Managing the Money

As schools and universities expand and upgrade facilities, they want the most value for the funding available. To maximize their investment, schools must define the project early on and make sure they have sufficient funding. Schools also should adopt cost-management techniques to maintain control of the budget.

A successful project needs to balance the various goals a school hopes to achieve with an expansion or upgrade. The process of balancing these goals is known as project definition. It is the first step in the cost-management process and can be performed at the feasibility stage of a project with programming-level information. Project definition helps form a basis from which all cost decisions can be weighed.

The following are the fundamentals of project definition and some of the key cost-management steps.

Assembling a team

A project definition team should include a representative of the school, a design or planning professional, engineers, and cost consultants. The team also may include key personnel from the institution such as professors, department heads, planners, finance directors, facilities managers, and engineering and maintenance staff.

All team members must understand the goals of the project. The goals will determine how the scope and quality is defined. As an example, if the goal is to have flexible interior lab spaces for different research projects, the design may require an infrastructure for gas systems or data and electrical systems that allows changes to be done quickly and with little disturbance to adjacent spaces.

Once the team understands the project, it can begin to look at details:

  • Scope. Scope defines the types of spaces needed for the project. It relates to the goals and issues established by the school and user groups.

  • Size. Decide how big the project needs to be. This figure needs to include the assignable square footage as well as a gross square footage, and consider factors related to circulation, mechanical and other building components.

  • Quality. This helps define the look and feel of the building systems and materials. Quality might be affected by adjacent buildings, campus standards and a school's long-range plans.

  • Risk Issues. With any construction project comes risk, and each risk has some associated cost. The most effective way to minimize risks is to identify them early on and determine the potential cost impact. Examples of risk issues include subsurface conditions, environmental issues, utility relocation, labor shortages, and material shortages.

  • Milestone schedule: A milestone schedule establishes a timeline for events from project definition through project closeout. It needs to identify the anticipated start and finish dates. This schedule becomes the guideline to estimate when the money will be spent.

Developing a concept

Most schools will retain an architect or planner to develop initial concept designs. The level of design needed depends on the requirements outlined by the institution. The following minimum design deliverables are needed to develop a solid budget:

  • A building program.

  • Conceptual plan (or plans of various options to be considered).

  • Published campus standards.

  • An overview of key building systems and materials selected.

  • General site plan.

  • Narrative of all issues developed by the project team.

The final and most critical step in project definition is developing a realistic budget that incorporates the scope, size and quality of the project; forecasts all costs; and identifies all potential risk issues. A realistic budget needs to address: all anticipated costs including all construction costs (hard costs), and costs that stem from designing, managing and paying for the project (soft costs).

Hard costs include building costs, site development costs, site preparation, site utilities, furniture fixtures and equipment. Soft costs include management costs, professional fees (design, project management and legal), land costs and other miscellaneous costs (such as moving and testing).

With project definition completed and a budget established, a school has a benchmark to guide its decisions.

Throughout these phases, the team will develop ideas further, define needs more precisely and evaluate quality levels more clearly. By using cost-management techniques to evaluate options, schools can determine ways to maximize the budget, so that as changes arise, they are viewed in the context of the project's budget constraints.

Design phase

Throughout the design phase, schools need to use cost-management methods to monitor the scope and cost of the project.

At each stage of the design, it is important to verify that the project scope (space types, size, quality, risks and schedule) remains consistent with the scope established in the project definition. “Scope creep” represents one of the major areas where costs increase.

Detailed cost estimates done at the schematic, design-development and working-drawing phases provide a tool to verify that the project is on budget, and also provide a platform for value engineering and cost options.

Value engineering provides information on cost-saving opportunities. It looks for ways to achieve cost savings without affecting the project's size and program. In cases where estimates exceed the budget, value engineering provides an avenue for finding cost-reduction opportunities.

Throughout the project, the team should review drawing details, materials, and specifications to ensure that they are clear and constructible. To get competitive pricing, the team must make sure that products, materials and capital equipment are not proprietary, and can be supplied or constructed by many vendors and contractors.

Throughout the process schools need to manage risk by:

  • Identifying issues involving risk.

  • Evaluating a potential cost range for each risk item.

  • Prioritizing the risk issues.

  • Focusing on eliminating or minimizing risks.

  • Determining if a risk is acceptable; if the risk is unacceptable, gather more information to have a more solid basis for making a decision.

Timelines are critical. It is important to keep schedules, including anticipated and actual start and finish dates, updated and accurate — and make sure cost projections reflect the timeline.

Scheduling monthly or bi-monthly meetings on scope and cost issues allows a team to identify changes and cost impacts more quickly.

Award phase

As a project moves into the award phase, validation and negotiation with contractors will be the main cost-management task. This includes the evaluation, reconciliation and negotiation of costs, scope and schedule issues. The process can be used with many different contracting methods (competitive bid, design/build, agency construction management or at-risk construction management).

A bid estimate needs to be developed based on the same documents that the contractors use in the bidding stage. Those involved should clearly define the details and formats in order to streamline the evaluation and negotiation. The process involves:

  • Verifying that the project goals are understood.

  • Addressing any issues raised by the school.

  • Verifying that the project scope is fully understood and incorporated in the pricing.

  • Ensuring that the pricing reflects the established budget.

  • Reviewing any exclusions or substitutions.

It is important for a contractor to understand any risks outlined by a school or raise any risk issues included as part of a bid. At this stage of the project all risk issues should be addressed, but there could be some potential risk issues over which no one has control (lack of subcontractor interest for specific disciplines, potential labor strikes). The process for managing these risks is the same as in the design phase; however, the costs can become greater because eliminating risks at this point may be difficult.

Requirements for schedule and change-order strategies need to be included as part of the bidding specifications. Examples of requirements:

  • The kind of format the contractor will use to report the project schedule.

  • The frequency of project schedule updates.

  • Specific milestone dates.

  • Guidelines for liquidated damages (if any) for late delivery.

  • Incentive clauses (if any) for early delivery.

  • How change orders will be received, what backup will be required, and the process for evaluation and approval.

All of these requirements need to be provided upfront to streamline the process during the construction phase and eliminate any misinterpretation.

Construction phase

A proactive approach to cost and scope management throughout the design phase will minimize change orders. But changes during construction may be needed because of departmental needs, changes in campus standards or unforeseen conditions.

When changes occur, evaluate the effect quickly and fairly. The best approach is not to react negatively toward the contractor. Evaluate change orders based on contractual details, specific scope (quantities and pricing). Follow these key steps:

  • Verify that a change order is valid according to the contract.

  • Prepare an independent cost estimate for a change order, making sure the estimate reflects all quantities and is priced on fair market value

  • Outline any unusual circumstances associated with a change order (out-of-hours work, extra management time, removal of work in place).

  • Reconcile the cost estimate with the change order.

  • Negotiate a price that is fair to all parties.

  • Process and carry out the change order in the timeframe outlined in the specifications.

The most ideal approach is to resolve any issues quickly. Litigation and arbitration are expensive and time-consuming. In the event of an impasse, bring in an impartial third party to evaluate the issues while the project is still underway.

Monitoring the budget throughout the construction process is important. In the project definition phase, the team should develop line items in the budget that address items that fall outside typical construction costs, such as furniture, fixtures and equipment (FF&E), and specialty items.

As pricing becomes available, it will be balanced against the budget, and any net dollars will flow back into the project. A contingency should be included to cover price changes and market fluctuations.

The amount of this contingency will vary depending on the complexity of the project, and is controlled solely by the school.

The schedule tracks all the detailed work associated with the construction of the project. The purpose of any schedule is to reflect the work in place as well as the anticipated work. It needs to be updated regularly and tie into the payment and costing for the project.

Payments will be issued monthly to contractors and subcontractors. Documentation needs to comply with the contract and tie back to the schedule and the work in place or material on-site.

It is important to process pay requests expeditiously because it constitutes the livelihood of the contractors and subcontractors.

Experience has shown that a project's success is determined by the effort spent on upfront planning and budgeting.

The overall goal of cost management is to put your institution in a position to make educated decisions on scope and cost issues, to make these decisions early on and to manage them throughout the design and construction process.

Laudolff, CPE, is a principal of Owner Services Group, Inc., Lombard, Ill.

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