – ‘functional unit’ method and superficial floor area – and multiple-rate methods – elemental cost plan, approximate quantities, and analytical and operational pricing of bills of quantities. Potts (1995) gives a more compact assessment of methods, noting that on the whole, there are four major ways to estimate the cost of a building in the pre-tender stage, as illustrated in Figure 1. The techniques in common use are:

1. Function or performance-related approaches,
2. Size-related approaches,
3. Approaches based on the manipulation of elemental cost analysis, and
4. Approaches based on unit rates.

The most appropriate times for the application of these techniques is shown in Figure 2. A quantity surveyor may use a combination of estimating methods in developing the costs for a project. For example, a client could be given a cost range for construction using the unit method and an elemental cost plan would be produced when the client’s outline brief is received. Approximate (or builder’s) quantities are used to produce a formal tender and when a contractor has received an order a full bill of quantities may be written for financial control during construction.
While there are several methods of producing detailed estimates, such as resource analysis, cost modelling, and cost engineering (Ashford (2004), both Potts (1995) and Brook (2004) note that elemental cost models are particularly popular at the pre-tender stage and are used by quantity surveyors in advising clients on their likely business costs. For example, cost modelling is a relatively accurate method that can be used for forecasting the estimated cost of a proposed construction project but Ashford (2004) argues that there is scant evidence of their use in practice.
Elemental cost analysis estimating relies on the selection of one or more suitable cost analyses and adjusting them for time, quality, and location in order to provide an estimate of the building (Jagger et al., 2002). According to Potts (1995) and Jagger et al. (2002), the technique of pre-tender cost control based on elemental cost planning was established in the 1950s as a means of controlling costs and establishing greater reliability of pre-tendering budget estimating. It is now a well-established technique and has been further developed by the Building Cost Information Service (BCIS) to include a national database of elemental cost analyses that can be accessed online.
The basis of estimation using this technique is the analysis of existing projects into functional elements in order to provide a means of comparing projects either existing to planned (Potts, 1995). A building element is defined as a part of a building performing a function regardless of its specification. According to Jagger et al. (2002, p. 1), “an element is defined as a part of a building that fulfils a specific function or functions irrespective of its design, specification, or construction.” Thus, examples of ‘elements’ of the superstructure include frame, roof coverings, roof drainage, external walls, external doors, windows, internal walls, and internal doors. Whichever solution is chosen, its function must be performed within the budget set aside for it. Thus elemental analysis allows the comparison of the costs of the same element between two or more buildings.
In the UK, two common elemental cost systems are used (Potts, 1995). The first is the CI/SfB adopted by the RIBA from the international SfB system that was first developed in Sweden. The second is the BCIS which was developed by the Royal Institution of Chartered Surveyors (RICS) and is more commonly used by Quantity Surveyors. In general, the two lists of elements are completely compatible (Ferry et al., 1999).
Overall then, there are several methods available to consultant quantity surveyors in producing pre-tender estimates. However, the accuracy of pre-tender estimating has received attention by researchers (cf. Trost and Oberlender, 2003, Drew and Skitmore, 2000, Skitmore and Picken, 2000, Ashworth and Skitmore, 1983, Flanagan and Norman, 1983). This paper concludes with a discussion of how quantity surveyors ensure the accuracy of the estimates, and the role of ‘gut reaction’ in this process.

Discussion and Conclusion

While there are various methods available to consultant quantity surveyors in producing pre-tender estimates, early price estimates are an approximation and thus will include some amount of uncertainty and indeed in the construction industry, estimates are known for their inaccuracy (Ashworth, 2004). Most large, complex development projects experience considerable cost and schedule overruns (Symons, 2005, Lyneis et al., 2001). Indeed, “overruns are the norm, being typically between 40 and 200%” (Morris and Hough, 1987, p.7). This happens partly because capital costs are typically underestimated by between 50% and 100% and operating costs by between a factor of two or three times, while revenues are often overestimated by 100% and work typically takes longer than expected (Symons, 2005).
Ellag et al. (2005, p. 528) note that
A major limitation of most of these [cost forecasting] models is that they only take account of significant factors that can be readily quantified. However, most of the significant factors affecting project costs are qualitative such as client priority on construction time, contractor’s planning capability, procurement methods, and market conditions including level of construction activity. Due to the qualitative nature of these factors, they are difficult to structure and quantify.
In line with this, Ashworth and Hogg (2002) note that the degree of accuracy of the pre-tender estimate will depend on a wide variety of factors. These include possible changes in market and contract conditions, such that allowance must be made for changes in type of client, labour availability, workloads, and so on; design economics, such that adjustments in the estimate may have to be made for changes in building design and the nature of the building site; and changes in the defined standard of quality, such that changes would be needed in the proposed estimate. And Ashford (2004, p. 275) notes that “[s]ome of these can be adjusted objectively, but in many circumstances only experience and ‘feel’ for the project can help to choose the appropriate rate.”
Several researchers have highlighted the importance of the estimator’s experience within the quantity surveying profession. Morrison (1984), Ashworth and Skitmore (1983), Skitmore (1985), Skitmore et al. (1990), Ogunlana (1991), Lowe and Skintmore (1994), and Ashworth and Hogg (2002), among others, identify ‘experience’ or ‘knowledge acquired through experience’ as a major factor in determining the accuracy of the pre-tender estimates. Indeed, Skitmore et al. (1990) identified project-specific experience as the main factor associated with the accuracy of early stage estimates. Based on their empirical research, Skitmore et al. (1990, p. 23) argued that [t]he highest levels of presumed expertise has been shown by estimators in the experience range thirty-five to forty-four years. These observations lead to the conclusion that acquisition of expertise is thought to be an ongoing process.”
Therefore, the conclusion of this paper is that estimating project costs requires a methodical approach, yet at the same time demands certain finesse. All projects are not the same. Even if contractors build the exact same facility over and over, the price of each project will differ. There are many specific factors that will always influence the pricing of the project, and the quantity surveyor must be able to discern the level of impact for each. Many of these factors call for the art of estimating, and the more experienced the estimator, the more accurate the ‘gut feel’ for some of these impacts will be. This is because

Cost estimation is an experience-based process. Construction practitioners are aware of uncertainty, incompleteness and unknown circumstances of factors affecting construction costs. Realisation and understanding of cost-determinants enrich the competence of cost estimators, and hence along with decent cost forecasting techniques, deliver more reliable and accurate cost estimates (Ellag et al., 2005, p. 538).