Construction Cost

Management

In the last decade, following the Latham and Egan reports, there have been many significant
changes in the role of the construction cost manager. Keith Potts examines the key issues and
best practice in the cost management of construction projects under traditional contracts and
new methodologies. All stages within the life cycle of a project are considered from pre-contract
to tendering and post-contract.
Worked examples, legal cases and over 65 project case studies are used to illustrate the
practical application of the theory, where appropriate. Extensive references are captured,
including the UK governments Constructing Excellence programme and the National Audit
Reports, in order to further develop an understanding of the subject. Reference is made to major
projects such as the Scottish Parliament Building, Wembley Stadium and BAAs Heathrow
Terminal 5.
Aimed at students of Surveying and Construction Management programmes, this book
uniquely embraces cost management in both the building and civil engineering sectors in the
UK and overseas and should thus prove useful to practitioners. Seminar questions are included
at the end of each chapter with additional links to over 100 project case studies in order to
reinforce the learning experience.
Keith Potts is Senior Lecturer in the School of Engineering and the Built Environment at the
University of Wolverhampton. He is a RICS external examiner in Quantity Surveying, and Award
Leader of the RICS-accredited MSc in Construction Project Management.

Contents

Preface

xiii

Part I Introduction
1 Introduction and overview
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9

2.10
2.11
2.12

Setting the scene 3

Construction overview 3
Influential reports 5
Recommendations from professional bodies 6
Learning from case studies 7
Learning from project failures 10
Relevant observation 11
Conclusion 11
Questions 12
Bibliography 12

2 Reports and recommendations

2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9

Introduction 14
The Latham report, Constructing the Team (1994) 15
Levene Efficiency Scrutiny (1995) 17
Construction Procurement Guidance, HM Treasury (1996) 17
Construction Industry Board (CIB) working groups (19961997) 19
The Egan report Rethinking Construction (1998) 20
Modernising Construction, National Audit Office (2001) 22
The second Egan report, Accelerating Change (2002) 23
Achieving Excellence in Construction Procurement Guides, Office of
Government Commerce (2003) 24
Improving Public Services through Better Construction, National
Audit Office (2005) 24
Conclusion 25
Questions 25
Bibliography 26

14

viii

Contents

Part II Management of the pre-contract stage

3 Selecting the consultants and contractors
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8

59

Introduction 59
Structure of BOT projects 60
Case study: Nottingham Express Transit (NET) Light Rail 60
Factors leading to success on BOT projects 62
Risks and securities 62
Case study: Sydney SuperDome, Australia 63
The Private Finance Initiative (PFI) 64
The role of the cost consultant in PFI/PPP projects 69
Case study: Stoke-on-Trent Schools, UK 70
Conclusion 72
Questions 72
Bibliography 73

6 Contractors estimating and tendering

6.1
6.2
6.3
6.4
6.5
6.6
6.7

46

Introduction 46
Cost estimating on engineering, manufacturing and process industries 47
Cost estimating on civil engineering projects 49
Cost estimating on building projects 52
General comments 57
Action after receipt of tenders 57
Conclusion 57
Questions 58
Bibliography 58

5 Cost management on PFI projects

5.1
5.2
5.3
5.4
5.5
5.6
5.7
5.8
5.9
5.10
5.11

29

Introduction 29
Selecting consultants 30
Selecting contractors by value 34
Construction Industry Research and Information Association
(CIRIA) Guide Selecting Contractors by Value 39
Two-stage tendering 41
FIDIC tendering procedures 41
Conclusion 44
Questions 44
Bibliography 45

4 Pre-contract cost management

4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8

27

Introduction 75
Stage 1 decision to tender 77
Stage 2 determining the basis of the tender 77
Stage 3 preparation of cost estimate 79
Stage 4 commercial appreciation 84
Stage 5 conversion of estimate to tender 85
Stage 6 submission of tender 86

75

Contents
6.8
6.9

Conclusion 86
Questions 86
Bibliography 87

Part III Key tools and techniques

7 Value management
7.1
7.2
7.3
7.4
7.5
7.6
7.7
7.8
7.9

105

122

Introduction 122
Understanding the relevance of whole-life costing (WLC) 123
The basic steps in whole-life costing (WLC) 123
Money, time and investment 125
Calculations 127
Problems with assessing whole-life costs 129
Whole-life value (WLV) 129
Conclusion 130
Questions 130
Bibliography 131

Part IV Procurement strategies

10 Organizational methods (part A)
10.1
10.2

91

Introduction 105
Risk identification 106
Risk analysis techniques 108
Risk register 114
Risk response 114
Strategic risk management 116
Case studies 118
Conclusion 119
Questions 120
Bibliography 120

9 Whole-life costing
9.1
9.2
9.3
9.4
9.5
9.6
9.7
9.8
9.9

89

Introduction 91
What is value management? 91
Value planning (VP) 93
Metropolis Uniteds new football stadium 94
Value engineering (VE) 97
Value reviewing (VR) 98
Case studies 99
Conclusion 103
Questions 103
Bibliography 103

8 Risk management (RM)

8.1
8.2
8.3
8.4
8.5
8.6
8.7
8.8
8.9

ix

Introduction 135
Traditional method 137

133
135

Contents
10.3
10.4
10.5
10.6
10.7
10.8
10.9

Design and build 140

Turnkey 146
Joint ventures 147
Consortium 149
Partnering 149
Conclusion 155
Questions 155
Bibliography 155

11 Organizational methods (part B)

11.1
11.2
11.3
11.4
11.5
11.6
11.7
11.8
11.9
11.10
11.11
11.12
11.13
11.14
11.15

Introduction: management methods 157

Management contracting 158
Construction management 161
Management contracting or construction management? 165
Reflections on the Scottish Parliament building 165
Design and manage 167
EC procurement rules 168
Achieving Excellence in Construction 168
The NHS Procure 21 guidelines 170
Highways Agency overlying principles for future procurement 171
The 2012 London Olympics 172
Selecting the procurement route 173
Achieving Excellence in Construction methodology 174
Conclusion 174
Questions 176
Bibliography 176

12 Payment systems and contract administration

12.1
12.2
12.3
12.4
12.5
12.6
12.7
12.8
12.9
12.10
12.11

178

Introduction 178
Price-based, lump-sum plan and specification 179
Price-based, bills of quantities (BofQ) 180
Operational bills 183
Price-based, method-related bills 184
Price-based bills of quantities (BofQ) with milestone payments 184
Price-based activity schedules 186
Cost-based, cost-reimbursement contracts 188
Cost-based, target-cost contracts 189
Conclusion 192
Questions 193
Bibliography 193

Part V Management of the post-contract stage

13 Contractors cost-control and monitoring procedures
13.1
13.2
13.3
13.4

157

Introduction 197
Developing a cost-control system 198
Method 1: cost-value reconciliation (CVR) 199
Method 2: contract variance unit costing 203

195
197

Contents
13.5
13.6
13.7

Method 3: earned value analysis 206

Conclusion 207
Question 209
Bibliography 209

14 Change management valuing variations

14.1
14.2
14.3
14.4
14.5
14.6
14.7
14.8
14.9

227

Introduction 227
Terms in contract conditions 228
Legal requirements of claims submission 229
Contractors programme 231
Concurrent delays 231
Proving the delay 233
Disruption 234
Progress records 234
Claims presentation 235
Quantifying the claim 236
Conclusion 240
Some legal cases 240
Questions 242
Bibliography 243

Part VI Contracts and case study

16 The NEC Engineering and Construction Contract
16.1
16.2
16.3
16.4
16.5
16.6
16.7
16.8

211

Introduction 211
Contractual requirements ICE Conditions of Contract, 7th edition,
January 2003 212
Contractual requirements JCT Standard Building Contract with Quantities
(SBC/Q 2005 edition) 213
Contractual requirements The NEC Engineering and Construction
Contract, 3rd edition 214
Fixing the rate 215
Quantum meruit claims 219
Some other relevant legal cases (reported in date order) 221
Conclusion 225
Questions 225
Bibliography 226

15 Claims management
15.1
15.2
15.3
15.4
15.5
15.6
15.7
15.8
15.9
15.10
15.11
15.12
15.13

xi

Introduction 247
The NEC family of contracts 247
Objectives of the NEC 248
Design principles 250
Core clauses 252
Secondary options 254
ECC tender documents 255
Conclusion 256

245
247

xii

Contents
16.9

Question 257
Bibliography 257

17 FIDIC standard forms of international construction contract

17.1
17.2
17.3
17.4
17.5
17.6
17.7
17.8
17.9
17.10
17.11
17.12
17.13
17.14

Introduction 258
The new forms 258
Balance of risk 260
Structure of the new Red Book 260
The employer (clause 2) 261
The engineer (clause 3) 262
The contractor (clause 4) 263
Commencement, delays and suspension (clause 8) 265
Measurement and evaluation (clause 12) 269
Variations and adjustments (clause 13) 271
Contract price and payments (clause 14) 275
Claims, dispute and arbitration (clause 20) 278
Conclusion 278
Questions 279
Acknowledgements 279
Bibliography 279

18 Case study: Heathrow Terminal 5

18.1
18.2
18.3
18.4
18.5
18.6
18.7
18.8
18.9
18.10
18.11

258

281

Introduction 281
Project management philosophy 282
T5 Agreement 283
The approval process 285
Controlling the time, cost and quality 286
Logistics 287
The 3D project model 288
The use of the NEC 288
Role of the cost consultants 289
Lessons learned 290
Conclusion 291
Bibliography 292

Table of cases
Index

293
295