Construction Cost Management: Learning from case studies

1 Construction CostManagementIn the last decade, following the Latham and Egan reports, there have been many significantchanges in the role of the Construction cost manager. Keith Potts examines the key issues andbest practice in the cost management of Construction projects under traditional contracts andnew methodologies. All stages within the life cycle of a project are considered from pre-contractto tendering and examples, legal cases and over 65 project case studies are used to illustrate thepractical application of the theory, where appropriate. Extensive references are captured,including the UK government s Constructing Excellence programme and the National AuditReports, in order to further develop an understanding of the subject. Reference is made to majorprojects such as the Scottish Parliament Building, Wembley Stadium and BAA s HeathrowTerminal at students of Surveying and Construction management programmes, this bookuniquely embraces cost management in both the building and civil engineering sectors in theUK and overseas and should thus prove useful to practitioners.

2 Seminar questions are includedat the end of each chapter with additional links to over 100 project case studies in order toreinforce the Learning Pottsis Senior Lecturer in the School of Engineering and the Built Environment at theUniversity of Wolverhampton. He is a RICS external examiner in Quantity Surveying, and AwardLeader of the RICS-accredited MSc in Construction Project available from Taylor & FrancisConstruction EconomicsDanny MyersHb: ISBN 9780415286138Pb: ISBN 9780415286398 Principles of Project and Infrastructure FinanceWillie TanHb: ISBN 9780415415767Pb: ISBN 9780415415774 Construction Project ManagementPeter FewingsHb: ISBN 9780415359054Pb: ISBN 9780415359061 New Generation Whole-Life CostingIan Ellingham and William FawcettHb: ISBN 9780415346573Pb: ISBN 9780415346580 Information and ordering detailsFor price availability and ordering visit our website our books are available from all good CostManagementLearning from case studiesKeith PottsFirst published 2008by Taylor & Francis2 Park Square, Milton Park, Abingdon, Oxon OX14 4 RNSimultaneously published in the USA and Canadaby Taylor & Francis270 Madison Ave, New York, NY 10016 Taylor & Francis is an imprint of the Taylor & Francis Group, an informa business 2008 Keith PottsAll rights reserved.

3 No part of this book may be reprinted orreproduced or utilised in any form or by any electronic,mechanical, or other means, now known or hereafterinvented, including photocopying and recording, or in anyinformation storage or retrieval system, without permission inwriting from the publisher makes no representation, express or implied, with regardto the accuracy of the information contained in this book and cannotaccept any legal responsibility or liability for any efforts or omissionsthat may be Library Cataloguing in Publication DataA catalogue record for this book is available from the British LibraryLibrary of Congress Cataloging in Publication DataPotts, Keith cost management : Learning from case studies / Keith bibliographical references and Construction industry Construction industry cost control. I. 1 dc222007032917 ISBN10: 0 415 44286 9 (hbk)ISBN10: 0 415 44287 7 (pbk)ISBN10: 0 203 93301 X (ebk)ISBN13: 978 0 415 44286 2 (hbk)ISBN13: 978 0 415 44287 9 (pbk)ISBN13.

4 978 0 203 93301 5 (ebk) To purchase your own copy of this or any of Taylor & Francis or Routledge scollection of thousands of eBooks please go to This edition published in the Taylor & Francis e-Library, 0-203-93301-X Master e-book ISBNThis book is dedicated to the memory of Francis Leon Potts,who first encouraged me to go into quantity surveying, and tothe love and friendship of Lesley, Ian, Gemma and I Introduction11 Introduction and the scene overview reports from professional bodies from case studies from project failures observation 12 Bibliography 122 Reports and Latham report, Constructing the Team(1994) Efficiency Scrutiny (1995) Procurement Guidance, HM Treasury (1996) Industry Board (CIB) working groups (1996 1997) Egan report Rethinking Construction (1998) Construction , National Audit Office (2001) second Egan report, Accelerating Change(2002) Excellence in Construction Procurement Guides, Office ofGovernment Commerce (2003) Public Services through Better Construction , NationalAudit Office (2005) 25 Bibliography 26 Part II management of the pre- contract stage273 Selecting the consultants and consultants contractors by value Industry Research and Information Association (CIRIA) Guide Selecting Contractors by tendering tendering procedures 44 Bibliography 454 Pre- contract cost estimating on engineering, manufacturing and process industries estimating on civil engineering projects estimating on building projects comments after receipt of tenders 58 Bibliography 585 cost management on PFI of BOT projects study: Nottingham Express Transit (NET) Light Rail leading to success on BOT projects and securities study: Sydney SuperDome, Australia Private Finance Initiative (PFI) role of the cost consultant in PFI/PPP projects study.

5 Stoke-on-Trent Schools, UK 72 Bibliography 736 Contractor s estimating and 1 decision to tender 2 determining the basis of the tender 3 preparation of cost estimate 4 commercial appreciation 5 conversion of estimate to tender 6 submission of tender 86 Bibliography 87 Part III Key tools and techniques897 Value is value management ? planning (VP) United s new football stadium engineering (VE) reviewing (VR) studies 103 Bibliography 1038 Risk management (RM) identification analysis techniques register response risk management studies 120 Bibliography 1209 Whole-life the relevance of whole-life costing (WLC) basic steps in whole-life costing (WLC) , time and investment with assessing whole-life costs value (WLV) 130 Bibliography 131 Part IV Procurement strategies13310 Organizational methods (part A) method and build ventures 155 Bibliography 15511 Organizational methods (part B) : management methods contracting management contracting or Construction management ?

6 On the Scottish Parliament building and manage procurement rules Excellence in Construction NHS Procure 21 guidelines Highways Agency overlying principles for future procurement The 2012 London Olympics Selecting the procurement route Achieving Excellence in Construction methodology Conclusion Questions 176 Bibliography 17612 Payment systems and contract , lump-sum plan and specification , bills of quantities (BofQ) bills , method-related bills bills of quantities (BofQ) with milestone payments activity schedules , cost -reimbursement contracts , target- cost contracts Conclusion Questions 193 Bibliography 193 Part V management of the post- contract stage19513 Contractors cost -control and monitoring a cost -control system 1: cost -value reconciliation (CVR) 2: contract variance unit costing 3: earned value analysis 209 Bibliography 20914 Change management valuing requirements ICE Conditions of contract , 7th edition,January 2003 requirements JCT Standard Building contract with quantities (SBC/Q 2005 edition) requirements The NEC Engineering and ConstructionContract, 3rd edition the rate meruitclaims other relevant legal cases (reported in date order)

7 225 Bibliography 22615 Claims in contract conditions requirements of claims submission s programme delays the delay records presentation Quantifying the claim Conclusion Some legal cases Questions 242 Bibliography 243 Part VI Contracts and case study24516 The NEC Engineering and Construction NEC family of contracts of the NEC principles clauses options tender documents 257 Bibliography 25717 FIDIC standard forms of international Construction new forms of risk of the new Red employer (clause 2) engineer (clause 3) contractor (clause 4) , delays and suspension (clause 8) and evaluation (clause 12) Variations and adjustments (clause 13) contract price and payments (clause 14) Claims, dispute and arbitration (clause 20) Conclusion Questions 279 Acknowledgements 279 Bibliography 27918 case study: Heathrow Terminal management philosophy Agreement approval process the time, cost and quality 3D project model use of the NEC of the cost consultants Lessons learned Conclusion 291 Bibliography 292 Table of cases293 Index295xiiContentsPrefaceMy first text book Major Construction Works: Contractual and Financial management (Longman) (1995) was based on documentation assembled during 1993 and 1994; this nowseems like a prehistoric era before the Latham (1994) and Egan (1998) reports!

8 In that book, I attempted to identify the key issues in the successful contractual and financialmanagement on major projects. It was based on my experience as a senior quantity surveyor, atseparate times employed by both contractor and client, on the Hong Kong Mass Transit Railway at the time one of the largest Construction projects in the world. In contrast to the norm at thattime within the UK, the massive Hong Kong project despite major difficulties was completedon time and within budget. The lessons to be learned from this project were identified in thecase study in the last chapter of the book. It was clear from this experience that any projectcould be completed on time and within budget providing the appropriate procurement systems,planning and control methods, contracts and financial procedures were in place crucially withexperienced, motivated people to implement a decade later, the world seems very different, yet the same fundamentals apply clients wish to obtain their project within budget and within time and to the necessary relentless growth of the World Wide Web (www) meant that all could now easily accessa vast array of important information.

9 The problem for students, however, was in identifyingwhich information was significant and which was this new text, I have attempted to embrace the recommendations of the key reports andgovernment bodies including the National Audit Office and the Office of GovernmentCommerce. The book includes the tools and techniques required under the newpartnering/alliancing philosophies as well as including chapters on valuing variations and claimsbased on the traditional procurement approach. Observations in the book are reinforcedthroughout with detailed analysis of over 60 project case studies with additional links to over100 case studies . Many of the project case studies are taken from the Buildingmagazine or theNational Audit Officereports to whom the author is most grateful for permission to chapter is included on the NEC ECC contract , which has been the standard contract in thecivil engineering and infrastructure sectors for some time and is increasingly chosen by publicclients in the building sector.

10 Its choice by the London 2012 Olympic Development Authorityreinforces its status. A chapter on the new FIDIC contract is included for those working on majorprojects outside the UK. Uniquely, the new textbook embraces both the building and civilengineering sectors and should be of interest to both undergraduate and postgraduate studentsas well as significant case study on the Heathrow Terminal 5 has been included. It is important thatthe lessons learned on this pioneering project in lean- Construction are disseminated andunderstood by the past two years I have received useful information from many senior quantitysurveyors and commercial managers representing both consultants, public and private clientsand contractors. These together with comments and observations received from undergraduateand postgraduate students at the University of Wolverhampton have deeply enriched the , I wish to thank fellow colleagues Rod Gameson, Chris Williams and particularly PaulineCorbett for their valued help in passing learned comments on the draft chapters.