Cost Control

Reconciling The Budget

While recognizing the Construction Trilemma, which declares that you can only have your hands on two of three dials - Scope, Quality, and Cost – while making decisions, you can still find yourself puzzling over reconciling a project's budget with its program.  When you get to an over-the-budget stalemate, what can you do?

Most construction professionals will immediately offer to "value engineer" your project.  In most cases, this is a misnomer.  What they intend to do is reduce costs by cutting scope and reducing quality.  While this works, it ignores the potential behind the original idea.

The practice of value engineering was created by General Electric during World War II, when they faced the war-time necessity of doing more with less.  GE realized that swapping cheaper materials for traditional ones, particularly when making items intended for a short lifespan, resulted in better value.  Value was simply the ratio of Function divided by Cost. GE engineers formalized a seven-step reiterative process that optimized Value for every component they produced.

Let's put that concept to the side for a minute and take a high altitude perspective first.  When a project is over budget, the severity of the problem should be assessed first by expressing the cost overrun as a percentage of the total budget.  If it's 15% or lower, your chances of reconciling without a great deal of tumult are good.  If it's greater than 15%, reconciliation will require a demanding effort.

We prefer to view the budget reconciliation process as virtual fundraising.  In any fundraising process, mathematical probability suggests the likelihood of a "pyramid" of gifts, illustrated in the image above.  A typical campaign will succeed with one large gift, followed by a few sizeable gifts, many moderate gifts, and numerous small gifts.

Following the advice of fundraising consultants, we begin the process by focusing on the large "donors".  They are the keystone contributors that will make or break the process. Unfortunately, they are also the high-hanging fruit that usually requires true value engineering “to pick”.

Since a building is a complex manufacturing process with a production run of one, specialty consultants and trades work in parallel, often relying on rules of thumb to avoid conflict and ensure good results.  Unfortunately, this practice has little incentive for identifying and harvesting economies between different disciplines, leaving them unnoticed.

Consequently, the overlap between disciplines is a good place to start looking for major donors.  An interactive session, involving consultants from multiple disciplines, can help identify opportunities where undiscovered synergies exist. The most fertile places to start looking are where Functions in one discipline directly impact Functions in another discipline.  This can result in a cascade of savings.

For example, if a traditional artificial lighting source was changed to a source that emits less heat (ie LED) and is then operated with a smart control system (ie, occupancy sensors), the cooling capacity of the rooftop unit for the building can be downsized, reducing both its cost and weight.  Since the rooftop unit weighs less, the structure can be downsized, possibly even reducing the size of foundations.  Large savings accrue.

GE defined Functions as a simple verb-noun combination like "illuminate area".  In the example above of interconnected Functions, "illuminate area" affected "cool area" which affected "support equipment".  Since the example’s lighting consultant, focusing only on their specialty did not choose LED sources because they were slightly more expensive, the underlying cascade of savings went unnoticed.  Seen through the lens of the Construction Trilemma, one ironic turn of the cost dial upward resulted in the scope dial turning downward while the quality dial remained steady.  Subsequently, the cost dial then took a dramatic turn downward.

We usually set the course for a cost reconciliation process by establishing an arbitrary plan, identifying the trades where major donors are likely to originate.  Since it's unreasonable to expect large savings from minor trades, intuition can be a good guide in setting the arbitrary goal amounts.  Once the goals are in place, brainstorming can begin.

After strategies have been identified and some validated, the arbitrary goals for the major donors can be readjusted.  Then goals can be set for the minor trades.  Recruiting these smaller donors, although tedious given their number, can occur under the confidence that overall success is within reach.

 

 

The Construction Trilemma

A trilemma is a difficult choice posed by three options.  It can be a choice among three favorable options, only two of which are possible at the same time.  The Construction Trilemma, which faces almost all institutions that build, involves three choices.

These choices can be thought of as dials, where your hands can only be on two dials at a time.  The third dial will move in response to the others.  In construction projects, the three dials are Scope, Quality, and Cost.  For example, as the Scope of a project increases, two choices remain - either the Cost must increase or the Quality must decrease.  You can't have your hands on all three dials at once.

The most common problem facing institutions is that of a fixed first Cost, leaving either Scope or Quality as the remaining choices.  Often times, the Scope is the first dial to grab, but the Quality dial can only be turned down so far.  Basic life safety and building codes pose a legal threshold that place a limit on the Quality dial.  It can only be dialed down so far.

For a mathematician, this trilemma can be represented by the Euler diagram above, where the possible dual choice is actually represented by an overlap of domains.

On many projects, an impasse is reached where there is a need to turn a dial that just can't move.  If you find yourself in this situation, what can you do?

If you're in the midst of a traditional Design-Bid-Build project, where the trilemma appears relatively late in the project - such as during the Bidding and Negotiations phase -  the options are few.  There is little choice other than to embark on a costly or acrimonious redesign where almost no one will walk away happy.

A better scenario is to find yourself at an impasse in a non-traditional project, where the Owner, the Architect, and the Contractor are working as a team early in the process.  This arrangement can capitalize on a front-loaded design effort, where tools such as BIM (Building Information Modelling) can provide oodles of data about a contemplated project early in the design process so that the Contractor, along with many subcontractors, can comprehend the structure imagined by the design team and accurately estimate the resources, time, and risk required. 

If an impasse is reached during the early design phase of a non-traditional project, the Scope and Quality dials can still be turned before the majority of the professional fees are spent.

The graphic above is an adaptation of Boyd Paulson's curves first published in 1976.  It summarizes the relationship between design modifications and their inherent cost.  Early in the project, the ability to radically alter the project without wasting money is easy.  But as the project progresses, especially after construction begins, the cost of design changes skyrockets due to the lack of competitive leverage and the interdependence of building components.  Rarely can one element change without requiring a cascade of changes amongst many other elements.

The graphic also includes a representation of the design team effort, which traditionally peaks during the laborious construction documentation phase.  During this phase, many different disciplines work in parallel to coordinate and communicate intentions about the final design.  The trouble with this traditional arrangement is that most of the fee is spent after the cost of changes becomes expensive.

The non-traditional process, sometimes associated with Integrated Project Design, is also shown.  The slide forward is facilitated by early communication between Owner, Architect, and Contractor and the benefits of BIM, allowing costs to be validated before the design changes result in wasted money. 

Involving a Contractor early on strikes many Owners as foolish, since their incentive to be competitive vanishes after being annointed.  However, since most general contractors self perform relatively few trades, if any, multiple contractors can be interviewed before the project launches and competitive fee structures compared.  Assurances can be obtained that at least three competitive bids will be obtained for each trade to ensure that the project receives the full benefit of the marketplace.

Ultimately, the Contractor will be assembling bids from subcontractors couched on assumptions of time, resources, and risk.  Limiting risk is the key to obtaining the highest value for every dollar spent.  That will be a subject of a future post.