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COST MANAGEMENT
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Agenda
- Introduction & Overview
- Project & Construction Budget
- Cost Management System
- Cost Estimating
- Cost Compliance Monitoring
- Design Phase Monitoring
- Bid & Award Phase Cost Management
- Construction Phase Cost Management
- Bid & Award Phase Cost Management
- Additional Information
- Q&A, Conclusion
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Cost Management Objectives
- Control Cost
- Deliver within Budget
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Cost Management Basics
- Realistic project budget within Owner’s limitations
- Most economical way
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CM’s Role in Cost Management
- Cost Management Plan (CMP), aka Project Money Plan
- Deliver within Budget
• Financial forecast
• Control project costs and cash flow
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Failure will lead to cost overruns
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The Purpose of Cost Control
- Control the project budget
- Help deliver the project within the accepted project budget
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Almost all projects have limited budgets, so:
- The CM must create a system and implement all
necessary processes and procedures to control cost
- The CM must control cost growth
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Two Types of Estimates:
- Conceptual
- Detailed
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Project Team: Interaction / Relationships
- The Owner is “first among equals,” but often lacks
expertise in cost control
- The Designer is typically more concerned with
technical aspects and aesthetics
- The Contractor is typically concerned with completing work
within its budget (unrelated to the owner’s budget), and
maximizing profit
- The CM, by default, is in sole possession of the cost control role
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Cost Control Responsibilities
- All communications must include the CM
- The CM must attend all meetings
- The CM must report accurately and regularly to the Owner
- The CM must ensure that the project is delivered in the most
economical way, and conforming to the project requirements
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Cost Control Stages
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Pre-construction Phase
- Gather cost information
- Provide cost estimates
- Employ “value analysis”
- Guard against cost growth
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Construction Phase
- Play a role in the payment process
- Manage the Change Order and Claims process
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Project Inception
- Unlimited funds (ideal world!)
- Owners are looking for positive ROI
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Preliminary Cost Investigation
- ALL project participants review and approve
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Success Requires Buy-In
- All participants must be working toward delivery within
the approved CMP and budget
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Conceptual Budgeting
- Project definition and project scope
- Project location / timeframe
- Conceptual estimates
• Analagous Estimating (top down)
- Actual results of previously performed projects
• Parametric Modeling
- Project characteristics in mathematic equations (ie, cost per sq ft, megawatt
cost, etc)
• Bottom-Up Estimating
- Individual project components
• Computerized Estimating
- National cost databases
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Interpreting Conceptual Budgets
- Conceptual budgets are based on conceptual estimates!
- What is the degree of accuracy / reliability?
- No single accepted variance
• Ritz suggests +/- 25% to 30%
• AACEI refers to conceptual estimates as an “order of magnitude” and
defines accuracy at +50% to -30%
• Other authors or organizations use different percentages
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Integrating the Owner’s
Conceptual Budget
- Meeting of the minds
- Critical point of the life of a project
• How much will it cost?
• Can I afford the project?
- ROI versus regulations
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Cost Analysis
- Owner may require “conceptual design alternatives”
- Each will require conceptual estimates
- Different project locations
• Utilities, site access, soils, topography, market conditions, etc.
- Other studies
• Life Cycle costs
• Energy studies
• Preliminary cash flow
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Development of the Project and its
Construction Budget
- Develop estimate of “cost of construction” as well as
“total project cost”
- Total Project Cost = Initial Project Budget
• Land acquisition
• A/E, CM & other consultants (plus contingency)
• Financing
• Owner management
- +/- 10-20% at this stage, plus 15-20% for design contingency
- Budget change at this point is inevitable
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Owner Project Objectives
- CM must clearly identify the Owner’s project objectives
- CM must draw out as much detail as possible, ie:
• Interior finish quality
• Energy utilization and efficiency
• Life cycle costs
• Architectural aesthetics
• Return on investment (ROI)
• Expansion capabilities
- CM must determine what the Owner REALLY expects
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Project and Owner Constraints
- Constraint = Restraint = Restriction on the project & activities
- Caused by external factors
- Examples:
• Financial constraints (cash flow, contract date, etc)
• Time-to-market (ie, must begin production by….)
• Schedule (ie, must take occupancy by…)
• Seasonal / weather constraints (ie, rainy season, frost, etc)
• Work tine (ie, work during evenings, not able to start before X o’clock, etc)
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Procurement Strategies
- Procurement Strategies = Budget Implications
- Types of procurement strategies:
• Design-Bid-Build
• CM at Risk
• Agency CM
• Design / Build
• Owner-Furnished, Contractor Installed
• Firm Fixed Price / Lump Sum
-Damage clauses / Incentive Fees / Cost-sharing
• Cost Reimbursement Contracts
- Cost Plus (plus a fixed fee / plus an incentive fee / plus an award fee)
• Unit Price
- Blanket purchase / Time & materials / Job order contracts
- Legal and/or financial requirements
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Resource Availability, Productivity,
and other Factors
- Local conditions / constraints
• Labor
- Availability / Cost
• Climate-related productivity factors
• Location
- Infrastructure
- Foreign payments
- Tariffs
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Project Conditions Impacting the Budget
- Other factors for conceptual budgets:
• Allowances (for known but undefined requirements)
• Contingencies (for unknowns)
• Cost escalation factors
• Field and general conditions costs
• Foreign currency fluctuations
• Market conditions for materials and equipment
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Organizing the Budget
- Standardized format
- Work Breakdown Structure (WBS)
• Define work components, packages
• Arrange in a hierarchical structure
• Identify every activity through a coding system
• Uniform communication
- All budgets should be reviewed for:
• Completeness
• Compatibility with cost limitations
• Attainability (managing the owner’s expectations)
- Be sure to list exclusions / assumptions
• (ie, no significant OT costs, no concrete pours during winter, single tower
crane, etc)
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Contingency in the Preliminary Phase
- Soft costs are difficult to quantify
- National standards versus concrete values
- Risk analysis
• Expected monetary value of risk = probability of risk event X value of risk
event
- DO NOT overstate the likely cost of probability of risk events
- Overstating = artificial inflation = meaningless
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Summary
- Failures often result from inadequate initial project budgeting
- A realistic budget contains:
• Considering the Owner’s goals and objectives
• Reasonable procurement strategy
• Identified project constraints
- It is a challenging task!
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Purpose and Objectives
- Ensure project completion within budget
- Two areas:
• Cost of project resources
• Effects of project decisions on project cost and life cycle cost
- There is a cost to construct / cost to maintain
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Development and Implementation
- Several processes
• Resource planning
- What resources are needed
- What quantity of resources are needed
• Cost Estimating
- Approximate cost of the resources needed
• Cost Budgeting
- Allocation of the estimated costs to project elements or activities
• Cost Control
- Controlling the changes that impact an accepted budget
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Understanding cost planning concepts
- Scope definition
- Good resource planning / cost estimating inputs:
• Land acquisition and access costs
• Design costs
• Labor costs
• Equipment costs
• Material costs
• Furniture, fixtures, and equipment (FF&E) costs
• Management cost
• Other costs
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Basic inputs to resource planning
• Work breakdown structure (WBS)
• Scope of work
• Historical information
• Resource pool description (market survey)
• Organizational policies
- Identify, then estimate the cost of each resource
- Outcome = project cost plan
- Owner’s acceptance of the project cost plan = project budget
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Project feasibility studies
- Determination of capital costs to test the
project’s business practicality
• ie, target rental rates, target production unit prices
- Screening estimates = conceptual estimates
- Commercial versus public feasibility:
• Commercial – business model
• Public (regulatory) – cost effective project delivery
• Public (non-regulatory) – amount of funding necessary for
project delivery (ie, municipal bond council)
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Conceptual Estimate
- Owner’s approval
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Cost Plan
- Owner’s approval
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Project Approval
- Cash flow
• Projected rate of expenditure, when incurred, not awarded
- Owner’s approval
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Project Cash Flow
- Projected rate of which the Owner’s cash is expended
(ie, taking the fast lane to the poor house)
- Allows the Owner to reinvest funds until needed
- Develop a borrowing schedule
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Developing a Cash Flow Schedule
- Items needed:
• Cash flow analysis
• Conceptual project schedule
• Conceptual estimate
- Time versus $$
• Typical “S” curve
- Straight Line analysis versus Bell Shape
- Font-end loaded / back-end loaded
• Equipment buy out / installation
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Typical “S” Curve for Cash Flow
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Typical “S” Curve for Cash Flow
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Cost Model for Monitoring Costs
- Monitoring / reporting on costs and variances
• Planned versus actual: (simple and straightforward)
- Cash flow
• Planned versus actual: dependence on creation / approval of cash flow curve
- Cost-trending (estimate at completion)
• EAC = Actual costs of work to date + remaining costs
• EAC = Actual costs of work to date + remaining budget
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Cost Model for Monitoring Costs, continued
- Earned value calculations
• Measure planned versus actual cost and schedule performance in order
to “trend” how the project is doing
- Schedule Variance (SV) = Earned Hours or $$ - Budgeted Hours or $$
- Schedule Performance Index (SPI) =
Earned Hours or $$ to date / Budgeted Hours or $$ to date
- Cost Variance (CV) = Earned Hours or $$ / Budgeted Hours or $$
- Cost Performance Index (SPI) =
Earned Hours or $$ to date / Actual Hours or $$ to date
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Impact of External Economic Factors
- Time to Market
• Productivity available / lead time
- Taxation laws
• Pollution control equipment, energy savings equipment
- Funding restrictions
• Fiscal year end / start
- Advance Commitments by Owner
- ROI
- Calendar restrictions
• School construction
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Method of Project Funding
- Typically the Owner’s responsibility
- The CM can impact
• Cost management plan
• Feasibility study / ROI calculation (may determine whether the Owner can
fund project)
- The CM must understand early on how the project will be funded
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Impact of Project Funding Method
on Cost and Schedule
- Method may impact Cost Management Plan and Cash Flow Plan
• Government grant funding
- Under construction within _____ months
• Construction Financing versus Permanent Financing
- Need to convert to permanent financing no later than _____ for the ROI
to work out
• Expiration of Land Options
- Sale must close no later than _____
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Summary
- Helps establish and manage the Project Budget
- Provides the tools necessary to manage and monitor budget, ie:
• Feasibility studies
• Cash flow schedules
• Cost Models
- Helps ensure the project is delivered within budget
- Helps to manage the budget from inception to completion
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The Cost Management Plan is based on
a reliable cost estimate
Selection of estimating techniques
Identifying factors for conceptual estimating
Parameters for cost estimating
Concepts of range estimating
Quantity survey based cost estimates and
procurement strategies
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Selection of Estimating Techniques
- Application of quantity surveys to cost estimating
- Accurate prediction of the project cost
- The estimate should be neither optimistic nor pessimistic
- CM should set forth all relevant cost assumptions
• Contracting plan, labor productivity, etc.
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What is a Cost Estimate?
- A predicted cost of constructing the project
- Level of accuracy is dependent upon the quantity and the
quality of information available to the estimator
- Is it an art, a science, or both?
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Types of Estimates and Accuracy
Ritz
AACEI
Estimate Type
Accuracy
Estimate Type
Accuracy
Feasibility
+/- 25-30%
Order of Magnitude
+50 to -30%
Appropriation
+/- 15-25%
Budget
+30% to -15%
Capitol Cost
+/- 10-15%
Definitive
+15% to -5%
Definitive
+/- 5%
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Understanding the Risk
- Owner interprets the CM’s estimate as a “warranty”
- Owner tends to focus on a single number rather than a range
- Solutions:
• Use qualifying language to accompany the estimate
• Continually manage the Owner’s expectations
• Work with the Owner to establish a realistic contingency
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7 Steps for Effective Cost Estimating:
- Knowledge (experience, education)
- Study (documents, the site, the schedule)
- Visualize (how to build, site operations)
- Organize (by operation / division)
- Analyze (measure the price)
- Check (for accuracy; perform a comparison)
- Finalize the package (best information, mark-ups)
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Available Techniques:
- In-house estimating data files
- Outside estimating software data files
- Outside estimating services
- Standardize cost indexes
- End-product “unit method”
- “Scale of Operations” method
- “Ratio” or “Factor” methods
- “Physical Dimensions” method
- “Quantity Take Off” method
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Factors for Conceptual Estimating:
- Minimum information required to perform a conceptual estimate:
• Project Type (heath care, commercial, etc)
• Project size or capacity (square footage, # of hospital beds, etc)
• Project location
• Project schedule
- Reliability of the estimate increases with more information
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Parameters for Conceptual Estimating:
- Parameters are defined as a set of physical properties whose
value determines the characteristics or behavior of something
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Parameters for performing a
conceptual estimate include:
- Design phase costs
- Construction phase costs
- Plans and specifications
- Construction and procurement strategies
- Site Information
- Engineering
- Quantity take-offs
- Labor
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Parameters, cont:
- Materials
- Equipment
- General Conditions
- Home Office Overhead
- Miscellaneous Costs
- Schedule
- Inspection and Permits
- Bid alternates & allowances
- Mark-ups
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September, 2006
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Market Survey
- A market survey is conducted by the CM to determine the
current costs and availability of labor, materials, plant and
equipment costs, current and future bidding climates, and
other related factors.
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Used for negotiating change orders or
settling claims or disputes
Not subject to competitive bid conditions
Often “independent” or “check” estimates
Incorporates a combination of analysis,
simulation, and speculation to determine the
probability of cost overruns, and maximum
possible deviation from the target estimate
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More European than American
A/E or CM does complete take-off of all
elements or units of the project
Establishes the list of bid items
Classic “unit price” contract
As units increase or decrease, so does the
contract cost
Requires a “final adjustment change order”
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Applications to Cost-Estimating:
- Based on history, this allows a very accurate database
to be developed and maintained
- Can be modified based upon indexes or location factors
- An excellent estimating tool
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Objectives of the Cost Management Plan
- Capture and monitor cost from the onset
- Variances happen!
- Need a pro-active response to these variances
• Is it a major variance or a minor one?
- Setting the decision-making process
- Delivery of the project within the approved budget
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Developing a Project Contingency
- Funding “set aside” to cover the unknown / unexpected
- Contingency lien items should be in every estimate
- Suggested contingencies:
• Preliminary estimates: +50%
• Budget estimate:
+30%
• Design and bid:
+15%
• Construction (new):
+10%
• Construction (renovations):
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+15%
Project Contingency
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The Internet and Cost Monitoring
- Becoming more predominant
- Current project cost data can be posted
- Costs can be continually monitored, decreasing the
likelihood of surprises
- Multiple users: reports utilized as needed
- Free flow of information
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Summary
- Recommended Cost Monitoring Techniques
- Developed early in the project
- Covers:
• What is to be monitored
• How to monitor
• Plan of action
- Developed prior to incurring cost variances
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Estimating Cost and Budget Impacts
During Design
- Proactive and not reactive
- Uniform framework throughout the design phases
- Design phases include:
• Schematic design
• Design development
• Construction documents
• Bid set and addenda
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Estimating Cost and Budget Impacts, cont.
- Ideally, the CM should participate in the design process
and provide timely cost advice
- The cost estimate should be on a unit price basis
- Dig into the “boiler plate”
- Determine cost impacts
- Escalation
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Recommended Estimates
- Program estimates (performed @ planning completion)
• Can the plan be delivered within the approved budget?
- Completion of schematic design
• Parametric (may obtain approximate quantities)
- Completion of design development
- In-progress final design / construction documents
• Quantitative
• Varies between 30-90%
- Completion of bidding documents
• An estimate may be required in order to bid
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Evaluating the level of design detail
- Guard against cost growth
- Report the level of under-runs and over-runs
- Dependent on the situation
• Bring the project back under budget
• Modify the project budget (if so, by how much?)
- Cost growth without owner or project team
knowledge / approval = NOT an option
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Value / Analysis Program
- Value engineering / value analysis
• Multi-disciplined, systematic, and proactive function to optimize value
• Least life-cycle cost, or provide the greatest value, while still meeting all
functional, safety, quality, operability, maintainability, and durability established
for the project
• Good for “designing to cost”
• About to go to construction
• During construction
- CM should take an active role
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Trade-off Factors in Value Analysis
- Fully documented with recommendations
- Factors to consider
• Construction cost versus life-cycle cost
• Capital cost savings versus operations and maintenance (O&M) cost
• Current space savings versus future space needs
- Avoid the trap:
• Up-front cost savings versus life-cycle cost
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Summary
- Cost management must be started early in the project
planning and design
- Costs must be managed throughout the entire life of the project
- Largest changes are likely to be made during pre-construction
- Change must be monitored and reported
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Bid evaluation, review, and contract award
- Follow established Owner procedures
- Evaluate and analyze the bid:
• Completeness
• Responsiveness
• Technical / references
• Math errors
• Alternates
- Compare to budget
- Recommend action
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If over budget, possible options include:
- Reject all bids; redesign and re-bid
- Negotiate with the apparent low-bidder
- Use bid alternates
- Increase the project budget to allow award
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Problems with unbalanced bids:
- Mathematically unbalanced buds are possible on
unit price contracts where:
• The contractor needs monies early in the project in order to help finance the
job, or
• The contractor has reason to believe that the estimated quantities in the
bidding documents are in error, and a potential significant profits possible due
to quantity overruns / under-runs
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Problems with unbalanced bids, cont:
- The Owner may be faced with over-paying for work if the bid is
front-end loaded, resulting in problems if the contractor defaults
- The Owner may over-pay for change-order work
- Suggested remedy: include language in the instructions to
bidders allowing the Owner to declare the bid non-responsive if
the bid appears unbalanced
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Summary
- The CM traditionally assumes the primary responsibility for
cost control
- Bid review and analysis is a key function of the CM
- Define and report ALL irregularities, both minor and major,
to the Owner for decision
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Surprise: it starts during the design phase
Contract documents must specify:
- Schedule of values
- Earned value information
- Payment application procedures: form and frequency
- Use of resource-loaded CPM schedule and updates
- Requirements for certified payrolls
- Submittal of unit costs for equipment, general conditions,
or daily delay
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Contingency Management
- Theoretical during planning and design
- Accounts for inevitable change
- What is the average contingency? From the mid 70s-80s:
• Building Research Board 5.7-11.5%
• Veterans Administration 3.9-8.8%
• US Census Bureau
2.2-10.0%
• Average:
5.0-10.0%
- Current recommendation: 10-15%
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Schedule of Values
- Required when the contract is bid and awarded on a
lump sum basis
- Defined as: “A statement furnished by the contractor to the
owner reflecting the portions of the contract sum allotted for
the various parts of the work….used as a basis for reviewing
the contractor’s application for progress payments.”
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Schedule of Values, cont.
- Must be reviewed and agreed upon by the contractor, CM,
and Owner
- Required X days after issuance the notice to proceed (NTP)
- Must be detailed enough to evaluate contractor’s pay requests
- Must not be front-end loaded!
- Must be balanced
- Promotes prompt payments to the contractor to avoid
interest or penalties
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Cost Loaded CPM Schedule: Key Provisions
- Avoid front-end loading
- Assign maximum value to any one activity
- Discrete “schedule of values” is useful in change order
and claims negotiations
- More cumbersome to manage than a traditional
schedule of values
- Benefit: ties progress payments to schedule updates
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Controlling the Change Order System
- Change in inevitable – it will happen
- Controlling change orders during construction is not
as easy as during design
- During construction, change orders often arise from situations
beyond the control of the CM (3rd party delays, differing site
conditions (DSC), etc.
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Controlling the Change Order System, cont.
- The role of the CM is to mitigate damages by administering
the change order process promptly, and in accordance with the
terms and conditions of the contract documents
- Opportunity for real leadership from the CM!
- Management techniques:
• Written notice requirements
• Written change order requirements
• Project warranties
• Delegation of authority
• Change control board
• Change order policy
• Budget contingency
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Factors covering cost changes:
- Once agreed that a change order is required,
the following are necessary:
• Have a thorough understanding of the scope of the changed work
• Important: obtain supporting documentation as proof of additional costs
• Determine fair and reasonable adjustment to both cost and time
- The CM should prepare an independent estimate listing the
anticipated labor, materials, equipment, subcontracted work,
contractor’s overhead and profit, and any justified impact costs
- The independent estimate allows for a better review of the
contractor’s proposal
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Factors covering cost changes, cont:
There are two ways to price change orders:
- Forward pricing
• Done prior to performance of changed work, and with the agreement of all
parties
- Actual Cost pricing
• Also called “time and materials” or “force account”
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Factors covering cost changes, cont:
- In Forward pricing change orders, the CM should recognize
some special factors, such as:
• Statutes and condition of the work
• Size and complexity of the change
• Climatic conditions
• Learning curves
• Additional supervision
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Factors covering cost changes, cont:
- Other items to consider:
• Value of salvaged material
• Odd lot sizes
• Special delivery costs
• Higher cost for proprietary items
• Cost escalation from the bid opening
• Storage costs
• Bond and insurance premiums
• Changes in the sequence of the work
• Premium time
• Congestion in work areas
• Mobilization and demobilization
• Loss of efficiency or productivity
• Extended general conditions, field overhead, home office overhead
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Productivity and efficiency, using
man-hour analysis:
- Useful for productivity studies, impact analyses, and
efficiency losses
- Assumes use of resource-loaded CPM schedule by the
contractor
- Use the accepted “as-planned” schedule to determine what
productivity level has to be achieved in order to meet the plan
- Monitor field activities to calculate actual productivity
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Productivity and efficiency, using
man-hour analysis, continued:
- If the contractor is at or above the planned productivity = OK
- If not, the contractor is likely behind schedule, and corrective
action may be required
- This is also useful for change order and claim analysis
concerning lost productivity and lost efficiency
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Productivity and efficiency, using
man-hour analysis, continued:
- Provides actual data from the project in lieu of generic
“national studies” often provided by contractors
- “Measured mile” technique: compares a non-impacted portion
of the project with the impacted portion; also allows an
“earned value analysis” to determine the productivity impacts
of change orders
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Cost Evaluation System for Potential Claims
- CM typically charged with leading the settlement actions on
behalf of the owner
- Same techniques as for change orders
- Advantage: typically work is already complete
- Burden of proof is on contractors to substantiate entitlement
and damages
- Include audit provisions in the contract
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
Summary
- Must establish and manage a realistic contingency
- Must determine a fair schedule of values
- Process payment applications, change orders, and
claims promptly
- The CMs primary role during this phase is an aggressive and
timely resolution of change orders issues
- Independent estimate of change order costs
- Two methods: forward pricing and actual cost pricing
- Be aware of factors impacting change order costs
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Project Close Out
Release of Liens
Release of Retainage
Final Cost Accounting
Final Closeout Report
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
Conclusion
- The CM plays a key role in Cost Management during all
phases of a construction project: planning, design, bid/award,
construction, and closeout
- The CM is the cost professional on the project
- Cost management must be established and implemented at
the outset and continued throughout the project
- CMAA procedures intended to help the CM with this role
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QUESTIONS?