Owner’s Project Cost Management Approach

By CEIM Reporter

For the project especially large-scale and complex project like underground oil storage cavern, the cost overrun shall occur due to three reasons such as: incomplete and inadequate drawings and specifications, the Owner’s change to project requirements and changes from Contractor. In spite of the efforts made by Owner, Owner’s Consultants and Contractors, there are considerable factors that made cost overrun inevitable and numbers of the factors are out of their responsibility and ability.

The followings are the Owner’s common factors that cause the problem in cost management of the project:
– Lack of management policy on report and control practices
– Improper estimating techniques and/or standards leading to impractical budget
– Fault sequence commencement and completion of activities and/or events
– Unexpected material cost escalation
– Poor scope of work definition or inadequate WBS (Work Breakdown Structure)
– Selecting Contractor with the lowest tender price
– Improper planning system resulting in ineffective action or cost
– Improper comparison of actual cost and planned cost
– Unexpected and unplanned technical issues
– Delays and disruption resulting prolongation cost

The conclusions for above mentioned problems shall be made as follows:

1. For Owner’s Cost management of pre-contract stage:
– The Owner normally selects Consultant or Contractor who proposes lowest bid regardless of experience, quality or expertise;
– Scope of work of Consultant or Contractor is poorly planned and defined;
– Low accuracy is inherent in the approved cost estimate;
– Tight approved budget is included in the overall scheme;
– Value engineering (VE) is not carried out during design phases especially in the initial phase of the project.

2. For Owner’s procurement strategies:
– Traditional method of procurement based on the clear separation of design and construction is deployed.
– Price-based, lump-sum and specification contract in which Contractor is required to estimate the quantities and subsequently to calculate tender sum based on the owner’s drawings and specifications is deployed.
– Risk access is not carried out for decision making especially in selection of project delivery system.

3. For Owner’s Cost management of post-contract stage:

Owner’s cost-management and monitoring procedure lacks the following characteristics:
– Cost is not forecasted before decision making
– Cost-recording system is not cost-effective to operate
– Actual cost is not subject to variance analysis
– Time and quality do not implicate in the cost

Change management – Valuing variations:
– The proper recording system for changes is not established and applied
– Traditional method of valuing variation which is based the valuation on the rates or prices specified in Bill of Quantity (BofQ) or schedule. Normally, those rates or prices were quoted at the time of tender.

Changes to the project arise due to:
– Inadequate briefing from the owner
– Inconsistent and late instruction from the Owners
– Incomplete design
– Lack of careful planning at design stage
– Lack of coordination of specialist design work
– Late clarification of complex details

Claim management:
– The delay claims on extension of time and cost of prolongation from Contractor is not solved effectively and in amicable way.

The Contractor often submits the claims due to the main following reasons :
– Inadequate time and planning before project commencement
– Inviting the tender on incomplete drawings
– Introducing extensive changes to the project
– Inadequate site investigation – deep basement; pilling, earthwork, tunneling or unforeseen ground condition
– Extensive changes to contract standard form
– Owner’s inference with the timing and sequence of construction

Recommendation for management improvement

For the project with the similar condition as one in the case study, the recommendation shall be made as follows:

1. Value-for-money mechanism should be in place to evaluate quality and price of the bid.

2. For any contract, the scope of work should be clearly defined.

3. Proper methods with the different degree of accuracy for each stage of the project shall be used.

4. The budget should be used positively to ensure that the design stays within the scope of the original scheme.

5. The factors to be considered during cost estimate shall be:
a. Land acquisition including legal fees
b. Owner’s organization cost allocated to the project
c . Site investigation
d. Insurances
e. Consultant’s fees including engineering
f. Equipment procurement and installation
g. Construction cost
h. Taxes
i. Contingencies and risks
j. Financing and legal cost

6. Comprehensive value management (VM) should be in place all the time.

7. Design and Build shall be deployed.

8. Price-based bill of quantity (BofQ) with milestone payments is applied.

9. Some risk management procedures should be in place all the time to access the risks so that unacceptable risks could be transferred to relevant Contractor or Insurer by contractual commitment. Who-life costing technique could be used where possible.

10. Costs should be forecasted before decisions are made to allow consideration of all possible actions

11. Cost-recording system should be simple and cost-effective to operate

12. Actual costs should be subject to variance analysis to determine the reasons for any deviation leading to cost overrun

13. The costs implication of time and quality should be incorporated into the decision making process

14. Parties should keep comprehensive and detail records of the factors relevant to the variation

15. Change consequences shall be mitigated by:
a. Setting up clear project objectives
b. Timely change instructions
c. Practically-completed design
d. Adequate planning at design stage
e. Adequate coordination of specialist design work
f. Timely clarification of complex details

16. The variation valuation procedure in which the parties need to have skilled negotiation and be prepared to adopt a give-and-take attitude in order to bring a satisfactory claim settlement.

17. Parties should keep comprehensive and detail records of the factors relevant to the variation.

18. The variation valuation procedure in which the parties need to have skilled negotiation and be prepared to adopt a give-and-take attitude in order to bring a satisfactory claim settlement.

19. Owner’s project management team should be equipped with knowledge of construction technology, construction law, term and conditions of the contract, contract administration, project-planning system and negotiation skill.

20. The following actions shall be required to avoid the claims:

a. Adequate plan made by competent Owner’s engineer and/or Consultant

b. Availability of verified and completed drawings and specifications prior to bid

c. Minimize and eliminate the unnecessary changes to the project;

d. Application of Value Engineering and/or Whole-life Costing and/or Risk Access techniques to analysis the changes to project;

e. Comprehensive site investigation in which the scope of site investigation shall be given by Consultant or Engineer who use site investigation data for engineering works;

f. Usage of relevant contract standard form set forth by recognized organization such as FIDIC, ICI, etc.

g. Relevant Coordination procedure between Owner and Contractor.

Hakkında Cumhur Şamiloğlu
Civil Eng., MRICS Management of International Business (MSc-2002)

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