Procedure Of Achieving A Cost Target Construction Essay

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This report is focused on the procedure of achieving a cost target within its minimal framework for optimal profit development or achievement for a given project. It is an approach where the roles of various players and factors affecting cost in the building industry are properly stated, identified, and discussed. These roles played by each of the mention elements go a long way in determining the cost effectiveness of the project and the subsequent output (profit).

Furthermore, no matter the amount of money -large or little- an investor or developer whether an individual, cooperate body or organization is willing to invest, at the same time he will be considering a good return on the investment. This in essence means that he has to set a cost target within his available resources to enable him in achieving a better profit development.

The various processes were also extensively considered. These are processes involved in the setting out a considerable cost target that will enhance an optimal profit development of a given project. The process of cost target starts right from the time the project is conceived by the initiator or developer till the completion and handing over of project, at various stages cost implications are considered so that the objective being profit development will be achieved.

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All these are comprehensively and extensively discussed in the report. They are all geared towards an effective cost target for an optimal profit development of projects.

CHAPTER 1

INTRODUCTION

It is reasonable to assume that the objective of a building project is to create the best possible facility for a given level of expenditure. If this is true, then the objective of effective cost target during the development stage of the project should be to establish an effective project team, a unity of purpose and commitment to results.

Yet the process of planning a project through the development phase if not well understood by some of the principal players, the dynamics of their separate interests may well run counter to the overall project objectives.

Indeed, in some part of the world the adversarial attitude amongst the various segments of the building industry is so entrenched that it is sometimes difficult to persuade the parties to the project to act together in the common interest of achieving profit development. At least, not without good communication, or perhaps a gentle education program.

So, the development manager, or project manager, must be aware of the dichotomies that exist and the pitfalls that he or she faces. This is the first step in understanding and improving the performance of the team and the resulting development process. This in essence will enhance a good cost target that produces a maximum profit development of any given project.

Cost can simply be defined as the amount paid for something : the amount of money required to be paid for something, it can also mean money spent doing something: the amount of money spent in producing or doing something

Parties that are involve in cost target for profit development

The principal actors in a building project and their respective interests may be identified as follows:

• The "Owner as Sponsor" anxious to maximize return on investment, perhaps at the expense of operational costs

• The "Owner as Operator" anxious to minimize operating costs, perhaps at the expense of initial capital costs

• The "Designer" anxious to provide a good design service and build a reputation for future work, perhaps by creating a "professional image" in the final building

• The "Constructor" anxious to maximize profit, especially if severe market competition has resulted in tight firm-price margins

• The "Project Manager" anxious to set the stage for a successful project implementation through efficient management.

These relationships must be managed just as positively as the technical aspects of the project.

Thus the objective of project planning may be said to be the achievement of predetermined specifics within given targets of quality, time, cost, and client satisfaction. A successful project is therefore one which is perceived as having achieved satisfactory tradeoffs within these parameters. Management in the project context means to plan, organize, execute, monitor against the plan and then control by taking corrective action. Or in simpler terms: "To direct by saying what you are going to do before you do it." This provides an opportunity to modify your actions at minimum cost and maximum effect. Provided always, of course, that this does lead to procrastination beyond the period of opportunity for effective action. It must be understood that this approach is particularly sensitive amongst team members during the development stage of the project when its functional design is being determined. Professionals understandably do not like to feel that they are being restricted in their professional judgment, second guessed or criticized. Cautious but candid, constant and complete communication between all members of the project team is therefore essential.

The role of financial advisors in cost target achievement

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Many construction projects suffer from preventable financial problems. Underbids ask for too little money to complete the project. Cash flow problems exist when the present amount of funding cannot cover the current costs for labor and materials, and because they are a matter of having sufficient funds at a specific time, can arise even when the overall total is enough. Fraud is a problem in many fields, but is notoriously prevalent in the construction field. Financial planning for the project is intended to ensure that a solid plan, with adequate safeguards and contingency plans, is in place before the project is started, and is required to ensure that the plan is properly executed over the life of the project.

Mortgage bankers, accountants, and cost engineers are likely participants in creating an overall plan for the financial management of the building construction project. The presence of the mortgage banker is highly likely even in relatively small projects, since the owner's equity in the property is the most obvious source of funding for a building project. Accountant act to study the expected monetary flow over the life of the project, and to monitor the payouts throughout the process. Cost engineer apply expertise to relate the work and materials involved to a proper valuation. Cost overruns with government projects have occurred when the contractor was able to identify change orders or changes in the project resulting in large increases in cost, which are not subject to competition by other firm as they have already been eliminated from consideration after the initial bid.

Large projects can involve highly complex financial plans. As portions of a project are completed, they may be sold, supplanting one lender or owner for another, while the logistical requirements of having the right trades and materials available for each stage of the building construction project carries forward. In many parts of the world projects typically use quantity surveyors

CHAPTHER 2

MANAGEMENT OF PROJECTS AS IT AFFECTS COST TARGET

In project management a project consists of a temporary endeavor undertaken to create a unique product, service or result. Another definition is a management environment that is created for the purpose of delivering one or more business products according to a specified business case.

Project objectives define target status at the end of the project, reaching of which is considered necessary for the achievement of planned benefits. They can be formulated as S.M.A.R.T: Specific, Measurable (or at least evaluable) achievement, Achievable (recently Acceptable is used regularly as well), realistic (given the current state of organizational resources) and Time terminated (bounded). The evaluation (measurement) occurs at the project closure. However a continuous guard on the project progress should be kept by monitoring and evaluating. It is also worth noting that SMART is best applied for incremental type innovation projects. For radical type projects it does not apply as well. Goals for such projects tend to be broad, qualitative, stretch/unrealistic and success driven.

The gap between target cost and allowable cost gives the strategic cost reduction challenge: a figure used to set targets for value engineering, motivate project goals and lead decisions whether re-design is beneficial or even necessary. In addition to indicating areas for future improvement, target cost also is a valuable tool for assessing bottom line viability of new project, through the cardinal rule: never launch a project above its target cost.

Once costs are understood at all levels, this information can be combined to evaluate how specific costs impact margins, providing a more comprehensive understanding of areas of strength, while isolating where future gains are likely to be derived from through project.

CHAPTER 3

COST EFFECTIVENESS

Another name for project management is therefore "cost effectiveness." Cost

Effectiveness may be defined the as best value for money. For analytical purposes, this needs to be more closely defined as the optimum trade-off between specific parameters. These parameters include affordable scope requirements; quality including aesthetic value, time put in place, enhanced production or reduced operating costs, and so on, all according to the type of project and original basic project objectives.

Much of this may be subjective as in the case of assessing aesthetic value or forecasting the future labor cost trends. Yet, it is nearly always possible to make a value judgment in comparing alternatives and the better the project objectives are defined at the outset, the easier this judgment becomes. This goes without saying that the design consultants have a particular responsibility to ensure that their staff and sub consultants also clearly understand project objectives.

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When design consultants accept an assignment to produce specifications and working drawings they, and all their support staff, should clearly understand that they are spending money on two different levels. First is the cost of their own design work. Second is the cost of putting the design physically into place. Every line on a working and specification drawing and every sentence or even every word put into a specification has an associated cost downstream. And the cost is committed just as surely as the time is spent in its preparation. What is not always appreciated by the owner/sponsor is the relationship between the cost of doing the design and the cost of constructing it. The ratio is about 1 to 8 or 10. There is therefore substantial advantage in "getting the working details just right" in the first place. As the ability to Influence Cost curve indicates, the earlier the point in the development process of "getting it just right", the greater the economy.

Making the Right Choices that affect cost

This is also an interesting anomaly. The more elegant and simple the solution to meet the design criteria, the cheaper the cost of both construction and the detailing effort. It is well worth searching for. The next question is how early and how detailed should cost effective comparisons be made? Bearing in mind that, while it is easier to draw comparisons the more detailed costing efforts become, it is also easier to "lose sight of the woods for the trees". How often does one find a project team's design, schedule and cost functions getting "bogged down in detail"?To state the obvious, cost-effective analysis should only be taken to the level of detail commensurate with the stage in the project and the ability to draw reasonable comparisons and hence make selections from amongst options.

This suggests that different regulations should be set for evaluating costs at different stages of the project. These should range from macro levels during conceptual analysis to medium levels for design evaluations to micro levels during construction. Such values may also vary according to the relative emphasis on the various project restraints, such as the relative importance of budget against time.

Bearing in mind that a time delay near the end of the project is far more expensive, and therefore more important, than one earlier on by virtue of the much higher carrying costs.

Calculation of Construction Costing (1/10th of 1% Rule)

The "micro" level for cost monitoring, reporting, and controlling purposes during construction may be set at 1/10 of 1% of the total project construction cost as a good rule of thumb. That is, this is the minimum value that would be set to show up as a separately coded item in the routine cost reports. Conversely, items that exceed, say, 2 1/2% would be required to be broken down once more. This approach leads to more balanced items in the cost report, with a total of around eighty items being reported, which is manageable - especially when segregated by trade.

For example, for a building project with a construction budget of N10 million, the cost reporting structure would be set up to code items of not less than N 10,000 and not more than N 250,000.

Such guidelines help considerably in developing initial budget strategies and maintaining balanced judgment during the life of the project.

So, in evaluating design alternatives in the earlier planning phases, a lower limit of significance might be set at say 2 1/2%. Hence, in the example given above, in comparing the merits of design alternatives of elements in the N 250,000 range, differences of N 6,000 or more would be considered significant and worth pursuing. This assumes, of course, that the design team has been diligent in maintaining a reasonable and consistent level of cost consciousness.

CHAPTER 4

COST ESTIMATION

Costs Associated with Constructed Facilities

Estimation of construction cost will go a long way in determining the profit that will maximize. The costs of a constructed facility to the owner include both the initial capital cost and the subsequent operation and maintenance costs. Each of these major cost categories consists of a number of cost components.

The capital cost for a construction project includes the expenses related to the initial establishment of the facility:

Land acquisition, including assembly, holding and improvement

Planning and feasibility studies

Architectural and engineering design

Construction, including materials, equipment and labor

Field supervision of construction

Construction financing

Insurance and taxes during construction

Owner's general office overhead

Equipment and furnishings not included in construction

Inspection and testing

The operation and maintenance cost in subsequent years over the project life cycle includes the following expenses:

Land rent, if applicable

Operating staff

Labor and material for maintenance and repairs

Periodic renovations

Insurance and taxes

Financing costs

Utilities

Owner's other expenses

The magnitude of each of these cost components depends on the nature, size and location of the project as well as the management organization, among many considerations. The owner is interested in achieving the lowest possible overall project cost that is consistent with its investment objectives.

It is important for design professionals and construction managers to realize that while the construction cost may be the single largest component of the capital cost, other cost components are not insignificant. For example, land acquisition costs are a major expenditure for building construction in high-density urban areas, and construction financing costs can reach the same order of magnitude as the construction cost in large projects such as the construction of nuclear power plants.

From the owner's perspective, it is equally important to estimate the corresponding operation and maintenance cost of each alternative for a proposed facility in order to analyze the life cycle costs. The large expenditures needed for facility maintenance, especially for publicly owned infrastructure, are reminders of the neglect in the past to consider fully the implications of operation and maintenance cost in the design stage.

In most construction budgets, there is an allowance for contingencies or unexpected costs occurring during construction. This contingency amount may be included within each cost item or be included in a single category of construction contingency. The amount of contingency is based on historical experience and the expected difficulty of a particular construction project. For example, one construction firm makes estimates of the expected cost in five different areas:

Design development changes,

Schedule adjustments,

General administration changes (such as wage rates),

Differing site conditions for those expected, and

Third party requirements imposed during construction, such as new permits.

Contingent amounts not spent for construction can be released near the end of construction to the owner or to add additional project elements.

CHAPTER 5

COST REQUIRMENTS FOR ACHIEVEING EFFECTIVE COST TARGET

No critical cost requirements. This is not very common, but it can occur where the building is only a part of a major development project or where the first consideration is quality.

Low total cost of whole project. By contrast, this is almost always said to be the main priority .However, very often one or more of the following criteria are actually the real ones.

Low cost of building contract. The concern here is to keep the lump sum building cost to the minimum, even if this does not minimize financing cost, administrative and supervisory costs, or cost of furnishing and maintenance. It is quite often required on public- sector projects where these things may come out of different funds.

Low cost in relation to unit of accommodation. This is a very usual cost requirement, in both the profit and social sectors.

Good budgetary control of the project. In many cases it is important that the final cost should as close as possible to the initial cost forecasts, even if this is not necessarily the lowest cost that the competitive market might produce at the time the actual orders are placed.

Good forecast of cost at contractual commitment. This is required by clients who want an accurate forecast of final cost before committing themselves to major expenditure.

Best combination of capital and maintenance costs. One would like to think that this was more common than it is - there are all sorts of reasons like taxation, grants, cost yardsticks, etc, which tend to prevent these two things from being weighted equally.

Low capital cost. A more usual requirement, especially if the building is going to be sold, or if running costs come out of different fund.

Low maintenance cost. Less usual, but may be required it maintenance is going to be inconvenient, for example by putting the building out of commission while it is going on.

Timing of cash flow. This may be required in order to optimize the cost on a discounted cash flow basis or else to phase in with the availability of the client's funds.

Minimum capital commitment. This would be required if the client wanted the contractor to bear most of the cost until the building was handed over.

Share in risk of development. A variation on the last, where the contractor is paid by a share in the profit; this has been used on large speculative developments.

CHAPTER 6

DEVELOPERS AND DEVELOPMENT

The embarking of a building project is often known as development and the person or organization responsible for initiating the project is the developer. In the building sector this person or organization is identified as the client or building owner or the proprietor. In a popular term 'developer 'is often used for those who build for profit, but this is not always correct. Those who build for social purposes can also be developers. All development arises from the demand of customer. This may either be

- a direct demand: for office, for housing, and or library etc or

- an indirect demand, that is a demand for something which will require building development in order to satisfy it (such as a demand for car company which will need a factory to produce them).

But the demand must be an economic one. There must be someone willing to take care of the bill or who can be induced to do so.

Developers, whether individuals or corporate public or private bodies, will be building either.

- For profit, when their approach to cost will be governed by the way in which they expect to receive their reward, usually by leasing or by sale, or

- For use, when their approach will be governed by the actual units of accommodation which they require.

Profit development, social development and user development

Profit development, where it is intended that receipts from the disposal or use of the building will more than cover cost.

Social development, which is usually in the publicly funded sector.

User development, which covers such projects as a private house, or an office building for an insurance company's own occupation.

CHAPTER 7

COST TARGETS FOR PROFIT DEVELOPMENT

The setting of cost target for profit development (e.g. office block for letting, housing for letting or sale) is related to free-enterprise economics, and even where there are grants, subsidies, taxation reliefs, and so on to be taken into consideration, the criteria are simple. Even if non-quantifiable element, like preserving the environment, has to be taken into consideration, will have to be assessed against its effect on profit. In most cases calculations are use to show how much the developer can afford to spend under the heading of 'building cost' after other items of expenditure such as land costs, professional fees, etc, have been taken into account. There is some flexibility because the standard of building will partly determine the rent or the selling price that can be asked, but this is often dictated by the environment and by the cost of the land. It would obviously not be economical to erect a high-cost luxury building for sale or rent in an unpopular neighborhood, nor to try a low-cost, low-income development in a fashionable district where land cost are high and there is a good income potential.

There is no room for 'hard luck stories' in carrying out profit development, but on the other hand there is the challenge of working in a real situation where time means money. For example

Early completion of a retail complex may involve substantial extra profits;

Late completion (e.g. after festive period instead of before festive period) could be financially disastrous.

Cost target for social or private sector user development

In social or user development, however the main object of the exercise is the actual provision of the buildings. It becomes very difficult to set realistic cost target since there is no definite limit at which an individual building ceases to be possible. In public sector building in particular, it is usually possible to rise whatever sum of money is required for the purpose. Any constraint is usually at a higher level than the individual project, for example, the proportion or the national budget which is allocated to education may determine the amount to be spent on school building as a whole.

Therefore in other to determine a reasonable cost for this type of building it is necessary to set artificial limits, based upon the cost of similar buildings erected elsewhere. The gross floor area is too crude as a basis for the purpose of this comparison and so various targets based upon user requirements have been established, often by the ministries responsible so as to ensure a nation-wide standard. In the case of schools the unit cost was the number of 'cost places' (a fictitious number of pupils calculated from the teaching space), while for hospitals the number of beds was once the basic yardstick.

These cost targets were usually determined by a set of artificial standards which had to be adhered to. Although tight in some ways, these usually made exceptions for technical difficulties associated with a particular project. But here we are not in the world of simple profit economics.

The cost planning of social development projects, therefore, may resemble the playing of a board-game such as Monopoly, where the architect and the cost planners try to win according to a set of rules which have little validity in the real world outside. Sometimes the rules may be very crude indeed, for example:

A rule the money cannot be transferred from one fund to another.

A rule that money cannot be spent outside the financial year in which it is allocated.

A rule that no major contract can be let except by competitive tendering on affirm bill of quantities (BQ) with no allowance for cost fluctuations.

A rule that any financial considerations other than the contract amount are irrelevant.

The purpose for profit development

One of the major purposes for the development is to make profit and profit is quantifiable.

If an adequate profit cannot be foreseen the development will not be undertaken, however much it may be needed.

Once a final decision has been made on income levels the cost will have been determined and must not be exceeded. If any item goes up in cost the money must be saved elsewhere.

A misjudgment of either the costs or the expected receipts of a scheme will have exactly the same effect on its profitability; neither is more important than the other.

If the expected profit is not made the project will be a failure from the client's point of view, however pleasant or useful the resulting development may be.

In the case of social development.

The cost is not an excellent measurement of the effectiveness of the project (as it is with profit development); the benefits of a hospital, clinic, school, or police station are largely unquantifiable.

Therefore nobody really knows whether they ought to be spending twice as much money (or half as much) on building of this kind, and no amount of cost planning is going to give them the answer.

The most that cost planning can do is to help use the total allocated funds more effectively within the current framework of rules, and accept that the basic values will be decided for political reasons.