Is your project over budget, or was the budget always wrong?
Large capital projects are exponentially increasing in size and scope, but most cost estimation processes have been managed in the same way for the last decade.
Today, the global construction industry produces approximately 2.5 quintillion (1030) bytes of data every day, yet 95.5 percent remains unused, according to FMI's Big Data report. Studies, such as Cheng & Teizer, 2013 and Park et. al, 2013 look into how we can use this data and evolve productivity in the industry. But what about the undying issue of projects going over budget?
Large projects across asset classes typically take 20 percent longer to finish than scheduled and are up to 80 percent over budget.
Recent studies have discovered that the above trend is largely due to delay of information sharing, difficulty in capturing data for analysis, and mismanagement and storage of information. With the lack of information shared and the overdependence on experience alone when developing a budget, estimates are not as accurate as they could and should be.
Experience is undeniably a significant factor in building the correct estimate, especially during the concept stage, but data should also complement this. Data, such as regional escalation and current market trends, will render a more accurate early estimate so a developer can better plan their financials for the project cycle.
Construction programs are not as effective as owners would like them to be and data sharing can be slower than the actual construction process.
Individual projects within a major programme tend to act as siloes, where information sharing is almost non-existent, even in cases where clear paths of communication exist. Programmes fail to achieve effective data communication since the cost coding or ‘language’ of the individual projects is inconsistent, mainly due to the tailored estimate formats or work breakdown structures that different contractors use.
International construction market survey
A common error in capital planning estimates concerns escalation and how to factor in market changes during the actual construction period. Our international construction market survey 2019 shows that almost every market is changing year on year. For example, locations such as San Francisco, New York, and Seattle are now more expensive to build than they were a few years ago, whereas other locations such as Oman experienced no escalation and even decreased in construction costs.
Using comprehensive data on cost and economic trends to develop conceptual estimates helps clients make better informed decisions regarding their global capital programs. During the early stages of a construction project, small decisions can have notable impacts on the budget with little expenditure.
One of the reasons for cost overruns on construction projects has been identified as a lack of benchmarked data to support front-end estimates.
Bent Flyvbjerg, an Oxford Professor who has made a career researching mega-project mismanagement comments: “Whatever the underlying causes of cost overruns may be, there seems to be one promising means of addressing them: creating a ‘reference class’ of similar projects to serve as a platform for comparing costs”.
An effective benchmarking strategy
From our experience, the following are three processes a company can follow to create an effective benchmarking strategy for cost estimating:
- Set account benchmarking objectives and focus the exercise around these goals. Benchmarking will not be successful if applied in an ad-hoc fashion. It requires an understanding of what is important to the organisation (critical success factors) and then measuring performance for these factors. This will affect what metrics are tracked, the type of analysis performed, and how the data is ultimately displayed.
- Create a coding structure standard to set the foundation for benchmarking. Standard coding such as ‘Uniformat’ or ‘Masterformat’ allows owners to create one ‘language’ for their organisation; this 'language’ is how cost estimates are broken down and provides a consistent schedule of values to allow for comparisons across projects in different regions. It can also be used across various disciplines; schedule, cost, and design. This structure is the bridge between good data and the ability to use data in a meaningful way.
- Implement a data collection strategy to provide a framework to understand how benchmarking can support overall enterprise objectives. The Royal Institution for Chartered Surveyors’ (RICS) Guide to Cost Analysis and Benchmarking considers a data collection strategy to be a key step in the overall benchmarking process, in order to set a defined baseline with a clear method of measurement. Establish the phases of data collection, including the purpose, scope, and responsibilities of all stakeholders. Without these considerations, the cost of obtaining the data may outweigh the benefit to the organisation.
Construction continues to face fundamental issues which emerge from not using digital technology to drive productivity, and we cannot ignore the growing impatience that we’re not adapting or improving fast enough. By embedding data into the cost estimation process at the outset and using benchmarking cost techniques in a smarter way, clients and suppliers equally have an opportunity to drive change in our industry.
To help make better informed decisions regarding your global capital programs, read more about our international construction market survey 2019.