BSc Hons.

Quantity Surveying And Construction Management

1

PRE-CONTRACT COST PLANNING
AND PRE-CONTRACT
CONTROLLING

By

BALARABE SAGIR MOHAMMED
(12/S/SL/BSc/21)

On

COST STUDIES
(26-6017-006)

SUBMITTED TO MODULE LEADER
Mr. Nihal Lokuliyana




21st July, 2013.


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Contents
Abbreviations .............................................................................................................. 3
Introduction .................................................................................................................. 4
Pre Contract Cost Planning and Cost Controlling .............................................................. 5
Principles of Pre-contract Cost Planning ............................................................. 5
Purpose of Pre-contact Cost Planning................................................................. 5
Cost Control ........................................................................................................ 6
Aims of Cost Control............................................................................................ 6
Principles of cost control ...................................................................................... 6
Cost Planning and Cost Controlling process with respect to RIBA (2007) plan of work stages
................................................................................................................................... 8
Budget Distribution Techniques ......................................................................... 11
Value Management (VM) .......................................................................................... 14
Elements of Value Management ....................................................................... 15
Benefits of a Value Management Study are: ..................................................... 15
Advantage of Value Management ..................................................................... 16
Disadvantages of Value Management ............................................................... 16
Value Management Strategy ............................................................................. 16
Value Management Techniques ........................................................................ 18
Life Cycle Costing and Value Management .............................................................. 20
Advantages of Life Cycle Costing ...................................................................... 22
Disadvantages of Life Cycle Costing ................................................................. 23
Conclusion ................................................................................................................. 24

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Abbreviations
RICS Royal Institute of Charted Surveyors
RIBA Royal Institute of British Architects
VM Value Management
LCC Life Cycle Costing
FAST Functional Analysis and System Technique
QS Quantity Surveyor
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Introduction
Students are expected to write a report in order to:
- Explain the term Pre-contract Cost Planning and Cost Controlling
- Explain Pre-contract Cost Planning and Cost Controlling process with respect to
RIBA work plan
- Explain the term Value Management
- Explain Value Management strategy
- Explain Techniques used in Value Management
- List advantages and disadvantages of Value Management
The report should reflect on the following Key points
Purpose of Pre-contract Cost Planning
Pre-contract Cost Planning activities/practices involved with relevant stages of RIBA
2007
Principles of Cost Planning and Cost Controlling
Cost Limit, Cost Targets and Cost Checking
Budget setting techniques and distribution techniques
Concept of life cycle costing and advantages and disadvantages
Quantity Surveyors role as a cost manager, in pre contract cost planning and cost
controlling

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Pre Contract Cost Planning and Cost Controlling

Pre-contract Cost Planning
Royal Institute of Charted Surveyors (1982) defines Pre-contract Cost planning as the
technique by which the budget is allocated to the various elements of an intended building
project to provide the design team with a balanced cost framework within which to produce a
successful design.(RICS 1982)
Cost planning, as part of a cost management framework is a total system that requires
commitment from inception to the completion of a project.
Principles of Pre-contract Cost Planning

There is a standard framework reference available for each identified part of the
building
The cost planning can be adjusted to design requirement.
It allows the costs checked as the design develops with the amount allocated.
It allows the designer to take necessary measures or actions before any decision on the
final design is made.
It takes into account contingencies cost and design reserve.
It enables costs to be presented in a logical and orderly way for clients from time to
time during the design process.
Purpose of Pre-contact Cost Planning
To see if the project is affordable / test business case
Set a budget or limit for design direction
Cost planning informs the owner exactly when finance instalments will be needed, so
he would keep with billing
Ensure that clients are provided with value for money
Serves as a guide to designers to arrive at practical and balanced designs within
budget.
Integrate costs with time and quality.
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To keep expenditure within the amount, or limit, allowed by the client.

Pre-contract Cost Control
Pre-contract cost control is the total process which ensures that the contract sum is within the
clients approved budget or cost limit.(RICS 1982)
Cost control ensures that resources are used in the best possible way. for any construction
projects cost control commences inception and continues until the issues of the final
certificate.
Aims of Cost Control
To limit the clients expenditure to within the amount agreed. Simply the tender sum
and the final account should approximately equate with the budgeted estimate.
To achieve a balanced design expenditure between the various elements of the
building.
To provide value for money, this will probably necessitate the consideration of a total
cost approach.
Principles of cost control
The process of cost control, using control systems, involve the establishing the following
Frame of reference (cost limit)
Method checking (cost target)
Means of remedial action (cost check)
Frame of Reference
Having a frame of reference in a cost control system consists of two stages, while the first
stage is when the client approved a realistic first estimate (cost limit), the second stage
involves the break down of how the estimate is to be spent on the various parts, or elements,
of a building. This entails dividing the total cost limit in to a number of element cost limits
called cost targets with one cost target for each element of the building.
Method Checking
Cost targets are checked as the design advances. The sum of individual cost targets should be
controlled to within cost limit. The cost planner, in conjunction with all members of the
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design team, must detect and measure variances from the cost targets previously established.
Accordingly, the cost limit (or estimate) is checked (or spent) as it was originally established.
Remedial Action
This involvolve taking remedial action to counter any cost overruns which has become known
by the project team. This should be done ideally at the earliest stage to ensure that the total
project expenditure is contained within the cost limit.
Result Action
1. Cost check = Cost target Cost target is confirmed
2. Cost check < Cost target 1. Surplus fund subsidise element in
situation
2. Elements upgrade
3. Surplus kept as reserve
3. Cost check > Cost target 1. Use surplus fund in element 2
2. Redesign lower the standard
3. Request for more fund from the client
Possible remedial action









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Cost Planning and Cost Controlling process with
respect to RIBA (2007) plan of work stages

The RIBA Outline Plan of Work organises the process of managing, and designing building
projects and administering building contracts into a number of key Work Stages. The
sequence or content of Work Stages may vary or they may overlap to suit the procurement
method.
The selection of procurement route has a significant influence on how the different work
stages proceed. It is worth noting that the exact way in which different stages are conducted
within the overall project programme needs careful consideration at the outset.
The 2007 RIBA Plan of Work below describes the key work stages and activities in
construction projects from appraising the client's requirements through to post construction.
However, as required by the task, only the pre-contract cost planning and cost control stages
will be explained, ie stage A to H


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RIBA 2007 plan of work



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Pre Stage (A) Appraisal (Budget Setting)
This is a preliminary stage where functional requirements are given emphasis. Questions like,
is building the solution to the clients problem? are raised. Though there are no detailed cost
studies, by given due consideration to the client requirements. This is then traced through the
remaining design stages using a different set of techniques focused on distributing this budget.
Project budget is established at this stage using any of the following
Floor area method
Functional unit method
Elemental cost estimate based on costs/squaremeter (if required information is
available)

Budget Setting Techniques
Different techniques are employed in establishing budget, in traditional method, the following
are considered at this stage.
i. Developers Budget
Which is also called the residual analysis method is an estimating method where the allowable
building cost is determined by deducting cost of site (with its related charges) from the
anticipated income derived from the proposed. Express thus:
Allowable building cost B = V- L+F+P+M, where
V= value
V =Value, income or revenue derived from the proposed development;
L =Land costs and associated expenses;
B = Building costs, allowances and fees;
F =Finance costs on land and buildings;
P = Developers profit (management costs or risk).
M = Marketing costs
It can be used at any stage of the dev. As it does not require any form of drawings.
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ii. Functional unit
The unit method estimating consists of choosing a suitable standard unit and multiplying by
floor area = Standard units of accommodation X Cost/Unit
iii. for example:
iv. Schools: costs per pupil place
v. Hospitals: costs per bed place
vi. Roads per kilometre
vii. Car parks costs per car space
The technique is based on the fact that there is usually some close relationship between the
cost of a construction project and the number of functional units it accommodate
iii. Superficial
This estimate is the approximate cost obtained by using an estimated price for each unit of
gross floor area. Most popular and most commonly used at project early stage.

iv. Storey enclosure
Measuring the area of area of external walls, floors and roof areas and multiplying by an
appropriate weighting factor. Because of its lengthy calculation its rarely adopted.
v. Cube Method
This is where estimate is drived by volume of a building, where length and breadth of walls
are measure are measured externally and hight is taken from top of foundation to a point
midway in the case of unoccupied pitch roof or to a point of the pith where its occupied.

Budget Distribution Techniques
Elemental method
This method can be adopted with adjustments at all stages. It helps design team to determine
the financial implication at a very early stage. it allows for comparison and adjustment
between projects and between elements.
Approximate Quantities Method
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cost limit
cost
target
cost
target
cost
target
cost
target
This method can only be adopted at the production information stage in the case of RIBA
2007 plan. This is because it can only be used when there is a detailed design and
specification for their accuracy.

Stage (B) Design Brief: This is the first stage where indicative cost of the project to the client
is established. This is achieved by giving consideration to clients outline needs in the design
brief. The indicative cost serves as the target cost which is used for feasibility and planning
purposes. The aim is to establish an initial budget for the client, or if already prepared, to
confirm or reject the feasibility of the budget. Value for money framework is established.
Availability of finance may also be investigated. It provides the opportunity for a life cycle
cost (LCC) which will be discussed later






Eg. breaking down cost limit to cost targets

Design
Stage (C) Concept: This involves the implementation of the design brief and preparation of
additional data. According to the RIBA 2007 plan, Concept Design including outline
proposals for structural and building services systems is prepared as well as outline
specifications. The cost planner with the other design team evaluates comparative cost of
various outline proposals and prepare initial cost plan. The initial cost plan can be established
using cube, superficial, storey enclosure or approximate quantities methods of estimate. Initial
cost plan is also Cost-checked against the cost target.
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Stage (D) Design Development: Development of concept design to include structural and
building services systems, updated outline specifications and cost plan. Completion of Project
Brief. The first detailed elemental cost plan (comparative cost plans) is prepared. The cost
plan is based on the first detailed proposals and this confirms the cost limit. Cost checks are
done against the initial cost plan for comparison.
Stage (E) Technical Design: The design team prepare final proposals for the project to
permit the co-ordination of all component parts and elements of the project. Elemental
approximate estimatedrafted at this stage. It represents a confirmation of the cost limit for
the project. Checks of the design against cost plan.
Pre-construction
Stage (F) Production Information: At his stage, the RIBA 2007 plan is characterised by
preparation of production information in sufficient detail to enable a tender or tenders to be
obtained. Final cost checks of pre-tender estimateto ensure that cost of each element does
not exceed its cost targets and cost limit. Elemental approximate quantities method is used
at this stage and the cost consultant to price tender documents
Stage (G) Tender Documentation: This stage in the RIBA work plan is for preparation
and/or collation of tender documentation in sufficient detail such as the Bill of Quantities.
Thecost consultant to price tender documents
Stage (H) Tender Action: Post tender estimate by using cost analysis technique







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Value Management (VM)

The Australian and New Zealand Standard AZ/NZS (1994) defines Value Management as a
structured, and analytical process which seeks to achieve value for money by providing all the
necessary functions at the lowest total cost consistent with the required levels of quality and
performance.
Norton (1995:11) describes Value Management as a systematic, multi-disciplinary effort
directed towards analysing the functions of projects for the purpose of achieving the best
value at the lowest overall life cycle costs.

In a Value Management study, the object is not to reduce cost but to improve value. This
means cost is just one element relative to value on a construction project. Two other important
aspects are time and function or quality. It is necessary to achieve a proper balance between
all of the important aspects, which contribute to a project design.



The value management process as illustrated by ICE 1996)
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Elements of Value Management
There are three major ways to improve value by applying VM. (Norton1995:14))
1. To provide for all the required project functions but at a lower cost
2. To provide additional functions without increasing the cost
3. To provide additional functions and at the same time to lower the cost



Elements of Value (Kelly 1993,159)

Benefits of a Value Management Study are:
A better understanding of needs and the functions necessary to meet those needs
A better definition of program or project objectives
A better definition of quality and performance standards
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Clearer briefs
Reduced wastage of resources
Capital funds savings
Improved operational efficiencies
Team building and strategies which

Advantage of Value Management
VM creates a clearer focus on the project objectives
VM works towards arriving at a more effective design
Identification of alternative methods of construction
Discovery and discussion of project issues, constraints and risks involved
Clearer project brief and decision making
Identifies and removes unnecessary costs associated with the project
VM deals with lifecycle costs also, not only initial project cost and provides an
authoritative review of the project in its totality and not just a few elements.
All options, alternatives and innovative ideas are considered
Over specification is addressed and an improved building programme can be
developed leading to time being saved and ultimately savings in cost
If properly implemented it can identify possible problems early on in the project

Disadvantages of Value Management

It is time consuming and therefore not suitable for projects with time constraints
VM workshop team must requires a high technical expertise with sufficient work
experience
Extra cost on the client for professional fees
Disruption of project team
Value Management Strategy
The structured approach of the typical VM Job Plan is intended to provide a systematic
project review that is efficient and consistent. The VM Job Plan consists of six distinct phases
of activity that encompasses most of the VM study effort. The VM Job Plan phases are:
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Value management strategy phases

Information Phase: This is the stage where required relevant information available about
the projects background requirements and costs is drawn. A significant part of this first
phase should therefore be spent on coming up with answers to the questions: what does it
do? and what else does it do? A FAST diagram is a tool used to analyse, structure and
answer these questions above or by the use of construction cost models

The creativity/speculation phase: After the FAST diagram and/or cost models have been
completed, the VM Team should begin to generate ideas for each of the poor value basic
functions. The objective of brainstorming is to generate as many ideas as possible that could
conceivably be developed into alternatives to the original concept. The typical brainstorming
session consists of the VM Team spontaneously producing ideas related to the performance of
the required function.

Evaluation or Analysis Phase: The ideas generated during the creativity stage are here
critically analysed for their feasibility. The objective of the Analysis Phase is to cull or filter
the brain stormed ideas down to the most viable ideas. The ideas that pass the Analysis Phase
will be carried forward to the development phase.

Evaluation matrices are used to evaluate a range of solutions to a particular problem
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Development Phase: The basic objective of the Development Phase is to determine if an idea
is both technically and economically feasible. If an idea has been determined to be not
feasible during the previous evaluations, it will not be further analysed during this phase.

A properly developed alternative idea will have been evolved to a level of detail sufficient to
permit the review board to determine its disposition in an expeditious manner. The Review
Board must be able to determine if the alternative will work and if it is more economical than
the original design on a life-cyclebasis.

Presentation phase: The objective of this final phase is to assist the communication of the
results of the VM study to the decision makers and the original design team. The refined ideas
supported by drawings, calculations and costs are presented by the team to the body that
commissioned the VM workshop.

Implementation Phase: A Value Management will have no value if the proposed and
accepted recommendations are not implemented, or if implementation is delayed until few
proposals are feasible. The Review Board must quickly decide the disposition of a VE
proposal and direct the responsible staff to implement the accepted proposals.

Value Management Techniques

There are a number of techniques and tools employed in value management, here only the
more fundamental and operationally important techniques.
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a. Function Analysis

Function analysis is one of the original techniques used during the early development of the
value methodology. A function Analysis is developed to demonstrate the logical relationship
between the functions.

The function is first defined in order to seek its alternative solution. A function is expressly
defined by two words, active verb and measurable noun terms which together defined an
object. The verb answers the question of "What does it do?" The noun answers the question of
"What does it do to it?" The verb should be in an active tense such as: divide, interrupt,
transmit, collect, prevent, and so forth.

Functions can be subdivided into primary or basic and secondary. Primary functions are those
without which the project would fail or the task would not be accomplished, whereas
secondary functions are a characteristic of the technical solution selected for the primary
function and may be non-essential, although both need identifying to fully understand the
problem.

b. Function Analysis System Technique, or FAST Diagrams
In essence, Function Analysis System Technique (FAST) is a method of stimulating
organized thinking about any subject by asking thought-provoking analytical questions. These
questions all begin with a key word such as how, why, when, where and what.
Functions, expressed in the usual verb-noun format, are examined by asking questions about
the item and arranging the answers in diagrammatic form so that the relationship of functions
becomes apparent. The diagram thus formed is called a FAST diagram. FAST diagrams, then,
are graphic representations of functional logic developed by in-depth investigation of the item
under study.

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Nadine et al. (2007 p4) This diagram represents a FAST Diagram









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Life Cycle Costing and Value Management

What is Life Cycle Costing?
Flangan and Norman (1983) defined the life cycle cost of an asset as the total cost of that
asset over its operating life, including the initial acquisition costs and subsequent running
costs,
Norman (1990) aptly defined the life cycle cost of an asset as the present value of the total
cost of the asset over its operating life including initial capital costs, occupational costs,
operating costs and the cost or benefit of the eventual disposal of the asset at the end of its
life.
Life Cycle Costing phases are:
Planning
Design
Construction
Start up
Operational/use
Renewal
Recycle, Reuse or Disposal
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Phases of life cycle cost (LCC)

In Value Management the life cycle costing is used as an evaluative tool. It can assess
competing design alternatives, consider costs of ownership over the economic life of each
alternative etc. all expressed in present value.
The concept of economic analysis, which is used in life-cycle costing, requires that
comparisons be made between things similar in nature. In value engineering all alternatives
can be compared using life-cycle costing because the alternatives for each project component
are defined to satisfy the same basic function or set of functions. When the alternatives all
satisfy the required function, then the best value alternative can be identified by comparing
the first costs and life-cycle costs of each alternative.

Advantages of Life Cycle Costing
Useful to control programs.
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Making effective equipment replacement decisions.
Making a selection among the competing contractors.
Useful in reducing the total cost.
Comparing the cost of competing projects.

Disadvantages of Life Cycle Costing

Time consuming,
Expensive and
Doubtful data accuracy.













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Conclusion
Cost management to project and for the employer is vital from its earliest stage to the
practical completion. Most importantly when establishing budget to project certain aspects
and stages need to be completed. Thats where the RIBA introduced the working out line for
the architects and quantity surveyors to proceed with the project while having a proper
knowledge of the working stages and their requirement. According to the RIBA outline plan,
initially by doing an approximate estimate client could have an idea of the cost requirement
for the project. By following the pre contact cost planning process, from the inception to
tender stage, making changes to the elements of the project can arrive with a much more
reliable cost estimate to bid.
Value management (VM) as service which maximizes the functional development from
concept to completion, through the comparison and audit of all decisions against a value
system determined by the client or customer. The discipline of value management is currently
attracting more and more attention in the construction industry. Clients are increasingly
enquiring and demanding that it is used during the key stages of their construction projects. It
is not difficult to see why. There exists even greater competition in the market place than ever
before, therefore it is vital that resources are applied as efficiently as possible and waste in
any form reduced to a minimum.

Life cycle costing (LCC) is very important as general method of economic evaluation which
takes into account all relevant costs of a building design, system, component, material,
practice or project over a given period of time, and adjusting for differences in the timing of
those costs.13 Life-cycle costing models can be used to track the costs of development,
design, manufacturing, operations, maintenance, and disposal of a system or project facility
over its useful life. These models relate cost components as a function of some independent or
explanatory decision variables.

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Reference
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