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The Challenge of Cost Estimating & Bringing a Project in On Budget

One of the greatest challenges of developing a project or remodeling/expanding an existing one is to:

• first, accurately estimate the project's cost and create a realistic budget, and
• then to bring the project in on budget.

Many a project gets into serious trouble when, for whatever reason, the project can't be developed within the budget. Usually, by the time the problem is discovered, it's too late to increase the budget, as financing has already been secured. So to keep the project within budget, critical aspects end up being compromised, such as the theming, finishes, and quality of the materials. Or certain attractions are eliminated, so the project never performs as originally planned and projections are never achieved. In fact, such last-minute deletions and changes can seriously threaten a project's very long-term survival.

Many cost overruns are attributable to construction issues. Sometimes, there's an attempt to avoid construction cost overruns through what is know as value engineering. Value engineering is a process that predominately takes place in the early and mid-stage design phases when structural and mechanical systems and finish details and specifications are being decided. Value engineering is the process of finding the best way to build (design) the project to accomplish the task and to design goals for the least possible cost. Cost does not only include original construction costs, but also what is known as life cycle costs — the entire cost of the component over the life of the project, including construction, maintenance and operating costs. Unfortunately, budgets are often established before value engineering can take place, so by the time problems are discovered that will put the project over budget, it is too late to turn back the clock and reexamine many of the systems and materials. So instead, the process amounts to engineering the value out of the project to cut costs. This is not value engineering.

This reoccurring problem is often caused by the nature of the design process. Design proceeds from general to specific and from conceptual to detailed. Accordingly, there is limited ability to accurately predict construction costs at the onset when initial project planning takes place and accurate costs are needed as part of the business plan to secure financing.

Design goes through four basic stages of development:

• Conceptual
• Schematic design
• Design development
• Construction documents and specifications

Each stage encompasses greater detail and requires more accurate information than the phase that came before.

Most project developers try to minimize their upfront financial exposure on a project until full financing is in place, so they want to spend little (if anything) on actual design when developing their business plan. Often, they prepare a conceptual budget based more on what they think the project should cost than what it really will cost. They often estimate construction costs without any specific plans by using square-foot estimates and guessing what size will be required. Square-foot estimates almost consistently guarantee inaccurate cost estimates, as each and every project has unique characteristics that generalized square-foot costs can't reflect.

Cost overruns are also caused by the traditional design-bid-build process. First the project is designed, and then a contractor is selected by either competitive bid or negotiation to build the project. This process precludes value engineering until the project is already designed. So by the time the bid comes in over budget, the only way to reduce costs is to make major compromises in quality or components.

An alternative to the design-bid-build process is design-build, where a builder enters into a contract before the project is designed and guarantees to build the project for a fixed price. The builder then controls the design of the project. The problem with this process for entertainment projects is that few builders are familiar with the many complexities of a quality entertainment facility. Therefore, their original contract scope of work fails to reflect all the true design requirements. As a result, either an inferior project is built, at least from the perspectives of the guest experience, operations or maintenance, or the owner must pay the contractor extras, which will mean cost overruns.

Our company has developed a process called producer-directed concurrent engineering, which addresses these problems for entertainment projects. As producers, we oversee the process. First, to come up with a realistic construction cost estimate, we develop a schematic design and work with a general contractor and subcontractors familiar with entertainment projects. This becomes the construction budget. The general contractor and subcontractors are then an integral part of the design team along with the architect, engineers and other design professionals. Unlike the traditional design-bid-build process that is sequential, where the input of the general contractor and subcontractors doesn't occur until the design is completed, their involvement and input is concurrent in our producer-directed concurrent engineering process.

Likewise, all the designers work concurrently in our process, unlike the traditional design process, where the architect first designs, and then the design is passed along to other design professionals, limiting their ability to influence design decisions already made that might improve quality or reduce cost. In a sense, everyone jumps into the sandbox at once. The general contractor and subcontractors give valuable value engineering input throughout the entire design process, and they re-estimate costs at each design stage to assure the project stays on budget. As producers, we oversee the design process to assure it is a concurrent team process, so neither the architect and other design professionals nor the general contractor totally controls the design.

For additional discussion on budgets and concurrent design, see:

• Design and Development, Creating a Profitable FEC
  
• Making the Most of Your Budget

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