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5 Cost Planning Tips in Project Development

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June 11, 2024

Not all projects are created equal.

Mr. Kerry, not his real name, is a hotel owner who embarked on building his second resort hotel. He has created a good brand with good following and is confident that his previous experience is enough to start another successful hotel project. He formed his design team of architects and engineers and started the project. However, the project went overbudget and was 8 months delayed. The project ended up in contractual dispute with the general contractor.

As a post project review, he hired us to review the completed design and the over-all cost spent. He was fascinated by how we manage construction and development cost for the other 20 competing hotel brands. He was anxious to know what is the project cost if he hired a cost engineer. We spent the next ten days estimating the cost and when we presented our cost report, he almost fell from his chair from disbelief.

Apparently, Mr Kerry spent US$ 8Million more on his project and could have saved another US$ 4Million if he optimized his design via value engineering. He thought that getting a lump sum contract with the general contractor will ensure that he will not go above his budget. He pats me on the back and says, 鈥淚 could have started another hotel with those cost savings.鈥

This is a real story and the frustration in managing cost happens every day. Projects go overbudget for so many reasons and there are ways that it can be controlled and managed. Getting the best cost insights is key.

Another real project story is a hospital project that saved more than US$ 24Million in project cost by going through a careful process of cost engineering and value engineering. The early design outputs were measured using Key Performance Indicators (KPI) and were compared to a baseline of similarly completed projects. This cost exercise gives the design team a real time cost insight on how the design meets the cost constraints and budget goals of the Owner.

A Cost Driver Analysis (CDA)  is performed on the project to pinpoint specific items of work that are beyond the normal ranges of KPIs and this is where the Value Engineering efforts are focused. These cost exercises save the Owner so much time and financial resources.

Designers who work closely with cost engineers finish their design faster and more efficiently. They know which parts of the design to change. It鈥檚 like pressing the right buttons and getting the right results. I am sure you have heard of designers complaining that they need to redo and change the design because it did not meet the Owner鈥檚 cost expectations.

There are projects with bid proposals that come back way off the Owner鈥檚 target budget. This is when the project gets delayed and designers scramble to change the design. To a point, the project does not push through since it is not feasible to build it at that cost anymore.

I would always advise that cost planning should be done early even at business planning stage where concepts and ideas are priced out. Over the last two decades, we have built a portfolio of countless cost feasibility studies made for various customers. You could almost see the twinkle in the eyes of our customers when the cost feasibility study comes out to be really enticing and promising.

This service sets us apart from the traditional project development mindset where the cost engineer is only called upon when the design is already done. We get to be involved early in the planning stages of the business itself and not just on the design and construction.

Sometimes, project owners would use the cost savings to create more value for the project by reinvesting those savings to generate more revenue. In 2014, when we were doing the planning for an office complex of 150,000sqm, the project team was able to lower the project cost by US$ 15Million. The project owner realized that upgrading the whole complex into a LEED Gold Certified project will bring in more revenues and capture a select crowd of customers. Again, there are many uses to these cost insights that can benefit the project.

HIRE AND LISTEN TO AN EXPERT

The specialized knowledge and experience of experts are invaluable to a project owner. Their insights on successes and failures of methodologies and strategies can save the project possible foreseeable troubles. It is also a must that you listen to the expert鈥檚 advice because this is where value comes from. We have seen failures from experts who ended up saying yes just to appease the customer at the expense of the project goals.

An expert鈥檚 efficiency and foresight often lead to faster project completion and fewer revisions, ultimately reducing overall costs. Ultimately, the fees will pay for itself many times over.

Mr Kerry tried to save on expert advice and he paid dearly for it.

ASK THE RIGHT QUESTIONS

By asking probing questions, you can clarify project objectives, identify and mitigate risks, uncover assumptions, explore alternatives and address constraints. This helps ensure that everyone involved understands the purpose and desired outcomes, leading to a more focused and effective project plan.

Asking the right questions leads to good iterations. It will be worth your time to go into these questions and iteration exercises.

Simon Sinek鈥檚 idea of starting with why is a great start for the project team to take action and improve on the ideas presented. Understanding the purpose, beliefs and values of the company and the project provides a solid foundation for ideas to advance.

THE PERFECT TIME TO CHANGE

Poor planning often leads to costly changes on the project sites. Changes during construction stage will often result into expensive change orders and lead to contentious discussions with your contractors and vendors.

We have seen a multi-billion dollar project that wasted so much time and resources on rework after the original design was changed. The design change led to thousands of change orders and months of delays.

Proper review of design prior to implementation will save an owner so much money, time and headache. The perfect time to change is during planning, not during execution.

When you change your ideas, plans and drawings have minimal cost. But once you start building, any further changes will result to both time and financial losses.

The advent of Building Information Modeling (BIM) and 3D design capabilities allowed design teams and project owners to appreciate both the effectiveness and loopholes prior to construction. We have seen a drastic reduction in change orders for projects that are done using BIM. This should become a standard for projects from hereon.

KNOWING YOUR NUMBERS

Cost Engineering is a way of converting lines and curves into numbers. Those lines may still be a concept or idea but you can already measure and put a value on it. When you look at your building plans, it gives you a visual picture of what it will look like. Cost Engineering provides you the numbers that will allow you to understand the whole project altogether.

During these business planning stages, key concepts such as the Buyer鈥檚 Willingness to Pay and the Vendor鈥檚 Willingness to Sell take the spotlight. The numbers will guide you much like Google maps gets you to where you want to go.

Now, not all projects are only constrained on cost. Military projects are both cost and time sensitive. Hospitality and Healthcare spend a premium on quality. The trifecta of constraints: cost, time and quality will be different for each project.

THE FIRST IDEA IS NOT THE BEST IDEA

This is a principle that is applicable to any project. The first idea should be able to withstand scrutiny and open itself to iterations. These iterations lead to improvements on the product itself while improving the over-all value created.

The most common pitfall is that when the boss says it, it becomes the firm rule. In contrast, better and more successful ideas come in when the original idea goes into a series of iterations.

The same is true with design and the cost associated with it. There is always a better version of the design that deliver more value for every dollar spent. A deliberate practice of this approach to project development will allow for innovation and critical thinking to be a norm for the project team.

The knowledge on cost and its applications can drive bigger and better businesses to fuel our economy. Start-up organizations or those who expand their businesses should get sound financial advice. In the end, you don鈥檛 want to experience Mr Kerry鈥檚 frustrations. In the last 16 years, we have completed more than 600 projects worldwide. That鈥檚 a lot of insights that we can learn from. Let鈥檚 discuss your questions by calling us at +632 8856 7700 or email us at info@quantitysolution.com.

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