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Procurement Perspectives: Determining the true costs of construction projects

Stephen Bauld
Procurement Perspectives: Determining the true costs of construction projects

When municipalities estimate the cost of construction projects, it does not always reflect the true costs of the proposed project.
Most figures stated in several studies as to how the process works provide a rough approximation only of the cost of carrying out the construction and each is based on a number of assumptions which vary from one index to another.

Therefore, it is wise to use several different indices when preparing a budget, using an average of the various costs provided, so as to develop a more balanced picture of actual market pricing.

As we know, the construction market is constantly changing depending on several factors related to the number of projects out for bid at any given time.

I talk to many frustrated contractors that have bid on major construction projects, then they get cancelled due to being over budget, which is directly related to municipalities being able to estimate properly. While the costs of building in principle can be estimated, it is as important to pay attention to the true costs of not proceeding with the project as it is to the costs of undertaking it.

As a general rule, no one likes to commit substantial resources to a project unless there is a clear benefit in doing so. This includes the cost the contractors incur when taking the time and resources to prepare the bids. Some municipalities have a bad reputation for cancelling bids for the reason of being over budget.

This will result in fewer bids from contractors that lose faith in the municipality’s ability to create a proper budget for the project in the first place.

Poor estimates are especially relevant with respect to the refurbishment and expansion of an existing building, in contrast to the construction of a new one. It is common knowledge that the estimated costs of refurbishment are generally only half the actual costs when refurbishment is undertaken because of a wide range of unknown factors dealing with an existing structure.

In addition to actual out-of-pocket costs, one must also consider lost productivity during the process of refurbishment and the possible perpetuation of built-in inefficiencies that result from the current arrangement or building structure.

Even if re-fabrication may still appear to be a cheaper option, it is essential to make sure price comparisons are realistic.

The preparation of cost estimates for a major capital project includes the following:

  • The program cost estimate should be considered the equivalent of the total project purchase price.
  • It should incorporate reasonable allowances for all costs and the value of any resources needed to complete the work, design, secure any required right-of-way or access, mitigate any environmental condition, communicate and consult with the public as well as the design and building costs for the construction.
  • It should include the costs of overall project management and specific management plans (e.g., transportation management plans) and allow appropriate reserves for unknowns as well as costs that will be incurred in utility adjustments, environmental or other compensations, and road or railway relocation.

After the overall cost estimate is prepared, it should be broken down into year-by-year expenditures and on a contract-by-contract basis if there are multiple contracts involved.

Key component costs should also be disclosed. An estimated inflation rate per year should be built into multiple year costing.

Year-of-expenditure estimates should reflect a realistic time frame, taking into account project planning and developing durations. Inflation rates may be different for specific cost elements.

Potential schedule slippages can also be accounted for in the form of a project contingency. Estimates should be developed using the best information available. When preparing any estimate, appropriate engineering or other professional advice must be obtained in regard to any assumption made.

Stephen Bauld is a government procurement expert and can be reached at swbauld@purchasingci.com. Some of his columns may contain excerpts from The Municipal Procurement Handbook published by Butterworths.

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