Pre-contract Cost Control

Pre-contract Cost control

Pre-contract cost control is the total process which   ensures that the contract sum is within the clients   approved budget or cost limit.  As the design is developed and decisions taken the cost plan must be checked to ensure that such decisions will not adversely affect the intended expenditure.  If the value of any element in the cost plan is seriously altered by a decision taken at this stage it will be necessary to review the value of other elements in the cost plan.

A construction cost control system should enable a manager to observe current cost levels, compare them with a standard plan or norm, and institute corrective action to keep cost within acceptable bounds.

Pre-contract cost controlling process in the RIBA plan of work 

Feasibility Studies

If at any time during the design process it becomes apparent that the agreed budget is likely to be exceeded, without a change to the brief, the client should be informed and instructions requested. Likewise, if it becomes apparent that the whole of the agreed budget will not be required, the client should also be informed.

Outline Proposal Stage and Scheme Design Stage

When a change is proposed to the outline cost plan the following procedures should be followed;

All the relevant members of the design team should be informed.

The architect should confirm his agreement, in principle, to the proposal. No proposal should be incorporated in the cost plan without the agreement of the quantity surveyor, and he should indicate his confirmation that the proposal can be met within the agreed elemental target.

Where the proposal incurs additional cost over the elemental target, or would cause the total budget to be exceeded, the quantity surveyor should positively indicate to the design team alternative savings that are available to maintain the overall budget. Upon the conclusion of a proposed change, the quantity surveyor should communicate to the client, and all members of the design team, the consequential effects of the change and provide an updated cost plan.

Detail Design to Production Information stage

Objectives - To  allow  flexibility  in  the  design  process  for change of  mind, whilst  maintaining overall cost control of the project within the framework of the cost plan to reduce the amount of abortive design work and lost time caused through proceeding too far in the design process before realizing that the budget will be exceeded.

Principles - The method will vary according to the stage reached in the design process. Normally, however, this takes the form of measurement of approximate quantities from the consultant's drawings, to provide a check on the quantity and the quality of parameters set down in the appropriate cost plan. The gross floor area is the first check at any stage.

The two dominant considerations in deciding the priorities for cost checking elements are as follows.

The known variability of cost of an element i.e. where a wide range of cost is possible in an element, it will be necessary to cost check this before checking elements of low variability but of the same overall cost significance. Judgment must be applied before notifying the architect of possible excess expenditure in a particular element. If an excess revealed during cost checking is of such significance that is highly improbable that compensating savings will occur elsewhere, then this must be notified immediately and the design team must be asked to consider modification to the cost plan.

It is important for the quantity surveyor to maintain proper records of the cost checking process, setting down on a summary the value of the elements cost checked compared with the cost plan targets, and to be especially clear as to the drawings or information upon which the cost check has been based. (Pre-contract Cost Control & Cost Planning, The QS Division of RICS, 1982)

German floating home powers and heats itself

German floating home powers and heats itself

Scientists in Germany are developing a floating house that can produce its own water, electricity and heat in a bid to populate a large lake district that is now poorly served by utilities.

They say floating homes are becoming more popular in Germany as holiday homes and as permanent residences, and believe the Lusatian Lake District (Lausitzer Seenland), the largest artificial lake district in Europe, is well suited for the home they are working on.

Located between the states of Saxony and Brandenburg, the former open-coal-mining area has 23 lakes over 32,000 acres. The scientists, from two Fraunhofer institutes and two German universities, say being able to live on the water will enhance the region’s attractiveness and boost its economy.

Their floating, self-sufficient home is intended for Lake Geierswalde, northwest of the city of Hoyerswerda. They say it will be ready by 2017.

“These kinds of energy self-sufficient floating homes do not exist yet,” said project coordinator Professor Matthias Klingner of the Fraunhofer Institute for Transportation and Infrastructure Systems (IVI). Many lakes in the Lusatian Lake District are cut off from infrastructure such as water and energy supply. “We want to find a solution for this kind of environment,” Klingner said.

State-of-the-art self sufficiency

Standing on a 13-sq-m steel pontoon, the two-level house offers 75 sq m of living space on the ground floor, another 34 sq m on the first floor, with a 15-sq-m terrace overlooking the lake. The house combines modern architecture and structural engineering with state-of-the-art facilities for self-sufficiency.

Solar cells are integrated into the building envelope and lithium polymer batteries store the collected energy. To save space, the battery systems developed at IVI are integrated into the textile concrete walls or into stairs.

Researchers at IVI are also working on the efficient provision of heating and cooling systems. A salt hydrate fireplace provides heat on cold winter days: above the fireplace there is a tub filled with water and salt hydrates.

“When the fireplace is on, the salt hydrates liquefy and begin to absorb heat,“ said Dr. Burkhard Fassauer of the Fraunhofer Institute for Ceramic Technologies and Systems (IKTS). When the salt hydrates are completely liquefied, the thermal energy can be stored almost indefinitely. 

Like a pocket warmer

In order to release the heat when required, radio-based technology is used to induce crystallization. The principle is known from commercial pocket warmers where, to induce crystallization, a metal disc inside is clicked so that the pocket warmer solidifies and gives off heat. When heated in water, the crystals liquefy and the heat is stored until the next click.

However, a fireplace is not enough to heat the house during the winter. This is where a zeolith thermal storage unit in the pontoon will help: the zeolith minerals are dried during the summer – a purely physical process in which heat is stored.

“In winter, the moist air is enough for the storage unit to give off heat,” Fassauer said. An adiabatic cooling system provides for cool air in the summer. Unlike conventional air conditioning systems, it does not require electricity but uses the principle of evaporative humidification to cool.

A surface on the side of the house is landscaped and moistened and the process of evaporation then cools the building envelope.

The experts at IKTS are responsible for the water supply in the houseboat. They rely on a combination of ceramic membranes and different electrochemical and photocatalytic processes. Ashore, wastewater is usually treated using biological processes. This is not possible in a floating house.

“We must rely on physical and chemical methods. Thus, ceramics provide very efficient ways to bring together processes like photocatalysis, electrochemistry and filtration in a confined space,” said Fassauer.

As well as the two Fraunhofer institutes based in Dresden, the Technical University of Dresden (TUD) and the Technical University of Brandenburg (BTU) are involved, along with companies from the region.

Photograph: Artist’s render of the floating house that provides its own heat and water (Credit: Fraunhofer IVI)

Source:http://www.globalconstructionreview.com/news/german-floating-home-powers-and-8h8e8ats/#read

Pre-contract Cost planning process in the RIBA plan of work

Pre Design – Inception or Feasibility

At this stage Quantity surveyor should determine, whether the total expenditure authorized by the client which is within the responsibility of the design team.

Objectives

1.     To establish the limit of expenditure necessary to meet client's  requirements set out in the brief
2.    To provide the client with a statement of the likely area and  quality of building which  can be achieved within the limit of  expenditure
3.     To provide the client with the alternative budgets for different  completion dates and the quality of the building 

Duties of Client

1.   Location of the site; the availability of the site for    commencement of the construction
2.      Names of similar buildings of broadly suitable quality   
3.      The required occupation dates
4.      Any specific requirements relating to life cycle of costs
5.      Any specific requirements as to specification
6.      Requirement in respect of inflation

Duties of Engineer

1.    Advice on minimum story height for specialist areas on s  chedule of accommodation
2.      Advice on likely planning conditions
3.      Advice on routes of public sewers etc.
4.      The budget, with alternatives if appropriate
5.    A statement of the basis of the budget calculation including  any important assumptions made
6.    A statement setting out the time for design and construction  which the budget cost will   meet
7.      Cash flow forecast
8.      A statement of items not included

Design - Pre Construction Period, Outline Proposal

A statement of the cost of an intended design at the outline proposal stage which details the cost targets for the main elements of the building, together with approximate quantity and quality parameters which meet those targets.

Objectives

1.     To describe, together with the outline proposal drawings,  the chosen distribution of the resources made available by  the budget to provide a balanced design
2.    To set cost targets for the main elements so that, as the  design develops, in order to control the cost within the  budget
3.     To provide the whole design team with a control document which communicates the cost, quality and quantity parameters which are to be followed

Duties of Client

1.    Confirmation of  the budget, where  alternative budgets  were quoted in the budget report the client must state his  preferred alternative
2.     Confirmation of the design and construction time stated in  the budget report
3.      Confirmation of the brief
4.      Acceptance of any other matters within the budget report,  and authority to proceed

Duties of Engineer

1.     Outline drawings of the building and site works indicating alternative solutions
2.     Indication of preferred specification for main elements
3.     A statement of cost
4.     A broad indication of specification
5.     A statement of floor areas
6.     A request for decisions on any alternative proposals

Scheme Design Stage

A statement of the cost of a selected design at the scheme design stage, which details the targets for all the elements of a building, together with   the quantity and quality parameters described by the scheme drawings and specifications.

Objectives

1.    To set out for the design team the actual distribution of  resources described by the scheme design.
2.     To provide the whole design team with a control document which describes, in detail, the cost, quantity and quality parameters which have been adopted.

Duties of Client

1.    Confirmation that the cost plan prepared at the outline  stage is acceptable
2.     Confirmation of the brief
3.     Indication of any preferred alternatives given in a previous cost plan
4.     Acceptance of  any other matters within the previous cost plan report, and authority to proceed

Duties of Engineer

1.      Scheme drawings and scheme specifications
2.      A statement of the cost
3.      A statement of the specification
4.      A statement of the floor areas
5.      A cash flow forecast, where appropriate
6.   A statement of the relevant life cycle cost where appropriate

What is Cost Planning?

Construction is having widely varying characteristics, perform diversity of functions and serve the needs of variety of clients. Hence wide range of planning techniques has been devised to meet the needs of a variety of solutions.

The main objective of pre contract cost planning is to ensure that the contract sum is within the clients approved budget or cost limit.

Cost planning is the technique by which the budget is allocated to the various elements of an intended building project to provide the design team with a balanced cost framework within which to produce a successful design. (Pre-contract Cost Control & Cost Planning, The QS Division of RICS, 1982, P6)

How Economies of Scale Can Affect Probability Within the Construction Industry

An economy of scale, in micro economics, refers to the cost advantages that a business obtains due to expansion. There are factors that cause a producer’s average cost per unit to fall as the scale of output is increased. "Economies of scale" is a long run concept and refers to reductions in unit cost as the size of a facility and the usage levels of other inputs increase. The common sources of economies of scale are purchasing (bulk buying of materials through long-term contracts), managerial (increasing the specialization of managers), financial (obtaining lower-interest charges when borrowing from banks and having access to a greater range of financial instruments), marketing (spreading the cost of advertising over a greater range of output in media markets), and technological (taking advantage of returns to scale in the production function). Each of these factors reduces the long run average costs (LRAC) of production by shifting the short-run average total cost (SRATC) curve down and to the right. Economies of scale are also derived partially from learning by doing.

Economies of scale is a practical concept that is important for explaining real world phenomena such as patterns of international trade, the number of firms in a market, and how firms get "too big to fail". The exploitation of economies of scale helps explain why companies grow large in some industries. It is also a justification for free trade policies, since some economies of scale may require a larger market than is possible within a particular country. Economies of scale also play a role in a "natural monopoly."

In Internal and External Economies of Scale, external economies of scale occur outside of a firm, within an industry. Thus, when an industry's scope of operations expands due to, for example, the creation of a better transportation network, resulting in a subsequent decrease in cost for a company working within that industry, external economies of scale are said to have been achieved. With external ES, all firms within the industry will benefit.

Economies of scale -

Lower input costs: When a company buys inputs in bulk - for example, potatoes used to make French fries at a fast food chain - it can take advantage of volume discounts. (In turn, the farmer who sold the potatoes could also be achieving ES if the farm has lowered its average input costs through, for example, buying fertilizer in bulk at a volume discount.)

Costly inputs: Some inputs, such as research and development, advertising, managerial expertise and skilled labor are expensive, but because of the possibility of increased efficiency with such inputs, they can lead to a decrease in the average cost of production and selling. If a company is able to spread the cost of such inputs over an increase in its production units, ES can be realized.

Specialized inputs: As the scale of production of a company increases, a company can employ the use of specialized labor and machinery resulting in greater efficiency. This is because workers would be better qualified for a specific job.

Techniques and Organizational inputs: With a larger scale of production, a company may also apply better organizational skills to its resources, such as a clear-cut chain of command, while improving its techniques for production and distribution.

Learning inputs: Similar to improved organization and technique, with time, the learning processes related to production, selling and distribution can result in improved efficiency.

External economies of scale can also be reaped if the industry lessens the burdens of costly inputs, by sharing technology or managerial expertise, for example. This spill over effect can lead to the creation of standards within an industry.

The Operation of the Price Mechanism for Construction Product in Free Market Economy...

Construction product represents a nation’s fixed assets. It is the government’s duty to ensure that the correct items are built at the correct time in relation to the country’s development strategies and policies. The demand arises as a need for investment. As the private sector is dominating the construction industry in the country, prices could be jacked up unreasonably which will lead to the down fall of the economy. To protect such incidents, the government made regulatory bodies to control and guide the industry to the required standards.

A price mechanism refers to a wide variety of ways to match up buyers and sellers through price rationing. It also describes the price of goods and services based on the demand and supply.

An example of a price mechanism uses announced bid and ask prices. Generally speaking, when two parties wish to engage in a trade, the purchaser will announce a price he is willing to pay (the bid price) and seller will announce a price he is willing to accept (the ask price).

The main advantage of such a method is that conditions are laid out in advance and transactions can proceed with no further permission or authorization from any participant. When any bid and ask pair are compatible, a transaction occurs, in most cases automatically.

The same method is applied in construction. Tenders are called for projects and bidders are asked to submit their bids. The type of tender varies according to the client and project. Once the bids are submitted, they are evaluated and the best priced bid is announced as the winner of the tender. If it is a government project then the lowest bid is taken but in other cases, quality is also a prime concern. Each contractor will price the items according to the current rates and in some cases prices may go down for materials which they have and in such instances the price difference between the bidders could change drastically. Unworkable prices and over prices are evaluated and bidders are called for explanations. This is the general process in the current situation.

As for the standard prices, the governing bodies decide on the prices and is regulated and updated according to the demand.

Project Procurement Strategy

Introduction

Procurement is the process that is used to deliver construction projects. The dictionary definition states that procurement is ‘acquiring or obtaining by care or effort’. Clients who have made the major decision to build are faced with the task of procuring the construction works that they require. This may be a daunting prospect, given the level of financial commitment and other risks associated with the venture, the complex nature of construction and the possible perception of the construction industry as one that frequently under-performs.

A little over 35 years ago the clients of the construction industry had only a limited choice of procurement methods available to them for commissioning a new construction project. Since then there have been several catalysts for change in procurement, such as:

• Government intervention
• Pressure groups being formed to create change for the benefit of their own members, for example, the British Property Federation
• International comparisons, particularly with the USA and Japan, and the influence of developments relating to the Single European Market
• The apparent failure of the construction industry and its associated professions to satisfy the perceived needs of its customers in the way that the work is organised
• The increase in PFI projects and planned expansion of PFI policy
• The influence of developments in education and training
• The impact from research studies into contracting methods
• The response from industry, especially in times of recession, towards greater efficiency and profitability
• Changes in technology, particularly information technology
• The attitudes towards change and the improved procedures from the profess ions
• The clients’ desire for single point responsibility
• The publication of headline reports: in 1994, the Latham Report, and in 1998, the Egan Report.

This has resulted in a significant shift in methods of procurement used by clients.

Although traditional procurement systems are frequently used, in recent years there has been a significant shift towards alternative strategies. Forms of Design and Build procurement now appear to be as commonly encountered as traditional procurement. Similarly there is continued use of management contracting which, by value, represents a significant proportion of procurement overall.

General matters

The wide range of procurement systems now available, and the understanding that procurement choice may have a significant bearing on the outcome of a project, signify both the opportunity and importance of meeting the procurement challenge with a well-considered strategy. The selection of appropriate contractual arrangements for any but the simplest type of project is difficult because of the diverse range of views and opinions that are available. Much of the advice is conflicting and lacks a sound base for evaluation. Individual experiences, prejudices, vested interests and familiarity, together with the need for change and the real desire for improved systems, have all helped to reshape procurement options available to us at the commencement of the twenty-first century. The proliferation of differing procurement arrangements has resulted in an increasing demand for systematic methods of selecting the most appropriate arrangement to suit the particular needs of clients and their projects. In recent years, the amount of research and publications within the field of construction procurement has also grown, as the bibliography at the end of this chapter indicates.

Whilst the main issue is that of satisfying the client’s objectives, a matter examined in detail later, at an implementation level the following are the broad issues involved.

Consultants or contractors

These issues relate to whether to appoint independent consultants for design and management or to appoint a contractor direct. The following should be considered:

• Single point responsibility
• Integration of design and construction
• Need for independent advice
• Overall costs of design and construction
• Quality, standards and time implications.

Competition or negotiation

There are a variety of different ways in which designers or constructors can secure work or commissions, such as invitation, recommendation, speculation or reputation. However, irrespective of the final contractual arrangements that are selected, the firms involved need to be appointed. Evidence generally favours some form of competition in order to secure the most advantageous arrangement for the client.

There are, however, many different circumstances that might favour negotiation with a single firm or organisation. These include:

• Business relationship
• Early start on site
• Continuation contract
• State of the construction market
• Contractor specialisation
• Financial arrangements
• Geographical area.

Also, the advent, development and promotion of partnering has changed the view of some clients toward the need for competition (see later in this chapter). In determining the need for competition, it must not be assumed that the choice between that and the option of negotiation is clearly defined, as each case must be decided on its own merits.

Measurement or reimbursement

There are in essence only two ways of calculating the costs of construction work. The contractor is either paid for the work executed on some form of agreed quantities and rates or reimbursed the actual costs of construction. The following are the points to be considered between the alternatives:

• Necessity for a contract sum
• Forecast of final cost
• Incentive for efficiency
• Distribution of price risk
• Administration time and costs.