Committee Reports::Report - Control of Capital Projects::15 July, 1985::Appendix


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APPENDIX 10 Report of The Royal Institute of Architects of Ireland to Sub-Committee on Public Expenditure Dail Eireann on Cost Control Procedures on Public Building Projects.

March 1985

Submission to Sub-Committee on Public Expenditure, Dail Eireann. Royal Institute of the Architects of Ireland.

1. Introduction.

In response to a request of the Sub-Committee on Public Expenditure during the R.I.A.I. submission to the Sub-Committee, we have prepared a set of draft forms adapting the commercial control mechanisms to public projects, together with an outline of their application.

The system proposed is based on plotting of a forecast of the total project cost across the whole period of the project as a base against which actual costs are recorded at quarterly intervals.

This system monitors progressive costs at regular intervals against the adjusted base costs for each interval on which the decision to proceed with the project was made. The period of the project for monitoring purpose runs through the design and contract stages. Any deviation between actual and predicted costs at any stage is detected within a maximum of three months of its cause and allows an immediate explanation or correction within the scope of the project.

It is essential to the operation of this or any comprehensive cost control system that it is established and interpreted within the context of the project as a whole by competent analysts and that those who monitor the progress understand the limits of accuracy and the way in which the process operates to ensure that figures are not applied out of context.

The body of the information used in the cost control structure proposed in this submission is already available in the ordinary course of design team operations.

2. General.

The proper management of a building programme is based on the productive use of resources and a cross checking system of monitoring which identifies the development of the cost of the undertaking on a continuous basis referenced back to the original projections and forward to the final projected expenditure.

The argument that cost predictions are speculative is in our submission invalid where these are paralleled with actual costs: the constant monitoring of actual against projected costs allows an accurate prediction of immediate future cash demands with a progressively more accurate prediction of the final cost. Project costs also provide a basis for reference for the control of costs throughout the project: substantial deviations between actual and projected costs are immediately identified and are either explained by circumstances or disclose an over-run in time to allow compensation within the scope of the project as a whole.

The argument that the value of an investment is not materially affected by inflation is also in our submission an inappropriate principle to apply to building cost control on the grounds that it fails to recognise the importance of cash flow and that it is impractical to relate values to a base date where the liability is discharged from liquid assets at current values: that is to say it leads to a false expectation by equating base date values to current assets.

The segregation of monies paid to a Building Contractor from the balance of the total cost of a building project is a distortion of the real cost of a project and by corollary the secondary costs seen outside the ambit of the whole project can be misleading. In our submission a proper financial management procedure requires a monitoring of the whole project cost as a complete process.

3. Inflation.

The projecting of inflation in building contracts is a complex process. Inflation can be assessed only on an empirical basis. If the expenditure on a building contract were directly proportional to time, an inflation of 10% per annum over three years would result in 16.5% increase on the Contract Sum: expenditure is not ordinarily directly proportional to time since time runs with the low cost elements of structure and siteworks in the initial stages the elemental cost rising towards completion of the contract period: this results in a higher inflation than the average for the whole contract period. The assessment of the application of inflation to a building project depends on the elemental distribution of cost and must be assessed in each case by the design team as a specialist procedure.

4. Briefing and Pre-tender Costs.

The client is responsible for briefing the Design Team by definition of performance requirements and any other constraints which he may wish to apply. The fees payable for a design service may be projected by reference to the building cost and are therefore a valid element of the total cost of a project, to be monitored as any other element of the cost. A separate schedule of fees and adjustments arising during a pre-tender stage will assist in financial control. Consultants are appointed in accordance with Conditions of Engagement which regulate any adjustment in their fees: increases usually arise through change in clients instructions resulting in unproductive work for which the consultant is remunerated in accordance with the Conditions according to circumstances: increases may also arise through instructions to provide services expressly excluded by the Conditions of Engagement as a part of the percentage fee services.

5. Cost Variations.

Variations to the works during the currency of the Contract are usefully divided into two categories: Contract Variations and Client Variations. Contract Variations are adjustments arising out of the nature of the works, usually indeterminate at the stage of preparing documents and so within the scope of normal contract administration. Client Variations are client instructions to vary the works. Both types of variation effect the cost of the works and are consequently important elements in a cost control procedure.

6. Programme Variations.

Variations and changes of circumstances effect the Contract period with resulting costs arising under head of Inflation and Financing: extensions of time as a secondary consequence of variations in content or circumstances must be incorporated as cost adjustments in a monitoring structure.

7. Empirical Cash Flow.

The identification of empirical cash flow as an element of financial management is submitted as a useful indicator of the general progress of the works as well as an indicator of liquidity demands on the Employer and so allows him to deploy resources to satisfy his obligations under the payment provisions of the contract.

8. Building Cost Analysis.

On the premise that continuous monitoring of actual against projected costs is the proper basis for financial management of a building project, we set out in tabular form a set of charts designed to monitor the progress of a building project as follows:

Form A:	Project Cost Feasibility Analysis and Review.
	This base cost analysis is undertaken at the outset of a project and projects the total project cost over the time scale for the project in terms of current and actual cost at completion to establish value and liquidity requirements. This form is established at the outset of the project and reviewed by a quarterly comparison of current costs to base costs throughout all stages of the project.
Form B:	Adjusted Quarterly Building Cost Analysis and Review.
	This analysis is a quarterly adjustment of Building Costs which carries with it an appendix of tables which resolve the specific heads of the analysis. This analysis commences on acceptance of tender and defines the actual financial status of the Building works at each quarter throughout the contract period by comparison to that projected at tender stage.
Form C:	Empirical Quarterly Cash Flow Analysis and Review.
	This analysis compares the actual specific and cumulative payments at each quarter with those projected at tender stage: it provides a monitor of progress and allows the Employer to adjusted liquidity in advance of demand. This analysis commences at tender stage and runs throughout the post tender period.
Form D:	Quarterly Cost Analysis and Review.
	This analysis combines the information assembled at Forms A, B and C and expands it to provide a comparison of projected against actual or adjusted costs at quarterly intervals. This analysis extends over the whole of the projected cost and adjusts the project total cost against actual figures as they become available. It is an essential feature of this analysis that it compares current figures against projected figures as any material deviation is immediately identified and either explained by circumstances or otherwise discloses an over-run which will effect the final cost of the project. It consequently identifies the points at which policy decisions must be made in order to maintain proper financial control. This analysis may be reviewed throughout the whole period insofar as its heads are relevant, or may be reserved to the post tender period in complete form.
	Tables dealing with the detail heads of monitoring Professional Fees, Finance and other secondary heads of cost identified in the whole project cost analysis may be constructed on the same lines as those exemplified above.
	Tables: A, B, C, D follow:

This document to be established at the outset of the project and reviewed on a quarterly basis throughout all stages of the project to completion.

PRE AND POST TENDER SERIES

Form A

Project Cost Feasibility Analysis and Review.

Project .....................	Base Date ....................
Review No. .......................	Review Date ..................

1.	Development.	Base	Review
1.1.	Planning Permission - apply	............ date	............ date
1.2.	Planning Permission - granted	............ date	............ date
1.3.	Appeal	............ projected date	............ projected date
2.	Contract Programme.
2.1.	Commencement on site - projected.	............ projected date	............ projected date
2.2.	Completion - projected.	............ projected date	............ projected date
3.	Building Cost
3.1.	Current projected cost at commencement (net of inflation).	£..............	£..............
3.2.	Inflation projected to commencement on site.	£..............	£..............
3.3.	Inflation projected from commencement on site to completion	£..............	£..............
3.4.	Total projected actual building cost at completion	£..............	£..............
3.5.	Professional fees and expenses based on 3.4. above	£..............	£..............
3.6.	Financing costs	£..............	£..............
3.7.	Agents fees	£..............	£..............
3.8.	Legal fees	£..............	£..............
3.9.	Specific preliminary on-costs	£..............	£..............
3.10.	Value added Tax on 4.4. to 4.9. (Total project cost is net of fitting out costs which are taken as outside the project cost).	£..............	£..............
3.11.	Total Estimated Actual Expenditure	£..............	£..............

This document to be completed on acceptance of tender and reviewed on a quarterly basis throughout the post tender period.

POST TENDER SERIES

Form B

Review No.

...........................

Date

........................

Quarterly Programme Review.

1.Contract Commencement date ..........................

2.Contract Completion date ............................

3.Adjusted Contract Completion date ...................

Adjusted Quarterly Building Cost Review.

		Credit	Extra	Total
1.	Contract Sum (gross)
2.	V.A.T.
3.	Contract Sum (net)
4.	Adjustments in wages and materials (actual)
5.	Adjustment in P.C. Sums in Contract (see table 1)
6.	Contract Variations
	(see table 2)
7.	Client Variations (see table 3)
8.	Adjustments (legislative enactment)
	Net Extra
	Credit
9.	Current amount of Contract Sum (net)
10.	Estimate wage and material increases in balance of programme
11.	Value Added Tax
12.	Estimated final amount of Contract Sum (gross)

This document to be completed and reviewed as Form B.

Table 1

Adjustment of P.C. and Provisional Sums in Contract for Nominated Contracts awarded to date (including suppliers).

Item	Contractor	Net. P.C. Sum	Contract Sum (Net)	Credit	Extra







Total adjustment for Nominated sub-contractors and suppliers to date			Net Extra Credit	________	________
				--------	--------

Carry to Summary. Form B.

Review No.

......................

Date

...................

This document to be completed and reviewed as Form B.

Table 2

Contract Variations.

Item	Clause	Net Value	Net Sum Included	Credit	Extra







Total for Contract Variation			Net Extra Credit	_______	_______
				--------	--------

Carry to Summary Form B.

Review No.

......................

Date

...................

Client Variations.

This document to be completed and reviewed as Form B.

Table 3

Item	Origin	Estimated Value	Credit	Extra






Total for Client Variations		Net Extra Credit	_______	_______
			--------	--------

Carry to Summary Form B.

Review No.

.......................

Date

...................

POST TENDER SERIES

Form C

Empirical Quarterly Cash Flow Analysis.

Quarter	Projected Quarterly	Cumulative Total	Actual Cumulative Total	Projected Inflation	Actual Inflation

This document to be established on acceptance of tender and reviewed on quarterly basis.

POST TENDER SERIES

Form D

Quarterly Cost Analysis and Review.

	Head	1st Quarter		2nd Quarter		3rd Quarter		nth Quarter		Total
		Projected	Actual	Projected	Actual	Projected	Actual	Projected	Actual	Projected	Adjusted Projection
1.	Adjusted Contract Sum Form B.
2.	Inflation (Form C) (wages and materials)
3.	Professional Fees
4.	Financing
5.	Special Costs scheduled
6.	V.A.T.
7.	Adjusted Total Expenditure
8.	Quarterly Cash Flow (Form C)
9.	Quarterly Cumulative Expenditure (Form C)

This document to be established on acceptance of tender and reviewed on a quarterly basis throughout the post tender stage (this document replaces Form A in the post tender stage).

9. Conclusion.

In the submission of the R.I.A.I. a cost control system established on the basis of comparative monitoring of actual to forecast total project costs eliminates the possibility of cumulative over-runs in the primary or secondary costs of a building project by the identification from its effect of the cause of any increase at a time when the appropriate balancing action can be taken. Cost control as an element of Building Economics is a complex and specialist subject and as with any other diagnostic process cost control returns must be read in the context of a proper understanding of building practice as a whole.

Brian O’Connell. Honorary Secretary R.I.A.I.

March 1985