Pre-contract cost control

Pre-Contract Cost Control

Definition

• Pre-contract cost control refers to the techniques and procedures applied to manage the costs of a construction project prior to the agreement and signing of the contract.

Significance

• Allows for effective budget planning and prevents unforeseen cost overruns.
• Encourages competition amongst contractors, helping to secure the most cost-effective deal.
• Identifies risks and their potential financial implications, allowing for necessary adjustments.

Methods

• Cost estimates: Preliminary estimates of construction costs are made at the early stages of project planning to establish a practical budget.
• Value engineering: A systematic method to improve the “value” of goods, products or services through an examination of function. Encourages contractors to adopt techniques that might improve the function or reduce the cost.
• Risk assessment: Evaluation of potential risks and their financial implications help in budget adjustments and risk mitigation strategies.
• Evaluation of tenders: Before the contract is awarded, tender documents from different contractors are evaluated based on predefined criteria, where cost plays a significant role.

Tools and Techniques

• Cost Planning: An approach to cost control that ensures cost certainty at the contract stage. It closely monitors the design process to ensure that it stays within the determined cost limits.
• Elemental Cost Plan: Simplifies the costing process by breaking down construction costs into basic building elements such as materials, labour, equipment, etc.
• Comparative Cost Analysis: Uses cost data from past projects to estimate costs for a new project. Comparison of costs among different projects facilitates better decision making.
• Bench Marking: This is a performance measurement tool used to compare the cost, time, quality and functionality aspects of the project.

Benefits

• Ensures that the project stays within the determined cost limits to meet the financial objectives.
• Encourages the adoption of cost-effective construction techniques and materials to lower costs.
• Provides a clear definition of the project, reducing the possibility of contract disputes due to financial issues.
• Increases efficiency by reducing wastage of resources and encouraging better project planning.

Challenges

• Accuracy of pre-contract cost estimates could greatly impact the success of cost control.
• Ensuring resources and methodologies are aligned with the budget limitations can be complex.
• Overlooked risks and uncertainties can also lead to cost overruns. Regular risk assessments are required to identify and mitigate these risks.
• High degree of expertise is required to implement these cost controls effectively. This includes understanding of the construction industry, knowledge of cost estimating and understanding of contract management.