Whole Life Costing and Cost Management Framework for Construction Projects in Nigeria

Whole Life Costing and Cost Management Framework for Construction Projects in Nigeria H. Onukwube Senior Lecturer, Department of Building, University of Lagos, Akoka, Yaba, Lagos. Nigeria. Email: onukwube12345678@yahoo.com Abstract: Costs and Value are not always well managed by clients. Some Clients are concentrating on the wrong goal lowest tender price rather than best value, but focusing on the initial capital costs of a construction project does not give value for money. Building owners need to think in terms of achieving value by meeting the needs of end users with a higher quality project at lower life costs. This paper presents the results of a study with the objective to establish the importance of various processes used in making decisions and estimating on whole-life costs. To determine the importance of various items of costs in cost management using whole-life approach. The study was carried out through questionnaire survey administered to a population of 30 construction professionals in consulting firms and clients Organisation. The data analysis included a statistical comparison of means and interpretation. It is expected that this study will enable clients to integrate the design and construction processes and also involve the integrated team early in the design as this will facilitate the planning of long term costs over the life of the project. Keywords: Construction Projects, Cost Management, Framework, Nigeria, Whole-life Costing. 1. Introduction Cost Planning and control of building designs were aimed at minimizing initial construction costs alone. However, many users of buildings have discovered that the running costs of buildings usually impact significantly on the occupiers budget (Dale, 1993). There are a number of current trends that are of concern for design professionals, these include: facility obsolescence, environmental instability, operational staff effectiveness, total quality management and value engineering (Kirk and Dell Isola, 1995). Clients are often over optimistic in their estimates of costs and the time required for delivery. In some cases, actual budgets were twice as much as estimates (Mott MacDonald, 2002). If real value for money is to be achieved, then clients must direct their professional advisers not to focus on capital costs only, but to acknowledge the significance of other costs and revenues associated with the acquisition, use and maintenance and disposal of an asset (Ballestry et al, 2004) 390

2. Whole Life Costing and Cost Management Framework 2.1 Definitions Several definitions of whole-life costing exists BSI( 1999) defines whole-life costing as a tool to assist in assessing the cost performance of construction work, aimed at facilitating choices where there are alternative means of achieving the client s objectives and where those alternatives differ not only in their initial costs, but also in their subsequent costs. Another useful definition is adopted by the Construction Best Practice Programme (CBPP, 1998a): The systematic consideration of all relevant costs and revenues associated with the acquisition and ownership of an asset. The whole-life costs of a facility (often referred to as through-life costs) are the costs of acquiring (including consultancy, design and construction costs, and equipment), the costs of operating and the cost of maintaining a facility over the whole life through to its disposal. That is, the total ownership costs (AECP, 2003). Cost management is the process of planning, estimating, coordinating, controlling and reporting off all cost related aspects from project initiation to operation and maintenance and ultimately, disposal. It involves identifying all the costs associated with the investment, making informed choices about the options that will deliver best value for money and managing those costs throughout the life of the project, including disposal (AECP, 2003) 2.2 Whole- life Costing As a Decision Making Tool The main use of whole life costing is in the effective choice between a number of competing project alternatives and this is mainly applied during the early design stages (Griffin, 1993). Further to this, the ability to influence cost decreases continually as the project progresses, from 100% at project conceptualization, to typically 20% or less by the time construction commences (Paulson, 1976; Fabrycky and Blanchard, 1991). Furthermore, once the building is completed, there is a slim chance to change the total cost of ownership because the decision to own or purchase a building normally commits users to most of the total cost of ownership (HMSO,1992). 80-90% of the cost of running, maintaining and repairing a building is determined at the design stage ( Kirt and Dell Isola,1995; MacKay, 1995) 2.3 Implementation Of Whole- Life Costing In The Construction Industry. Most basic principles of whole life costing are well developed in theory it has however not received a wide practical application in Nigerian construction Industry. Most building sectors in other countries have not fully adopted whole-life costing methodology ( Larsson and Clark; 2000, Wilkinson, 1996;Sterner,2000) although it has been used predominantly in public procurement (Clift and Bourke, 1999). Many researchers (Brandon,1987; Ashworth 1996; Flanagan et al 1989;Ferry and Flanagan; 1991,Al-Hajj, 1996; Bull, 1993;Wilkinson, 1996;Blinta and Sarma, 1997; Smith et al, 1998; Sterner, 2000; among others), have tried to highlight areas causing difficulties in the application of whole-life costing in the industry. Kishk and AlHajj (1999) categorized these difficulties on the part of the industry practices, the client, the analyst and the analysis tools currently being in whole- life costing 391

2.4 Construction Industry Limitations The capital cost of construction is usually separated from the running cost. It is normal practice to accept the cheapest initial cost and then hand over the building to others to maintain. Furthermore, there is no clear definition of the buyer, seller and their responsibilities towards the operating and maintenance costs (Bull, 1993). In addition, there is lack of motivation in cost optimization because the design and cost estimating fees are usually a percentage of the total project cost (McGeorge,1993). 2.5 Client Limitations Bull (1993) pointed out that there is also a lack of understanding on the part of the client. This may increase the possibility of subjective decision making. In addition, there are usually multiple aspects of needs, desired by the clients (Chinyio et al, 1998). Most of these aspects cannot be assessed in a strict whole- life cost framework (Kishk et al, 2001), Some of these factors are intangibles such as aesthetics. In some projects, these intangibles are also in conflict with the result of whole life costing (Wilkinson, 1996) 2.6 Analysis Difficulties The major obstacle facing the analyst is the difficulty of obtaining the proper level of information upon which to base whole- life costs analysis. This is as a result of lack of appropriate, relevant and reliable historical information and data (Bull, 1993). Furthermore, cost of data collection is expensive (Ferry and Flanagan, 1991) 2.7 Cost Management and Reporting: Overview Management of the overall cost of the project is the responsibility of the project manager, reporting to the project sponsor. In managing project costs, the main tasks are to: Manage the base estimate and the risk allowance Produce cost reports, estimates and forecasts Operate change control procedures. Maintain an up to date estimated outrun cost and cash flow Initiate action to avoid overspend Issue a monthly financial status Delivering the project at the appropriate capital cost (having considered the implication of quality, programme and whole-life objectives, using value criteria established at the start of the project) Ensuring that, throughout the project, full and proper account is monitored of all transactions, payment and changes. The project sponsor has overall responsibility for the project, including the estimated cost, and will need to be satisfied that appropriate systems for controlling costs are in place and functional. Where significant costs are attached to a design, these must be properly reviewed against the budget decision and properly authorized. For complex projects, there might be delegated levels for each cost centre. Value management and value engineering have an important part to play in influencing cost (AECP, 2003) During construction, instructions issued to the integrated project team, whether for change via a formal change control 392

procedure of for clarification of detail, have a much more immediate impact on cost. The project sponsor needs to establish procures for instructions and information that ensure: Instructions are issued within delegated authority Instructions are costed and their impact assessed before use The instructions is justified in terms of value for money and overall impact on the project The cost of all instruction monitored on a continuous basis 3. Objectives of the Study The study seeks to identify the principles of whole-life cost management and basically has two objectives: 1. To establish the importance of various processes used in making decisions and estimating on whole-life costs. 2. To determine the importance of various items of costs in cost management using whole-life approach. 4. Data Collection and Analysis The study was carried out through questionnaire survey. The questionnaire focused on: The profession of the respondents, construction industry experience, framework for making decisions on whole-life costs, estimating whole-life costs and cost management. Most of the questions were derived from journal publication. The respondents were asked to assess the importance of the variables used in the research instrument. A 5-point Likert scale of 1 for not important, 2 for of little importance,3 for somewhat important, 4 for important and 5 for very important was used. Statistical analyses were undertaken using the Statistical Package for Social Sciences (SPSS).The analysis ranked the variables on the importance index. 5. Results and Discussion Thirty questionnaires were collected and were found useful for the study. The demographic characteristics of the respondents are presented in Table 1. 393

1. Variables Profession Table 1: Demographic Characteristics of the Respondents Freq. Cum. Freq. Percentage Cum. Percent Civil Engineer 2 2 6.7 6.7 Builder 2 4 6.7 13.4 Architect 4 8 13.3 26.7 Estate Surveyor and valuers 7 15 23.3 50.0 Quantity Surveyor 15 30 50 100.0 2 Construction Industry Experience Over 30 years 8 8 26.7 26.7 21-30 years 7 15 23.3 50.0 11-20 years 7 22 23.3 73.3 1-10 years 8 30 26.7 100.0 The majority of the respondents (50%) are Quantity Surveyors, the remaining (50%)are Estate Surveyors and valuers, Architects, Builders and Civil Engineers. About 53.4% of the respondents are made up of respondents that have over thirty years experience and those that have less than ten years experience in the construction industry. 5.1 A Framework for Making Decisions on Whole-Life Costs. Importance index for five processes that facilitate decision making in the application of whole-life costs on projects are shown on Table2.From the table the most important process based on the ranking of the Mean Item Score(MIS) are: Integrating the design and construction processes(4.97);this is followed by involving the integrated project team early(4.87).others are :Taking account of the needs of the end users of the facility(4.53);team members responsible for design and construction should work together(4.53);making the sustainability of the completed facility a priority. 394

Table 2: A Framework for making decisions on Whole-Life Costs Variables Importance index Integrating the design and construction processes, so that the integrated project team can take responsibility for the cost and quality implications of their design, with input from those who will be responsible for operating and maintaining the facility. 4.97 1 Involving the integrated project team early on so that they can advice on how the design will affect cost, health and safety during construction and in use, speed of construction and the operational efficiency of the completed facility. 4.87 2 Taking early account of the needs of the end users of the facility in order to avoid costly design changes at a later stage. 4.53 3 The team members responsible for design and construction should work together to identify the most cost-effective design over the life of the facility. 4.53 3 Rank Making sustainability of the completed facility a priority, taking full account of its whole life costs. 4.47 5 The views of the respondents were based on the importance of the processes in the objectives of whole-life costs. From the surveys all the processes are considered important because all the mean item score are above 4.00. The ranking only shows that some processes are more important than others. 5.2 Estimating Whole-Life Costs. Importance Index for sixteen variables is shown on Table 3. From the table, the four most important variables in estimating whole- life costs based on the ranking of the Mean Item Scores (MIS) are: ensure the project team is integrated from the outset of the design process (4.97); use techniques such as value management and value engineering to minimize the potential for waste and inefficiency (4.80); ensuring financial reviews at key decision points as this will confirm if the project is still affordable (4.53); determine total investment needed to complete a facility (4.40).The four least important variables are: ensuring that variation orders are properly authorized (3.90); Preparing estimates and cash flow in line with the project programme (3.90); draw up a design brief that is output based with explicit reference to value (3.67); Specify at an early stage any constraints on capital costs. 395

Table 3: Estimating Whole-Life Costs. Variables Importance Index Ensure the project team is integrated from the outset of the design process, to enable specialist suppliers to contribute to the design. 4.97 1 Use techniques such as value management and value engineering to minimize the potential for waste and inefficiency. 4.80 2 Ensuring financial reviews at key decision points as this will confirm if the project is still affordable 4.53 3 Determine total investment needed to complete a facility, such as the cost of design, construction cost and land cost.. 4.40 4 Check how the facility will enhance the core business operations that will take place in the facility. 4.40 4 Produce an output based specification 4.23 6 Rank Planning and controlling both commitments and expenditure within budgets so that unexpected cost over/under runs does not result. 4.20 7 Compare capital and predicted whole-life costs with the benchmark cost for a similar facility procured in the same way. 4.17 8 Ensuring that the contracts provide full and proper control and that all costs are incurred as authorized. 4.13 9 Ensuring that designs meet the scope and budget, delivering quality that is appropriate and conforms to the brief. 4.10 10 Defining what is to be included in the project and limiting expenditure accordingly. 4.00 11 Ensuring all expenditure relating to risks is appropriately allocated from the risk allowance and properly authorized. 3.97 12 Ensuring that variation orders are properly authorized 3.90 13 Preparing estimates and cash flow in line with the project programme. 3.90 13 Draw up a design brief that is output-based with explicit reference to value, involve the users of the facility and others in its development. 3.67 15 Specify at an early stage any constraints on capital costs. 3.50 16 5.3 Cost Management Importance Indices for twelve items of cost in Cost Management are shown on table4.the ranking of the Mean Item Score (MIS) shows that the four most important variables are: construction costs (5.00); planning costs(4.40);maintenance costs(4.33);consultancy 396

costs(4.30),while those that are of little importance are information technology costs(2.93); health and safety costs (2.50). Table 4: Cost Management Variables Importance Index Rank Construction costs 5.00 1 Planning costs 4.40 2 Maintenance costs 4.33 3 Consultancy fees 4.30 4 Cleaning cost 3.87 5 Cost of operations 3.63 6 Cost of in-house resources 3.40 7 Security costs 3.33 8 Cost of utilities 3.30 9 Cost of Alterations 3.27 10 Information technology cost 2.93 11 Health and safety costs 2.50 12 The views of the respondents are based on the importance of these costs in cost management. The result of the survey shows that construction costs is very important, while planning costs, maintenance costs, consultancy fees are important. The ranking shows that some costs are more important than others in cost management of whole-life costs. 6. Conclusion and Recommendation The study has been able to establish the importance of various processes used in making decisions and estimating on whole-life costs. The paper also determines importance of various items of costs in cost management using whole-life approach. It is evident from the study that integrating design and construction processes as well as involving the integrated team early is essential in whole-life costs. The use of techniques such as value engineering and value management to minimize potential for waste and inefficiency is also useful in whole-life costs of projects in Nigeria. In cost management using whole-life approach, ten items of costs are very crucial, with construction costs being the most sensitive. There is need to integrate the design and construction processes and also to involve the integrated team early in the design as this will facilitate the planning of long term costs over the life of the project. This is because long term costs are more reliable indicators of value for money than initial construction costs. In planning for the long term costs emphasis must be placed on the following: construction costs, planning costs, maintenance costs, consultancy fees, cleaning cost, cost of operations, cost of in-house resources, security costs, cost of utilities, cost of alterations. 397

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