From my experience

Construction management – the budget is often underestimated

Two out of three construction projects go over budget*. How can that be, despite everyone insisting on sticking to the budget? Investment projects tend to be underestimated, and ideas for costly changes keep piling up as the deadline approaches. Here are the 8 rules to protect the investment budget that I follow.

Set a real investment cost, not an overly optimistic one

It is often said, “We only have this much money and can’t go over the limit.” Let’s be honest: the real-life market is different, so we are going to overspend. Not only that, there is always a change in the construction and real estate market. The costs calculated at the concept stage would become outdated by the commission stage.

How to do it right?

We plan a budget based on market data, experience, calculations, and the level of investment complexity. Add a reserve fund in case of contingency and inflation. Now we have a budget.
A budget is often too small and there is no changing that. In that case, I openly admit there is a high risk of overspending, so than nobody is disappointed afterwards. Because of that, the investor knows that creating an additional reserve during the investment is inevitable.

Money and investment projects in construction

The construction stage is more than just expensive. It also carries the greatest risk. I wrote more on the subject in another article, “Kiedy budujesz, pokora jest cenniejsza niż ambicja” (available only in Polish). Going through this stage is like crossing a river: we go where the other side is closer and where the bed is familiar.

So, to shorten the construction time, we need to plan this stage as best we can. The risk can be eliminated by:

• revising technical, design, and tender documentation;
• identifying the roles of every project member and their points of contact;
  making tenders, conducting negotiations and arrangements (everything must be on record!).

Follow these rules to keep the construction budget

Jumping the gun in construction is expensive

Speaking from experience, I say that the biggest deviation schedules occur in the first stage of construction: preparation and groundworks. Many times, there is no chance to catch up, the delay holds up the project and leads to unforeseen costs. Whenever contractors call for additional financing, it is often during this phase.

Before even breaking the ground, make sure the construction site is well prepared. This includes:

• making sure the investment is financed;
• all permits (for demolition, clearance, gas line relocation, road lane occupation…) are valid;
• detailed designs for the part of the building below ground are issued and reviewed;
• the construction site is accessible;
• the groundwater is on the standard level described in the hydrogeological documentation.

A later start leads to a lower budget loss than a premature start.

People are responsible for the investment project

My experience on this subject is clear: in a construction investment, people are more important than the brands they work for. A competent and committed expert, no matter how pricy, can save you a lot of money. I am not just talking about the construction manager, but also the designer, inspector, appraiser, lawyer, tax advisor, and others. If you bring together a team of decent professionals, their combined efforts will carry a challenging project on schedule and on budget.

When it comes to building investments, freelancers – people whose names are their brands – are the best choice. They have the most to lose if they make a mistake and lose the investor’s trust. There are no marketing departments, capital, logo or centuries of tradition behind them. Most often, they get the job after a recommendation or from regular clients. That is why they are more dedicated. They have no large indirect costs, offering a better quality-to-price ratio for the investor.

Another thing: experience. In construction, asking “what if” questions has a major role to play. An investment project must be covered against unfavorable and expensive contingencies. Experience plays a vital role in this, so investing in experienced professionals is self-explanatory.

The project manager is responsible for the budget

One person should be responsible for the budget – this person being the project manager. I sometimes witness cases, though, where PM’s supervisors make it difficult to keep expenses under control. We’re talking CEOs, investors, directors, cost controllers, sometimes clients/users of the investment. They demand changes throughout the project, delay key decisions, add expenses, especially at the beginning, when funds are not yet running dry.

The project manager, on the other hand, must be tough to defend the budget. Sticking to the budget calls for confidence:
“Sure, we can rebuild this entrance, but our current budget can’t afford it, so I need to overspend. I’ll include the extra cost in my report so that we can control all expenses.”

I carefully record all additional expenses and include them in each report.

Keep an open mind to new ideas.

Like on any construction site, there is no way of avoiding extra costs. Also, like on any construction site, there is always an opportunity to find cheaper ways of completing the job. Contractors, designers, investors – they all need to keep an open mind. Conclude contracts that encourage working together on ways to save money, secured with warranties against defects. The tender process is the best time for brainstorming ideas. And the best partner in looking for savings is a contractor with a professional service department.

How can it work?

During the previous construction job, the investor and I, the contractor, shared the construction company’s initiated savings evenly. Meanwhile, the designer received additional compensation for cooperation thanks to author’s control. These changes saved the investor PLN 182,547.20 (around $46K), or 1.1% of the contractor’s basic salary, which means a real cost reduction of 2.2%. That’s something!

During the same construction job, we saved even more by launching the processes described below.

Settle the unknown post-completion

If, when signing a contract with the contractor, there is a costly part of the construction works we have trouble evaluating, we don’t evaluate it. We can include provisions to account for the part based on actual usage according to:

• the detailed design to be developed in the near future,
• delivery notes and other receipts with measurements on which we base our rate for the part.

One example is the volume of groundwater that the contractor would drain out of the excavation underneath the building and into the municipal sewer system. The waterworks charge a fee for each square meter of discarded water, and as such, it needs to be measured. We can account for the volume of water actually disposed to the sewage system, pumped out of the excavation.

Another example: rebars. When signing the contract with the general contractor, there is usually no detailed structural design for the entire building. Therefore, we evaluate the estimated cost and the unit cost for rebar and agree to pay per ton of steel after issuing the detailed design of the structure.

On both of the elements above, we can save 1-2% of construction costs when it comes to a medium-sized residential building (6,000 – 8,000 m2).

On cost control

Just like we check a map to reach our destination, we check costs to adhere to the budget. A map shows us the path we covered and the remaining distance. The same goes for cost control: we record expenses – commitments, calculate future costs, and compare the total amount to the budget. That’s the whole philosophy!

It is all about attention to detail, consistency, and experience. The first one helps avoid missing small sums that happen in large amounts. The second allows for making smart decisions as we go. The third makes it easier to predict future costs.

Even for big and complex investments, cost control requires nothing more than an Excel spreadsheet – the simpler, the better.

On simplifying in-house processes

Obtaining permits, negotiating, designing, and doing construction are daunting jobs as they are. If we incorporate other complicated internal processes, the entire project clogs up; Delays and extra expenses are expected to happen.

Take payment procedures for example. I have often encountered this kind of scenario:

• the contractor issues an invoice,
• the invoice is accepted by the project manager and goes to the “commitment control team,” of course with numerous attachments,
• the CCT sends the invoice to the accounting department, which books and enters the transfer into the system,
• the finance director accepts the transfer, and the money goes to the contractor.

In the process above, one invoice is reviewed by 7 people: 2 from the contractor (manager + accountant), site manager, project manager, commitment control, investor’s accountant, and finance director. All we needed was 4 people: accountant and manager from both sides. That’s much faster and cheaper!

Managing an investment project in construction – sticking to the budget

For construction projects, keeping expenses under control is a difficult matter. Unfortunately, there is no one-size-fits-all solution. Every project is different and the construction industry has a lot of variables. In any case, if any of the issues described here start happening (which is common), it’s easy to go over budget. So remember:

• be real when setting up a budget,
• don’t start working on an unprepared construction site,
• choose experienced, reliable people, not “good brands,” for the project
• assign the project manager to take care of the budget and do not interfere with his work,
• constantly look for ways to build something cheaper,
• similarly, keep all inside procedures simple at all times,
• for high-risk jobs, settle up using the quantity survey method,
• when it comes to the budget, keep your finger on the pulse.

No overspending, next to delivering the investment on time, is another priority for me. In most of my existing projects (see MIKE management, Projects), I have achieved all these objectives. If you want me to support your project, contact me.

Piotr Mike
tel. +48 665 101 030, piotr@mikemanagement.pl

*the article includes data from The 2015 Global Construction Survey by KPMG

Artwork: Gosia Tchorzewska / GoTek Rysuje