Construction Cost Management & The Impact of the Project Schedule on Cost

Part 3: Cost Management Fundamentals By Ted Garrison Garrison Associates www.TedGarrison.com www.StrategicPlanningforContractors.com www.NewConstructionStrategies.com

Module 1: Cost Management Fundamentals

Idealism increases in direct proportion to one s distance from the problem.
John Galsworthy

Therefore, the people performing the work should be part of the planning process. Project cost management is concerned about the cost of the resources need to complete the project.
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Concerns of Project Cost Management

Project cost management is concerned about the cost of the resources need to complete the project. Project decision should be concerned with the following:
Short-term costs versus long-term costs Life-cycle costs Energy costs Cost impact to the various stakeholders
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5 Phases of PM
D e fin e P la n

E x e cu te The Loop A d ju s t M o n it o r

C o m p le te

E v a lu a te

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Keys to Successful Cost Planning

Focus on what s most important Approach planning as an art more than a science Create a plan that accommodates change Treat the plan as an alive and growing document
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A Vision is a Guide for Decisions

A plan should be a description of current strategies and tactics to achieve the vision. The vision provides the bases to adapt strategies and tactics to achieve the vision as things change. The master plan s strategies and tactics allow subs and workers to develop their strategies and tactics to obtain the results they must achieve in order for the vision to be accomplished.
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An Overview of the Planning Process

1. Create the project vision (Definition) 2. Outline the plan 3. Gather up all the information available 4. Identify what parts of the plan must be produced
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An Overview of the Planning Process

5. Conduct a planning meeting with the project team this includes subs
Get them excited Makes sure the vision is clear Let them know what they must do and when

6. Prepare, review and revise the plan based on team input avoid analysis paralysis 7. Produce a final plan 8. Create a process for building change in the project plan
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Steps to Planning
Analyze the project objectives Create a list of the necessary tasks. Match the tasks with the available resources. Develop a schedule and budget. Adapt to the project priorities. Work out the details.
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Key Elements of a Project Plan

Project requirements (Project Definition) Work Breakdown Structure (WBS) Schedule
Gantt Chart Network Diagram

Budget Identify potential risks Organizational chart identify all stakeholders Operating Procedures (systems or processes)
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Major Processes of Project Cost Management

Resource Planning
Quantities of people, equipment, materials Inputs
Work breakdown structure (WBS) Historical info Scope statement Resource description Organizational policies (i.e. Rental vs. purchase)

Outputs
Resource requirements
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Major Processes of Project Cost Management

Cost Estimating
Estimating cost of each resource Inputs
WBS Resource requirements Resource rates Activity duration estimates Historical info

Outputs
Cost estimate Supporting detail Cost management plan (describes how cost variance will be managed)
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Major Processes of Project Cost Management

Cost Budgeting
Creating budget for each work item Inputs
Cost estimates WBS Project schedule

Outputs
Cost baseline
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Major Processes of Project Cost Management

Cost Control
Control changes to the project budget
Monitor costs Ensure proper charges Inform stakeholders of variances

Inputs
Cost baseline Performance reports Change requests Cost management plan

Outputs
Revised cost estimate Budget updates Corrective Action Final estimate Lessons learned (c) 2008 Garrison Associates

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Module 2: Work Breakdown Structure (WBS)

It isn t what you know that counts, it s what you think of in time, which is why the WBS is so important.
Ted Garrison

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What is a WBS?
The WBS is the most important project management tool it is the basis for all other project management planning. The WBS gives the entire construction process structure. It s the list of tasks necessary to complete the project. In construction the specifications are the basis of the WBS.
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Why Use WBS?

It s the backbone for the entire project management process:
Providing a way of identifying the necessary tasks. Providing a method of identifying the necessary resources and skill sets. Providing the necessary structure to plan your schedule. Providing the necessary structure to prepare your cost estimate. It helps manage expectations and risk. It provides a visual way to understand what needs to be done.
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Tricks to Getting the WBS to Work for You

Get the key people involved (buy in). Brainstorm with your team when you are doing something different. WBS is designed to include all items to complete the project but just as important to eliminate items that don t need to be done. Develop task lists for different types of projects it will save time & avoid mistakes.
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Outline WBS
1.0 Project
1.1 Major Project Subsystem 1.1.1 Task 1 1.1.1.1 Subtask 1 1.1.1.2 Subtask 2 1.1.2 Task 2 1.2 Major Project Subsystem 1.2.1 Task 1 1.2.2 Task 2
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Work Breakdown Structure

Sample Garage ABC Trucking Slab Concrete Company A-1 Carpentry OH Door ACE Electric Jack the Painter

Vapor Barrier

Place Concrete

Frame Garage

Install Windows

Form Slab

Install Anchor Bolts Finish Concrete

Sheathing

Trim and Siding

Install Reinforcing

Roofing

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Module 3: Budgets and the Cost Constraints

One of the biggest causes of contractor failure is the lack of business ability and training to estimate costs accurately. At the heart of any effective cost management program is an: Accurate Cost Estimate
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4 Phases of Estimating
1. Material quantity survey 2. Pricing material, labor and equipment 3. Analysis of subcontractor/vendor bids 4. Compute costs

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Purpose of Estimates
Get future work cost knowledge Control present work compare costs to progress Control scope of work - dealing with changes Establish and control risk reflects on risk.
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Estimating Challenges
Priority of the project (specs vs. contract) The project s triple constraints Flexibility in the schedule Variables such as:
Weather, soil conditions, material availability, sub availability, and quality of project team.

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Typical Cost Problems

Making cost estimates for subs. Inflated estimates by subs. Failure to obtain a firm commitment. Poorly constructed WBS.

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3 Types of Construction Estimates

Preliminary (Conceptual) Estimates:
Usually used to determine budgets before drawing are completed. Usually done on a square foot or system basis.

Approximate Estimate:
Detailed systems pricing based on drawing but not pricing of individual items or tasks no quotations.

Detailed Estimate:
Complete quantitative take-off along with quotations.
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The 9 Steps of an Estimate

1. Determine what will be self-performed and what will be subcontracted. 2. Visit jobsite. 3. Do material take-off of all material. 4. Determine the labor & equip. requirements and expected productivity for the project. 5. Price materials, equipment and labor.
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The 9 Steps of an Estimate

6. Determine job overhead general conditions.
(toilets, signs, small tools, temp. water, temp electric, project management, taxes and insurance etc.)

7. Obtain and analyze sub and vendor bids. 8. Summarize and review the costs of all items. 9. Add mark-up which includes general overhead and profit.

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Project Overhead
Project overhead are all the items that are required to build the building but are not directly part of the project such as direct labor or materials or equipment used to in that aspect. Typical items such as the superintendent, project manager, waste removal, job office, phones, trucks, etc are charged to the project. All corporate expenses that are directly related to a project should be charged to project overhead.
This helps determine true costs of project More accurate than percentage of project
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General Overhead
These costs are from doing business and not associated with a particular project. When companies don t understand this cost they under charge. If too high will lose business. It usually established on an annual basis, but the key factor is the annual volume.
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Tricks to Exceptional Cost Estimating

Develop standard forms it s faster and helps eliminate mistakes. Use actual cost estimates from similar tasks. Involve the people most knowledgeable. Research the history of vendors and subcontractors.
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Tricks to Exceptional Cost Estimating

Consult standard reference books. Watch tasks that most directly affect the project s final outcome build in extra dollars when possible. Train yourself to be an exceptional estimator estimating is too critical to let it go to chance.
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Module 4: Activity and Task Analysis

There is no job so simple that it cannot be done wrong.

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Keys to Task Analysis

Task analysis is the process of gathering critical information necessary to predict the project outcome It is a great aid in delegating Allow the key project team members to participate in the process
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The Task Analysis Process

Determine available resources. Assign clear responsibilities. Determine good enough. Brainstorm effective strategies. Determine ways to monitor progress. Motivate early action.
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Task Analysis Worksheet

A good task analysis worksheet allows you to keep in one place everything you need to manage that task. They should be adapted to meet your specific needs. Updating worksheets from previous projects can save a great deal of time.
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A Sample Task Analysis Worksheet

Project Name: Task # Task Name: Person Responsible for Task: Contact Information: Specifications: Resources: People/Department

Equipment/Materials/Supplies:

Time Estimate: "Must Start" Milestones: "Must Finish"

Optimistic: Cost Estimate: Labor: Materials: Equipment: Contract: Overhead: Fee: Total: Other important comments:

Pessimistic:

Most Likely:

$ $ $ $ $ $ $

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Action Steps

Please turn to the inside of the front cover of the resource guide. Write down 1 to 3 action steps that you want to immediately implement from Part 3 of this program.