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An Accurate Budget Estimate is the First Line of Defense Against Cost Overruns

Posted: July 5, 2016 | Tradewinds, Estimating

By Rory Woolsey, CEP

On Bell Rock off the coast of Angus, Scotland, sits the world’s oldest surviving lighthouse. This 116-foot-tall granite structure was built by Robert Stevenson. Construction on the project began in 1807, and it was completed and functioning by February 1811, making the construction duration around five years. The cost exceeded the original budget estimate by 60%.

Just another example of a public-funded project exceeding budgets of time and money?

Did I mention that the Bell Rock is a treacherous sea-washed submerged reef, located 15 miles off the coast, and the base of the lighthouse is 12 feet underwater at high tide and four feet above water at low tide? Did I neglect to inform you that, during construction, the rock was hammered with brutal storms five months out of the year and labor shortages were ongoing due to a war with France? Compounding these issues, the granite specified for this project was not native to the area and had to be brought in by wagon at a premium expense.

Context Matters: The engineer’s plans and specifications were well defined for the Bell Rock Lighthouse. The baseline budget was established. The project was seemingly straightforward when viewed from the two-dimensional form of the Architect/Engineer (A/E) plans and specifications. The budgetary estimating lessons learned here are not too different from those that continue to frustrate facility managers today. The accurate estimating of construction goes well beyond the project drawings (things always seem to connect together neatly on drawings) and must include an accounting of the realities of the environment where the project is constructed. The fact is: project context matters!

Most facility renovation projects are not dealing with high tides and treacherous storms. Just the same, facilities budget estimators must account for the challenges (and the resultant costs) of building around site-specific issues such as ongoing operations, aging buildings, environmental issues, matching existing construction, noise limitations, the weather, access and egress to the site, time constraints, unrealistic demands by the client, the availability of labor, and phased construction. Whew! In most facilities, the reality of the context where a project is built has a considerable impact on the budgetary estimate … beyond plans and specifications. To ignore the context scope is to eventually face the angst of project cost overruns.

Busting Budgets: The consternation caused by the busting of a project budget is common in the challenging environments of renovation projects, and Bell Rock was exceptionally challenging. The consequences of overruns are painful in that getting the additional funding required to finish a project is not always an easy task. Explaining overruns is a tough position to be in. The fact is one of the most common causes for overrunning a budget is with the budget itself. If you start a project with a wrong baseline for the cost (or time), then you already set the project for failure. The first line of defense against budgetary overruns is to begin a project with an accurate, realistic budget from which the actual costs will be measured. Poor construction budgeting results in project cost overruns.

Getting Budgets Right: The actual cost of a project is eventually known after a project is completed and all the costs are reconciled. An estimate is a prediction or projection of what that actual cost will be. Therefore, to budget a project accurately, it is necessary, in the estimating process, to build the project before the project is built. In other words, you must predict the resultant cost by building it before you build it. This is great advice for estimating any facilities renovation project. This is why some of the best estimators I have ever worked with are those individuals who come from the field. Knowing construction and the means and methods for executing work in a field environment is very important to the process. An accurate budget estimate is one that captures the realities of the true scope of work of the project. Construction estimation – at its core – is not a cost book or a calculator (they have their roles), but all the parts, pieces, specifications, quality, site conditions, labor, equipment, and materials that make up the scope of work. Show me a poor budgetary estimate and I will show you poorly identified project scope of work.

Capturing Scope: Architects and engineers define scope well in plans and specifications, but for construction estimating, this scope is not complete enough. Successful contractors will tell you that construction scoping for estimating purposes (as with scheduling) goes well beyond the A/E scope, and includes field-specific realities or the context scope.

Beyond the context scope, the estimator needs to account for the means and methods used in the execution of the work. How will the work go together in the environment that the contractor will work in? What equipment and labor power will be used to complete the tasks? The answers to these questions will influence the overall cost of the project. The best estimators will think like a contractor and mentally build the project many times before the project is actually built. The informed budgetary estimator knows construction well, and is able to identify and capture the A/E, context, and execution scope in the process of estimating the projected construction cost of a project.

With limited funds and many facility needs, sometimes Owners will mistakenly stop short in budgeting a job with just the A/E scope of work captured. This is wishful thinking. It is better to accept the actual cost of a project than have to deal with the shock of a “higher than expected” estimate and the headache of cost overruns. As facilities managers and estimators, it is not our job to tell the Owner what they want to hear, but to identify the real cost of the project from the beginning, in the budget estimate. This requires thinking beyond the A/E scope of a project, and capturing, quantifying, and pricing all the real scope of work in the project. Accurate budgeting of our facilities projects is a big step to eliminating project cost overruns. The complete scope of work to be priced is A/E, context, and execution scope.

About the author: Rory Woolsey, CEP has worked in Management and Engineering for the construction industry for 43 years, starting as a construction laborer in Billings, Montana, in 1972.

He has since held positions as a field engineer, project manager, MIS manager, testing laboratory manager, estimator, senior editor, designer, structural engineer, and general contractor. He is currently the President of The Wool-Zee Company, Inc., construction consultants. Rory is currently an Accounts Manager for The Gordian Group, the parent company to RS Means.

Mr. Woolsey has also held positions with some of the leaders in the construction industry, such as Bechtel, H.J. Kaiser Constructors, and the R.S. Means Company, and has worked on projects ranging from heavy, military, industrial, commercial, and residential.

He has given over 8,000 classroom hours of instruction nationally to architects, engineers, contractors, and facility managers on topics of project management, CPM scheduling, construction estimating, facility maintenance, partnering, and leadership. Rory is a Certified Estimating Professional (CEP) through AACE International.