A Busted Budget: What Does It Cost?
By: Andy O’Nan, Beck Technology
Every now and then, a construction project is awarded for the same amount as
the original budget - to the amazement of all involved. Few people today
expect the conceptual budget to be very accurate; in fact, early budgets are
frequently off by ±15-30% or more. What does this cost the owner and is it
A busted budget can be catastrophic to an owner organization, but the costs
vary widely depending on many factors. One universal factor is time. As more
time passes, the more it will cost to get the project back on track. This is
an exponential factor and the costs are not limited to money, but also
include time, scope, quality, and flexibility. When the reality of a busted
budget hits, owners are forced to make changes – most of which are
undesirable. They can “value-engineer” the project or they can change the
budget itself. "Value-engineering” generally refers to a reactionary method
of cost reduction. Ideally, this is finding way to reduce waste without
reducing function, however, in practice it is more commonly a scope/quality
reduction process aimed at reaching a target budget. The cost of value
engineering can be difficult to quantify since it is often a rather
subjective de-valuing of the project. The owner typically ends up with
something less than what was originally expected at the same cost. They may
have to settle for less quality, give up space, design features, or perhaps
even postpone phases of the project into the future. Apart from the obvious
inefficiencies of rework it also creates mistakes. Design changes tend to
have a ripple effect on consultants and engineers who are consequently
pressured to compress schedules to make edits in order to keep on the
original schedule. Often resulting bottlenecks lead to delays which can add
significantly to costs like additional finance expenses, lost owner revenue,
less attractive proformas, among many others.
After value engineering options have run their course, it may become
necessary to modify the budget. Obviously a busted budget can jeopardize the
viability of the project altogether, but it can cause many other impacts
such as owner profits, available capital for other projects, stakeholder
confidence, and the owner’s ability to deliver their products or services.
For some owners, finding out that they are substantially under budget can be
just as harmful as being over. For instance, design contingencies may
unnecessarily tie up capital stunting the owner business or even rendering
the project unfeasible prior to moving past the initial budgeting.
Budgeting problems have been around for so long that they have become
institutionalized, but does that have to be the case? There are several
converging process trends that promise to improve predictability of
outcomes. These include lean principles such as target value design,
set-based design, and the last planner system, all of which have come to the
forefront as integration and BIM technology have become more widely adopted.
Lean in design and construction seems to be gaining steam, particularly in
design-build and integrated project delivery projects.
The target value design (TVD) process turns traditional design and budgeting
upside down. Rather than a budget being a result of the design, with TVD,
the design is the result of the target budget. This process requires a
higher frequency of estimating and analysis. The traditional process
requires estimates at traditional milestones such as concept, schematic, 30%
design development, etc., but the TVD process requires estimates on a much
more regular basis (usually cycles of less than a week). There are several
big advantages to this process model. One is that the design rework is
greatly reduced due to the possible design divergence from the targets being
limited to only a week or two of design effort. More frequent information
feedback loops keep the design on target regarding first cost, lifecycle
cost, LEED® related goals, delivery schedule and other targets. Compare this
to the traditional process where many months of design will occur before
accurate impacts on cost and other targets are analyzed. This
creates frustration and costly rework. It is not uncommon for an owner to be
informed the design is significantly over budget very late in design.
Another advantage of the TVD process is that more informed design decisions
are made because the impacts are known and transparent. More trade-offs can
be understood and optimized, rather than decisions being made on instinct
and then changed as forced by budgetary constraints.
The set-based design process is different to the traditional design process
in that rather than a single concept iterating and growing in detail from
beginning to end, a “set” of different concepts and building systems are
explored, tested, and then systematically eliminated until the final design
emerges. Set-based design together with the last planner system can have a
major impact on flexibility, performance, and predictability.
The last planner system reduces waste by delaying decisions until they
absolutely have to be made in order to deliver on time. This works by
developing the delivery schedule and working it backwards, a process known
as pull planning. Decisions are made as late as possible to still receive
the materials on site when needed, no earlier or later. The primary
advantage to this process is design flexibility, but with set based
processes, it also enables cross system optimization. As an industry,
trade-offs are not thoroughly researched and vetted across disciplines. With
these lean principles, the design space is explored and decisions are made
based on advantages to the overall project whether it is HVAC, structure, or
any other component. In a traditional design process, many decisions are
made prematurely which sets off a chain reaction of other work such as shop
drawing production and even fabrication. When this happens it makes design
changes much more costly if not impossible. Using the last planner system,
you maintain flexibility rather than uncritically accepting pre-existing
ideas and unnecessarily creating constraints.
Lean is centered on preserving value with less work and is derived mostly
from the Toyota Production System, identified as “lean” in the 1990s.
Popularized in the book The Toyota Way published in 2004, it has been
applied to many other industries including design and construction in the
last few years. From a cost budgeting stand point, target value design,
set-based design and the last planner system require detailed budgeting
based on specific criteria in each system.
Lean principles, including target value design, set-based design, and the
last planner system, were deployed by many leading edge design and
construction firms on projects for the first time in 2011 and 2012.
Integration and adoption of BIM technology are important catalysts in the
advancement of these trends. Integration of disciplines such as design,
construction, engineering, and trade specialties is becoming more common in
different forms across the industry. This is evidenced by the development
and growth of integrated project delivery (IPD) as well as some notable
cross discipline mergers and acquisitions such as Balfour Beatty / Parsons
Brinkerhoff and AECOM / Tishman.
Advances in BIM technology are bringing the disciplines closer together and
blur the lines between traditional design and construction. In the days of
traditional drafting, the design process had clear phases based on
progressive levels of detail that were added to the document set over time.
Budgeting at those traditional milestones made more sense then, but waiting
this long between estimates is an obsolete process today. With BIM, the
clear design phases are gone but the technology is capable of speeding the
estimating cycle time and enabling more scientific evaluation of designs.
This means that we are less reliant on human intuition alone and can make
better decisions the first time. BIM estimating processes will have an
increasing impact on building value and cost predictability.
Although building cost isn’t always the most important factor in design and
construction, it’s always a factor. An inaccurate budget can be highly
detrimental in many ways some of which are not easily measured. In today’s
information age, with on-demand access to almost anything on a smart phone,
people expect information in real time. Design and construction is well
behind, but early adopters of the latest technology and processes are
helping owners experience new solution finding missions and a shift is
slowly occurring. Technical challenges, entrenched behaviors, and liability
barriers are being removed all the time and different forms of integration
are becoming a larger part of the landscape. There is little doubt that this
industry shift will cause busted budgets to be an industry rarity instead of
an industry norm.
About the author: Andy O’Nan oversees
Beck Technology’s global
business development efforts. Prior to Beck Technology, Andy’s work in the
concrete formwork industry included estimating, engineering, CAD drafting,
field supervision and business development. Andy’s project experience
includes a wide variety of types across the southwest US including
water/waste water, transportation, commercial, residential, and industrial
projects. At Beck Technology, Andy has lead the deployment of the company’s
flagship BIM technology at over 120 firms including over 20 of the top 50
builders in the US. Joining Beck Technology in 2007, Andy currently directs
the team responsible for all business development, customer support, and
customer training. Andy is a graduate of Texas A&M University's school of
engineering and is a frequent public speaker on AEC technology.