Integrated Cost Management in a Project Environment from a Project Owner Perspective: The Pre-Contract Stage

Project Owners and in particular in the private sector understand the criticality of ensuring that their project investments are completed within the approved budget. For them, projects are no different than other investments they undertake where the Return of Investment (ROI) along with other factors such as risk exposure determines their selection. Going over budget, or increasing the capital cost without an increase in the operations revenue could very much turn the project into a “Big White Elephant”.

This article explains the steps that project owners usually would follow to have better control on their project cost. It divides the cost control process into eight steps: Cost Estimate, Project Budget, Procure Contracts, Award Contracts, Change Management, Progress Invoices, Forecast to Complete and Closeout. The proposed integrated cost management process is aligned with the best practices of the Project Management Institute (PMI) Project Management Body of Knowledge (PMBOK). This article will cover the pre-contract phase of the project life cycle.

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The PMWeb Enterprise Project Management Information System (PMIS) software will be used throughout this article to detail how a single Commercial of the Shelve (COTS) platform can capture the details of all processes needed to manage the project cost and other related processes. PMWeb provides those involved in delivering the cost management processes with the following important functions:

  1. Pre-developed document templates to capture project cost management information
  2. Custom developed document templates to capture additional cost management information
  3. Link WBS and Schedule activities from the planning and scheduling application
  4. Capture all type of cost data including the support for multi-currency at line item level
  5. Document management repository all documents needed to support the cost management processes such as drawings, BIM models, material brochures and catalogues, material specifications among others
  6. Workflow to formalize the process of submitting, reviewing, sharing and approving project management processes
  7. Tabular and graphical reports to aggregate, summarize, sort and filter the information captured from the cost management processes
  8. Dashboards to summarize and analyze the cost management data to enable faster and better informed decisions on the project cost.
  9. Ability to import and export data to third party cost estimating and other cost management applications
  10. Integrate with all other best practice project management processes
  11. Web-enabled to allow team collaboration in developing the cost management processes

Developing the Project Cost Estimate

Direct and Indirect Cost

The first step in the integrated cost management is to develop the estimated cost for delivering the ARTICLEDIRECTCOSTproject scope and services. The project cost estimate should take into account both Direct Costs and Indirect Costs. Direct Costs are proportional to the project such as material for products, workers, project managers. Direct Costs are also known as Variable Costs as they vary with the project requirements. Indirect Costs are the costs that are expended regardless of the size of the project such as project management, advertising for company, taxes. Indirect Costs are also known as Fixed Costs as they do not vary with the project requirements.

Pre-Contract Phase Stages

For a project owner, the project would usually start with very limited information to come up with a detailed cost estimate. At the concept design stage, the project would not have detailed drawings, Building Information Model (BIM) or specifications to determine the cost of the different project elements or components. As the project development evolves into the project life cycle design stages, more information will become available to come with a more accurate project cost estimate. The construction document stage is the stage where the project cost estimate should reflect the most definite estimate before the project goes into the contracts procurement stage.

It is a common practice to come up with revised detailed cost estimates at the conclusion of each stage during the pre-contract phase of the project life cycle. Those will be the concept design (also known as Level of Detail 100 in BIM), schematic design (also known as Level of Detail 200 in BIM), 30% design development, 70% design development, 100% design development (the three stages are also known as Level of Detail 300 in BIM) and construction document stage (also known as Level of Detail 350 in BIM). All those cost estimate versions, along with all the backup documents, need to be stored to keep track of how the cost estimate has evolved during those stages.

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Developing the Project WBS

One of the important project management best practices that need to be implemented before proceeding with the cost estimate is to develop the Work Breakdown Structure (WBS) which is a technique used to subdivide the major project deliverables and project work into smaller, more manageable components, also known as scope decomposition. Although each organization could have a different strategy in developing the WBS but they all need to keep in mind that the WBS will become the basis for developing the project detailed cost estimate, developing the project execution schedule, identifying projects risks, developing the project outsourcing strategy among many others. It is a growing trend nowadays that organizations, and in particular project owners, to have the WBS as also the project Cost Breakdown Structure (CBS).

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Top-Bottom Cost Estimating

At the concept design stage, project owners would usually come with a high level project cost estimate based on the building area to be developed, number of beds in a hospital, number of rooms in a hotel, number of villas in a residential development among others. The top-bottom cost estimating technique is usually used to identify the breakdown of this summary project cost estimate into the project main elements. The Work Breakdown Structure (WBS) will be used as the tool to provide the cost breakdown based on past experience for the weight of each component of the project scope to the total project cost.

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Cost Assemblies

Project owners who are involved in delivering repeated real estate projects of similar nature such as Hotels, Bank Branches, Schools, Clinics, Villas, Residential Towers, Commercial Towers, Retail Outlets among others tend to develop what is known as a “Project Cost Assembly”. The assembly will be based on coming up with a total project cost estimate based on a number of attributes such as floor area, number of floors, number of car parks, number of hotel rooms, number of hospital beds among others as well as adjustment factor for the project location, year, etc. After the total cost is calculated, the assembly will breakdown this cost on the project WBS components using the top-bottom cost estimating concept. The assembly design reflects the organization past experience and knowledge in delivering projects. It is considered as an organization asset that differentiates an organization from another.

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Detailed Project Cost Estimate

As the project components get detailed through the development of drawings, specifications or Building Information Models (BIM), a more detailed cost estimate will be developed. The project WBS will be detailed to lower levels to reflect this level of detail. The values for the detailed cost estimated could either be calculated from the quantities and rate for each item or based on quotes offered by third parties. All drawings, specifications, BIM models, quotes used to develop the cost estimate, needs to be attached to the estimate to provide the verification on the basis of calculating the cost estimate.

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Similar to the building cost assembly used during the early concept design stages, detailed cost assemblies can be also developed to identify the components and quantities of specific building systems such as retaining wall, built-up roofing, wall cladding among many others. Applications like PMWeb allows attaching all supportive documents such as product catalogues, drawings, specifications, BIM object details among others to those detailed cost assemblies. Again those assemblies reflect the assets the organization has developed and accumulated over their years of experience in delivering projects. The more cost assemblies an organization has, the more value this organization for itself over the years.

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Developing the project cost estimate in particular projects that require using products from multiple sources from different countries that uses currencies and exchange rates that could vary, the cost estimate should take this into consideration. Some applications allow linking the cost of those line items to an exchange rate table that can be updated on daily, weekly or monthly basis.

It is also common for some project owners to depend on third parties such as quantity surveying and cost management firms to develop the project cost estimate during the design development stages. Those consultants might use Commercial of the Shelve (COTS) cost estimating software applications as well as MS Excel to develop the cost estimate. COTS cost estimating software including applications like Nomitech CostOS, Hard Dollar, Timberline among others can export their developed cost estimate in MS XLS file format to enable the project owner to import those estimates into PMWeb or whatever solution is being used to manage the project cost development. Project owners should avoid creating silos of cost estimates where it will become impossible to track the cost estimate development and eventually lose governance on the project capital investment.

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Cost Contingency

One of the important line items that must exist in each cost estimate is the contingency allowance for accepted project risks. Those are the risks that that the organization has decided not to avoid, mitigate or transfer to others. An organization might opt to breakdown the contingency line item into separate groups to provide better control. The contingency allowance will be adjusted whenever a revised cost estimate is developed as more project information becomes available and thus some of the project unknowns become known or when the organization to avoid, mitigate or transfer those earlier accepted risks to others. Therefore, it is important that the project risk register is maintained current and shared with the project cost management team so they can come with the appropriate contingency amount to include.

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Generating the Project Time-Phased Budget

It is recommended practice to generate a project budget after approving the cost estimate for each design stage. The project budget could be at the same level of detail of the cost estimate or be rolled up to higher WBS level. There will be no jeopardize to the accuracy of the budget as the base for both is the same. Having said so, the budget could include additional cost line items that the cost estimate did not include as those could be related to the organization’s business rules and practices. For example, the PMI’s PMBOK recommends that the Risk Management Reserve be included in the project budget rather than the cost estimate. This is the contingency level that is under the senior management control. In addition, some organization might add the profit contribution to the budget rather than the cost estimate.

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In addition, a project budget would have different user access rights as well as different stakeholders’ approvals level. The project budget will become the basis for requesting and securing the project funding, plan the project fund spending, identify procurement and bid packaging strategy and eventually procure the contracts. Further, the project cost performance will be eventually based on the approved budget rather than the approved cost estimate. Similar to the project cost estimate, the project owner needs to keep a register of all budget versions with only one budget to be considered as the “Approved Budget”.

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Project budget needs to be linked to the project execution schedule to establish the time-phased budget. This will enable distributing the approved budget for each line item over the associated project schedule activity duration. The distribution of those funds can be equal over the total periods, front loaded, back loaded or any preferred distribution curve. Those distributed values are the “Planned Values or PV” which will be used to perform the Earned Value (EV) analysis and performance reporting during the post contract phase.

BUDGET

Similar to other document templates for project management processes, the project budget should include all necessary document attachments and links to other project management document templates that could impact the project budget. The project budget will also have a workflow to govern the steps for submitting, reviewing, sharing and approving the project budget.

Budget Adjustments

When a budget becomes approved as the baseline budget for measuring and assessing the project’s performance, any changes to this budget should be done in a controlled and governed format. Budget adjustments or changes could result in reducing or increasing the approved budget as well as transfer funds from one cost center or WBS level to another but without changing the total of the approved budget. Those changes would require different workflow steps and stakeholder involvements depending on the nature of the adjustment and the value of the adjustment.

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The approved budget is a critical stage gate for any project owner as it provides the anticipated value for the project investment as an overall as well as how and when this investment will be spent during the project post contract stages. This will impact when contracts will be procured, what will be maximum awarded value for those contracts and when payments will be done for delivering the scope of those contracts. The approved budget will enable the project owner to negotiate with the funding agencies on how to finance the project and what conditions need to be provided to secure the funding. Those conditions might have impact on the approved budget for which adjustments might be needed to comply with those constraints.

It should be noted that for some projects, project owners might decide to terminate or shelve the project as the final approved budget might not provide the desired return on investment compared to other investment opportunities.

Procure Contracts

Contractors Pre-Qualification

This is the stage that when completed, the project will move from the pre-contract phase to the post-contract phases. Project Owners will usually set the criteria to pre-qualify who are the contractors who should be invited to bid on the project. The project scope could be also divided into separate bid packages such as enabling works, superstructure, Mechanical-Electrical-Plumbing or MEP services, Finishes among others to invite the qualified bidders to bid each package. PMWeb pre-qualification module allows creating a customized pre-qualification document to be filled by all contractors who will be interested to bid on the project or selected bid packages.

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The pre-qualification document will include details on the contractor, bonding capacity, insurance, certifications, registrations, legal entity, ratings, ISO certifications among others. The captured information will enable the Project Owner to qualify and short list the contractors who will be formally invited to bid on the project.

The Bidding Process

The project owner will invite the contractors to bid on the project and provide their best commercial offer for the completing the project scope of work as per the construction contract documents which will include drawings, specifications, conditions of contract, bill of quantity and maybe BIM LOD350 models. The bidding process will include responding to Request for Clarifications from the bidders, attend pre-bid meetings and make site visits to confirm their understanding of the site conditions. The submission of the bidders’ proposals can be on either on two stage where first the technical proposal is submitted and only those who are qualified will be requested to submit the commercial proposal. Others might request the traditional approach of submitting the technical and commercial proposals at the same time.

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Today there is a growing trend in requesting the bidders to submit their commercial bids online. The public sector usually has a government portal that all bids need to use. For private project owners might opt to have their own online bidding portal similar to the one offered by PMWeb.

Bid Analysis

The submitted online bids will be captured in a bid analysis document where the approved estimated cost for each line item developed earlier in the approved cost estimate will be compared with the submitted bids by the pre-qualified bidders. It will immediately detail the variances between the bidders and help to identify if there is unbalanced bid, front loaded bids, misunderstanding of the scope among others. Unbalanced bid is where a contractor intentionally adjusts the unit price for specific project elements while keeping the total bid price attractive. This is a practice followed by some contractors who might be award that some items might be decreased so the unit price will be decreased to reduce the amount of deduction while items that could be subject to increase are increased in value to increase the amount of variation and make more profit. Many countries prohibit this practice and would consider the contractor bid as null and void. Other contractors might front load their bid to provide project finance for the project. Again most project owners would refuse those bids and disqualify the bidders.

The bid analysis will provide the project owner with the confidence that the final approved cost estimate and for which the project time-phased budget was developed is valid and in line with the formal bids received from the pre-qualified contractors. Should the received bids be acceptable, then the project owner will be ready to generate the commitment contracts that will move the project into the post-contract phase. Of course, the project owner might decide to terminate or shelve the project as the final received bids might exceed the originally approved cost estimate and approved time-phased budget.

BID ANALYSIS

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