Discrepancies between pre-tender estimates and actual bids for construction can often compromise the viability of a capital project. Factors such as volatility in material prices can further cause significant and unexpected delays in construction schedules, leading to cost overruns. This is why all key stakeholders in a capital project, including project owners, engineers, contractors, and subcontractors, need to ensure a high degree of cost predictability in construction.
Cost predictability in construction is often considered effective risk mitigation and a value-increasing mechanism because it helps foresee and assess impending deviations that might adversely impact the outcome of a project. Below, we discuss the challenges to accurate cost estimation in construction in capital projects and how to address those challenges with a few best practices.
Challenges to Cost Predictability in Construction
Cost estimation in construction is not an exact science, and a large number of factors contribute to variances in the estimates. The complexity and the type of capital project also influence the cost predictability in construction, highlighting the need for realistic expectations for estimate accuracy. The following are some of the key challenges that are common to cost predictability in construction for most capital projects:
Poorly Defined Project Scope
A poor or delayed scope definition can lead to significant changes to the scope and frequent change orders as the project is executed. For both project owners and contractors, changes associated with the scope are found to be most disruptive for cost predictability in construction. The challenge is to establish alignment between all stakeholders to ensure that appropriate scope and cost management framework is adopted for the required degree of cost predictability.
Lack of Transparency Between Stakeholders
Risk assessment is a collaborative approach that is closely tied to cost estimation in construction. Limited interpersonal team interactions early in the process result in a lack of transparency among key stakeholders and influence the cost predictability with inaccurate prices of the requirements.
Incomplete Bid Documents
Bid documents without detailed engineering drawings, piping and instrumentation diagrams (P&IDs), and material takeoffs (MTOs) often lead to large discrepancies between quotes by contractors and subcontractors. Inconsistent quotes can significantly impact cost predictability in construction.
Global market trends influence the cost of materials and labor for construction. Volatility in the prices of steel- and oil-based products, along with fluctuations in material indexes, make it challenging to arrive at accurate cost estimates in construction.
Lack of Contingency
A common way to mitigate risks in construction is by adding contingency cost in key areas that are uncertain. Material supply availability is uncertain, and it is difficult to lock in prices for an extended period. Without assigning an appropriate contingency amount, any unforeseen or unaccounted risk can undermine the ROI of a capital project.
The challenges to cost predictability in construction are further aggravated when project owners or contractors fail to notice the feasibility or achievability of their objectives. A lack of awareness surrounding the existing conditions of the construction site, such as the presence of any hazardous contaminants, can put additional risks and lead to cost and schedule overruns. However, there are a few cost predictability best practices that can effectively address these challenges.
Improving Cost Predictability in Construction in Capital Projects
One of the key factors to consider while improving cost predictability in construction is to identify the soft spots in estimates and nail them down to more accurate costs. Also, it is important to note whether a capital project is cost-driven or schedule-driven. A project’s schedule is the biggest factor that drives cost predictability. The approach for calculating cost estimates in construction changes when a project is schedule-driven.
The following are a few ways cost predictability in construction can be improved while considering these factors:
- Ensuring a well-defined project scope: The level of scope definition determines the range of accuracy of cost predictability in construction. A well-defined project scope captures all of the project requirements, including the deliverables, estimated budget, and duration of the project. After a scope has been defined and approved by the key stakeholders in the project, it is important to monitor and control the project scope to avoid scope creep when possible. In case changes are inevitable, a proper change management work process needs to be established to minimize risks and costs and maintain the project’s schedule.
- Progressive design efforts: Cost predictability in construction improves as front-end planning moves through the stage-gate process from FEP I to FEP 2. Engineering design details are critical in improving the cost predictability, as they become more detailed during FEP 3 with better layouts and material requirements. When exact quantities of materials and equipment are known, your cost estimation is better.
- Implementing better project controls during front-end planning and execution: Implementing strong project controls, such as a Work Breakdown Structure (WBS), Schedule of Values (SOVs), Project Execution Plan (PEP), contractor rate sheets, and project reporting schedules, during the pre-contract and bid phase can help mitigate specific risks that improve cost predictability.
- Hiring experienced estimators: A lead estimator’s prior experience and practical knowledge of the construction process are instrumental in determining the appropriate estimate class based on how far the project has progressed. The lead estimator is also responsible for selecting the risk assessment technique and allocating the appropriate contingency amount for the desired confidence level.
- Choosing the right project delivery approach: When a project is schedule-driven, the design-build project delivery approach should be preferred because the contractor who is in total control of the project can layout the project more easily to fit the schedule. This translates to lower cost impact and less effort for the project owner.
The H+M Approach
At H+M Industrial EPC, we improve cost predictability in construction by bringing in our in-house construction team early in the bid process to provide valuable inputs for the best execution strategy. By involving and aligning our engineering, procurement, and construction departments, we ensure the feasibility of our proposals that result in successful outcomes. With every projected cost estimate in construction evaluated by our experienced lead estimators, we plan ahead for any unforeseen risks and create opportunities for cost savings.