With over 25 years’ experience as a quantity surveyor and cost consultant, Stephen Birchall delves into the value of Independent Cost Reviews in the construction industry.
By Stephen Birchall, Associate Director at Tracey Brunstrom & Hammond.
Despite high levels of demand, 2022 saw many established companies file for insolvency. With rising interest rates, surging inflation, labour shortages, and low unemployment, forecasts indicate that construction activity is likely to expand modestly over the medium term, while facing increased pressure on profit margins.
In the current economic climate, a project team is challenged to deliver projects safely, within budget and on time, in addition to providing value to various stakeholders. To enable a board to make informed and confident decisions, owners and operators require reliable cost estimates that are within the accuracy parameters defined by their governance structures; to be prepared in a robust, transparent and timely manner.
Whether it be a road, rail, water, school or hospital project, the calculation and bases of a projects’ estimated cost is essential to its success. As construction projects increase in size and complexity, so do the project values and the commercial risk. On major and mega projects, inaccuracies in the estimated cost could affect the project by billions of dollars. An Independent Cost Review can assist in validating the estimated cost.
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In our experience, there is nothing worse for a client who has committed funds to developing a project, to get to the final stages of development only to find that the estimated costs have increased to a value that could make the project unviable. If this were to occur, this could have serious implications to the project’s feasibility; leaving the client with the unenviable choice of deciding to either stop the project (and write-off the costs) or look to reduce the project budget by removing scope. Either way, the benefits from the project, as envisaged by the client under the original business case, would likely diminish.
To avoid the risk of the estimated cost blowouts, it is prudent to introduce an independent review of the project’s estimated cost plan. External reviews of cost plans can identify any mistakes, unrealistic assumptions, or biases that might have impacted the process of estimating costs. The client can therefore have greater confidence that they have a realistic budget underpinning the business case.
Key objectives of Independent Cost Reviews
- Ensure the full scope of the project has been considered.
- Validation of assumptions and rates – are they reasonable and do they capture the project constraints?
- Verification of the Work Breakdown Structure – is it representative of the project scope and the Project Execution Plan?
- Review and check the quantities generated – are they complete, are there any omissions/errors?
- Test the risk register for completeness – are all risks captured and weighted correctly and are there adequate controls available to enable mitigation?
- Validation of the adequacy of contingency amounts – does it account for all risks and opportunities, and have they been correctly allocated and quantified?
While the points above form the basis of any Independent Cost Review, for a more complete picture and ultimately a more robust outcome, it is recommended that the following should also be considered as part of the analysis:
- Benchmarking.
- Alternative delivery options, offering cost or time savings.
- Procurement methodology.
- Constructability.
Performing an Independent Cost Review allows an independent expert to evaluate project costs with a fresh set of eyes, identify errors and opportunities, and provide the assurance required to proceed to the next stage of the delivery with confidence.