Construction Cost Management Second edition In this updated and expanded second edition, Keith Potts and Nii Ankrah examine key issues in construction cost management across the building and civil engineering sectors, both in the UK and overseas. Best practice from pre-contract to post-contract phases of the project life cycle is illustrated using over 70 case studies, including major projects such as Heathrow Terminal 5, Crossrail and the London 2012 Olympics. More case studies, worked examples, legal cases and current research have been introduced to cover every aspect of the cost manager’s role. Whole-life costing, value management and risk management are also addressed, and self-test questions at the end of each chapter support independent learning. This comprehensive book is essential reading for students on surveying and construction management programmes, as well as built environment practitioners with cost or project management responsibilities. Keith F. Potts is a former Principal Lecturer at the School of Technology, University of Wolverhampton, UK. He was an external examiner in Quantity Surveying and Award Leader of the RICS-accredited MSc in Construction Project Management. Dr Nii A. Ankrahis a Senior Lecturer at the School of Technology, University of Wolverhampton, UK. He lectures in Quantity Surveying, Commercial Management and Construction Project Management both in the UK and overseas. Page Intentionally Left Blank Construction Cost Management Learning from case studies Keith Potts and Nii Ankrah First edition published 2008 by Taylor and Francis This edition published 2013 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon, OX14 4RN Simultaneously published in the USA and Canada by Routledge 711 Third Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2013 Keith Potts and Nii Ankrah The right of Keith Potts and Nii Ankrah to be identified as authors of this work has been asserted by them in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Potts, Keith F. Construction cost management: learning from case studies/Keith Potts and Nii Ankrah. pages cm 1. Construction industry –Costs. 2. Construction industry –Cost control. 3. Construction industry –Costs –Case studies. 4. Construction industry – Cost control –Case studies. I. Ankrah, Nii. II. Title. TA682.26.P68 2013 624.068(cid:2)1 –dc23 2013001416 ISBN13: 978-0-415-62912-6 (hbk) ISBN13: 978-0-415-62913-3 (pbk) ISBN13: 978-0-203-75294-4 (ebk) Typeset in Frutiger Light by Florence Production Ltd, Stoodleigh, Devon, UK This book is dedicated to our wives Lesley and Akosua for their loving support and to the memory of our fathers Leon and Samuel who encouraged an interest in construction. Page Intentionally Left Blank Contents List of figures xiii List of tables xv Preface xvi Abbreviations xvii Part I Introduction 1 Introduction and overview 1 1.1 Setting the scene 1 1.2 Construction overview 1 1.3 Cost management in construction 4 1.4 Learning from case studies 5 1.5 Overview of chapters 7 1.6 Conclusions 9 1.7 Questions 10 1.8 References/further reading 11 2 Reports and recommendations 13 2.1 Introduction 13 2.2 Post-war reports 14 2.3 The Latham Report, Constructing the Team (1994) 15 2.4 Levene efficiency scrutiny (1995) 18 2.5 Construction Procurement Guidance, HM Treasury (1996) 18 2.6 Construction Industry Board (CIB) Working Groups (1996/97) 19 2.7 The Egan Report, Rethinking Construction (1998) 20 2.8 Modernising Construction, National Audit Office, (2001) 23 2.9 The Second Egan Report, Accelerating Change (2002) 24 2.10 Achieving Excellence in Construction Procurement Guides, Office of Government Commerce (2003) 25 2.11 Improving Public Services through Better Construction, National Audit Office (2005) 26 2.12 ‘Never Waste a Good Crisis’, Constructing Excellence (2009) 27 viii Contents 2.13 ‘Government Construction Strategy’, The Cabinet Office (2011) 27 2.14 ‘Infrastructure in the New Era’, Constructing Excellence and Pinsent Masons LLP (2011) 29 2.15 Reflections 29 2.16 Questions 31 2.17 References/further reading 32 Part II Management of the pre-contract stage 3 Selecting the consultants and contractors 34 3.1 Introduction 34 3.2 Selecting consultants 35 3.3 Selecting Contractors by Value 39 3.4 CIRIA Guide Selecting contractors by value 44 3.5 Single-stage tendering 46 3.6 Two-stage tendering 46 3.7 FIDIC tendering procedures 47 3.8 Conclusions 50 3.9 Questions 50 3.10 References/further reading 51 4 Pre-contract cost management 52 4.1 Introduction 52 4.2 Cost estimating on engineering, manufacturing and process industry projects 53 4.3 Cost estimating on civil engineering projects 55 4.4 Cost estimating on building projects 58 4.5 General comments 65 4.6 Action after receipt of tenders 65 4.7 Conclusions 66 4.8 Questions 66 4.9 References/further reading 67 5 Cost management on PFI projects 68 5.1 Introduction 68 5.2 Structure of BOT projects 69 5.3 Case study: Nottingham Express Transit (NET) light rail 69 5.4 Factors leading to success on BOT projects 71 5.5 Risks and securities 72 5.6 Case study: Sydney SuperDome, Australia 73 5.7 The Private Finance Initiative 74 5.8 Alternative PPP models – local asset-backed vehicles (LABVs) 79 5.9 The role of the cost consultant in PFI/PPP projects 80 5.10 Case study: Stoke-on-Trent schools, UK 82 5.11 Conclusions 83 5.12 Questions 84 5.13 References/further reading 85 Contents ix 6 Contractor’s estimating and tendering 87 6.1 Introduction 87 6.2 Stage 1 – decision to tender 88 6.3 Stage 2 – determining the basis of the tender 90 6.4 Stage 3 – preparation of cost estimate 92 6.5 Stage 4 – commercial appreciation 98 6.6 Stage 5 – conversion of estimate to tender 100 6.7 Stage 6 – submission of tender 101 6.8 Questions 101 6.9 References/further reading 102 Part III Key tools and techniques 7 Value management 103 7.1 Introduction 103 7.2 What is value management? 103 7.3 Value planning (VP) 105 7.4 Metropolis United’s new football stadium 106 7.5 Value engineering (VE) 109 7.6 Value reviewing (VR) 110 7.7 Case studies 111 7.8 Conclusions 114 7.9 Questions 115 7.10 References/further reading 115 8 Risk management 117 8.1 Introduction 117 8.2 Risk identification 118 8.3 Risk analysis techniques 121 8.4 Risk register 126 8.5 Risk response 129 8.6 Strategic risk management 131 8.7 Case studies 132 8.8 Conclusions 134 8.9 Questions 135 8.10 References/further reading 135 9 Whole-life costing 137 9.1 Introduction 137 9.2 Understanding the relevance of WLC 138 9.3 The basic steps in WLC 138 9.4 Money, time and investment 140 9.5 Calculations 142 9.6 Problems with assessing whole-life costs 144 9.7 Whole-life value 145 9.8 Conclusions 147 9.9 Questions 147 9.10 References/further reading 148