Should Cost Modelling: A New Tool for Maximising Return On Investment
Barbara Chomicka, Senior Project Manager at EC Harris, joins SSON to discuss cost calculation and the allocation of resources to generate the greatest value.
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SSON: Can you describe your operations/your role?
B Chomicka: EC Harris is the leading global Built Asset Consultancy, helping clients make the most from their investment and expenditure in built assets. Built Asset Consultancy is delivered by providing our clients, wherever they operate, with the best combination of sector know-how, professional skills and technology which delivers the most from the money spent on building, operating, using and owning assets.
I joined ECH in May 2010 as Senior Project Manager in London. I have a background in the design and delivery of large, bespoke complex construction projects. As a qualified architect, project and contract manager, I have also been integral in the pre-financing audits of some of the largest construction schemes in the UK.
SSON: How do you calculate cost, i.e. top down, what should make up cost?
B Chomicka: The principles of contemporary cost management systems in the UK construction industry are very similar to the ones that have been used since the mid-1920s. These principles centre on cost consultants pricing architects’ design, i.e., establishing how much the project ‘will cost’. This approach yields a bottom-up cost estimate based on design; an outcome of design approach. Such cost estimates are usually greater than the client is able to, or should, pay, and clients who reject them typically then instigate a value engineering exercise to bring that cost estimate in line with their pre-set development budget. Thus begins an iterative process of re-design and costing, ending when there is an acceptable fit.
The EC Harris LLP proposal for the construction industry is a top-down form of cost analysis based on benchmark data. The aim of the proposed Should Cost Modelling is to provide an initial indication of the current out-turn costs of the development that has been derived from benchmarked data from final accounts and priced cost plans. Should Cost Modelling is used by EC Harris LLP as a design management tool for reducing the cost of the product and identification and protection of value.
From a cost management perspective, the main difference between Should Cost Modelling and traditional cost-estimating is that Zero Cost and Should Cost allow the client and his teams to understand the basis of the Cost Estimate. It also allows for project-specific circumstances (project abnormalities) to be incorporated into the ideal (Zero) position resulting in realistic (Should) position. This in turn allows the client to judge emerging design proposals and associated cost estimates on their objective merits to see if they would add value to the project.
This approach is based on proposition that the cost of the product is considered to be an important strategic factor that should be decided by management, not designers. Should Cost Modelling is based on a desired functionality and performance instead of on proposed design.
SSON: By contrast, why is the traditional bottom-up "will-cost" estimate no longer appropriate for management purposes in a post-2008 world? What’s different?
B Chomicka: The traditional cycle of design and estimation -- or re-design and subsequent cost estimate revision -- is nowadays considered to be inefficient, reducing the value that can be profitably delivered to construction clients. Moreover, this backward-looking, ‘will cost’ methodology has become inappropriate for managerial purposes because ‘will cost’ information tends to be too late, too aggregated and too distorted to be relevant for project planning and control.
SSON: What are the variable factors in this cost calculation? What are the risks you are exposing yourself to?
B Chomicka: The Should Cost Modelling methodology provides a robust platform and commercial strategy to deliver predictability of outcomes at all stages of the design and construction. It revolves around the establishment of a robust commercial platform (baseline) and commercial success criteria for delivery of projects and programmes of work, at the earliest opportunity. The Should Cost Modelling approach allows the overall cost plan to progress in parallel with design, as well as to ensure that resources are allocated where they generate the most value.
Should Cost modelling permits:
- creation of cost model reflecting minimum achievable cost-to-deliver products
- identification of extra costs for specific site conditions and constraints
- all enhanced design over the base to be approved on a business case basis
- establishment of key efficiency ratios for all asset components
- establishment of the basis against which future design variances can be monitored
- • identification of value management opportunities to meet/better the should cost basis
- identification of risks and opportunities
- review and sign off of spend / design decisions with the client
- development of an informed budget for each asset component
The main limitation to the wider adoption of top-down cost management methodology in the UK construction industry such as Should Cost Modelling seems to be the cultural change required to replace the entrenched ‘will cost’ approach. As observed in Finland, where a form of top-down costing methodology (Target Costing) has been used since the 1980s, architects initially resisted the new approach, thinking that the design is "right" in and of itself and that any challenge and/or change to a proposed solution due to set cost targets was "wrong". Today Finnish architects now require well-analysed target cost information before commencing design work, proving that the top-down approach also benefits the design process.
Broadening the use of this methodology in the UK would probably require incorporation of the Should Cost Methodology into the RIBA’s Plan of Work.
SSON: How has this improved things for the business? What is the feedback? What are the results?
B Chomicka: The Should Cost Modelling concept is already in use by EC Harris in the construction industry in the UK and internationally, with encouraging results. In all reviewed case studies, this methodology provided design steering and helped mutual understanding among designers, cost consultants and clients, enabling achievement of target costs and purposed value for the clients.
The design teams involved in these projects recognised that there are many possible design solutions for each project definition, resulting in a variety of building costs.
SSON: How does your approach to cost ensure that resources are allocated where they generate the greatest value?
B Chomicka: The Should Cost Modelling adds value to the client by making transparent the differences between stages: e.g., why the delivery of Zero Cost - or optimum product - is not possible or desirable, why the Cost Estimate differs from the Should Cost, and what value and income decisions were made to arrive at the Cost Estimate.
For example, in line with the initial Zero Cost Model, there might be an allowance of GBP500 per m2 for the cladding, but the Should Cost Model would take into consideration a planning requirement for an enhanced faèade, and increase the cladding allowance to GBP 600 per m2. The resulting final Cost Estimates could also contain a further allowance off GBP 100 perm2 for special cladding to appeal to a certain type of tenant. The Should Cost methodology transparently identifies – and more importantly, explains – these differences, arming the client with the right information at the right time to facilitate decision-making. It also informs the basis of the design [client's brief] and the design team's development of detailed design proposals.