The RICS formal cost estimating and cost planning stages

This article is all about ‘The RICS formal cost estimating and cost planning stages in context with the RIBA Plan of Work and OGC Gateways (adapted from the RIBA Outline Plan of Work 2007). It is also about how to create a construction budget cost.

Introduction

One of the biggest challenges in construction is to set a realistic budget in the first place.

If we create a well conceived budget it makes the subsequent processes of tendering, contract production and signing, change control and payment a whole smoother.

If we get the budget wrong, and its too low, then the construction process will be much more difficult effectively fighting an uphill battle from day one. Should the Client not have additional funds, the project may have to be reduced in scope or even abandoned.

Additionally, if we set too high a budget, a perfectly feasible scheme may be dismissed as not workable.

For our economy to maintain and then grow, we must ensure that the construction industry can deliver end products that are actually attractive to their Clients. For example, a car manufacturer needs a new factory space ready in 12 months for a budget of £20 million. Can the industry deliver it ? We must deliver on the traditional time, cost and quality targets but also relatively new considerations such an environmental and social targets.

The construction industry is part of a diverse ecosystem and needs to contribute its part to ensure the ecosystem’s continued success.

To that end, the construction industry must ensure it can financially manage any project, no matter how small or big from ‘cradle to grave’. We must be able to provide accurate early cost advice and then deliver that project within those cost budgets. For example, if a Client wishes to build a university building and we advise a likely maximum cost of £50 million, we need to ensure that the project gets delivered within this budget (obviously if the scheme expands we can advise the Client of subsequent additional costs early).

Now, this early cost advice is difficult. We must provide a budget that is not too ambitious or low that it misleads the Client into a far too low construction budget. This would be no good for anybody. The Clients business plan will be incorrect due to the low figure and the Client may end up being damaged financially. The construction industry may lose that project because it’s no longer feasible and then lose the Client because they cannot trust the industry any longer. For example, if an investment banker experiments with a first property development project and they get burnt financially they are likely to exit the property industry and its our loss. So it is important to ensure that the early cost budgets are robust enough to cover the Clients eventual final cost.

But, it is equally important to ensure that the construction budget is not needlessly conservative with too much contingency and caution priced in. An over inflated budget may lead to a very feasible project being labelled unfeasible and then the industry loses the project because the Client incorrectly believes it too expensive. For example, if we tell a Client that their new office will cost £800k instead of what it may likely cost £650k because of an abundance of caution, the Client may baulk at the cost and proceed no further. This reduces the size of the construction industry while harming our Client, perhaps preventing them from growing their business or assets.

So, how do we get a balance between reckless ultra-optimism and creeping over caution? For the quantity surveying industry, it’s an ongoing problem to solve. The RICS has produced guidelines and notes about this very same subject and we need to keep learning and improving every year.

Generally speaking, upon receipt of a simple sketch plan, the Quantity Surveyor will produce an order of cost estimate based on gross internal floor areas and using historic rates per m2. So if your Client is looking to build a new office block and you have completed several office blocks around £3,000 per m2 then you can advise the likely cost as perhaps £2,800 to £3,200 per m2. Of course, the quantity surveyor needs to ensure that the Client understands that this is a ballpark figure and you can work with the Client to examine different budget scenarios. The Client must know that this is a very loose method of budget calculation but it is quick and fast.

This order of cost estimate than then be developed in tandem with increased design decisions from the Client. The RICS recommends further cost plans be developed in accordance with the National Rules of Measurement (NRM) guidelines. Essentially the quantity surveyor develops their cost in greater cost detail as the Architect produces more design detail such as floor plans and elevations.

Eventually after several cost plans, the Quantity surveyor should have something that resembles a fully priced bill of quantities called a pre-tender estimate. As the level of design and matching budget detail increases, the Clients risk decreases and the pre-tender estimate should be very close to the actual tender return prices from the market.

As highlighted above, the most important aspect of early cost planning is clear communication between the Architect, the Client and the Quantity Surveyor. If the Client is given an order of cost estimate they must be informed in writing of the assumptions made and the limitations of this document. As further cost plans are produced, the Client should be made aware of which risks are being gradually eliminated and which risks remain.

Construction cost planning and management will never be exact. We can and must of course try, but the most important rule is to keep the Client informed so they can make informed decisions.

Early cost advise – use NRM1 guidelines for preparation of order of cost estimates and you can find rates from pricing books such as Spons or ideally use historic rates from projects you have completed. These order of cost estimate can be based on number of units such as number of beds or rooms required. They can also be priced simply on the internal floor area of the building.

As the design develops – use NRM2 guidelines to break the budget down into elemental work sections such as external walls, internal finishes and so on. Use rates from the pricing guides or your own historic rates. These cost plans should be increasing in detail as more design information is issued.

 

RIBA Work Stages

It is best practice for good Architects and design teams to 1) agree a brief with the Client and then 2) prepare outline designs and eventually detailed designs.

At the same time, the Client needs accurate cost advice. So when the Client is agreeing a brief with the Architect he or she will also want to know a budget construction cost.

And then while the Architect develops detailed construction drawings there will also be a need for detailed construction costs.

At every stage of the design process there must be a corresponding construction cost budget developed parallel to or in tandem with the design stages.

These are the RIBA work stages:

Preparation

A. Appraisal

B. Design Brief

Design

C. Concept

D. Design Development

E. Technical Design

Pre- construction

F. Production Information

G. Tender documentation

H. Tender action

Construction

J. Mobilisation

K. Construction to practical completion

Use

L. Post Practical Completion

RICS Cost estimating, elemental cost planning and tender document preparation stages

The RICS stages are designed to run parallel to or in tandem with the RIBA design stages.

These are the RICS stages and we will reference which RIBA stages they run in tandem with.

Order of cost estimates

(as required to set authorised budget).

This cost estimate is based on the RIBA ‘preparation stage’. The Architect carries out the appraisal with the Client and agrees a clear brief with the Client.

Now the quantity surveyor must prepare an ‘order of cost estimate’ which will give a maximum cost for the construction.

This cost allows the Client to make a financial decision whether to proceed or not.

If the Client chooses to proceed to the next stage with this budget then this figure is called the authorised budget.

Cost plans

Once the Client approves the design brief the Architect can create a concept design. Then the Quantity surveyor can create a Formal cost plan 1.

This Formal cost plan 1 should be easily linked back to the original order of cost estimate and any deviation between the figures should be explainable.

Then the Architect can develop the design and the quantity surveyor can create the Formal cost plan 2 based on this increased information.

Once the Architect has created the technical design the quantity surveyor can create the Formal cost plan 3.

At this point the quantity surveyor can create a Pre-tender estimate which predicts that the final average tender return will be.

Pricing documents

Once the Client has given approval, the Architect can complete and print all of their drawings and specification and the Quantity surveyor can complete their pricing document.

This pricing document will be one of the following:

• Bills of quantities
• Quantified schedule of works
• Quantified work schedules

This pricing document is then used to tender the project to several suitable builders and this pricing document can be used to analyse the tender returns and to make an informed decision about which builder offers the best overall value.

Post tender estimate

Once the tenders are returned the quantity surveyor can produce a Post tender estimate which is essentially the original cost plan updated to include reference to the actual tender returns.

This post tender estimate should form the basis for the first post contract cost report to the Client.

This contract cost report can be updated on a monthly basis throughout the contract and will form the baseline cost budget that can be referenced to as the project proceeds.