January 27, 2014
Be prepared to not be prepared
Procurement Perspectives | Stephen Bauld
When it comes to refurbishing an old existing building or knocking it down and replacing it with a new one, it's always a tricky subject.
While the costs of building can be estimated, in principal, it is as important to pay attention to the true costs of not proceeding with the project as it is to the costs of undertaking it.
As a general rule, no one likes to commit substantial resources to a project unless there is a clear benefit in doing so. Very often there will be a scramble to find cheaper alternatives than proceeding with the project. Unfortunately, it is not unusual to find that the “cheaper” alternative will prove to be far more expensive. This is especially true with respect to the refurbishment and expansion of an existing building, in contrast to the construction of a new one.
It is common wisdom that the estimated costs of refurbishment are generally only half the actual costs when refurbishment is undertaken because of the wide range of unknown factors when dealing with an existing structure.
In addition to actual out-of-pocket costs, one must also consider lost productivity during the process of refurbishment and the possible perpetuation of built-in inefficiencies that result from the current arrangement or building structure.
Even if re-fabrication may still appear to be a cheaper option, it is essential to make sure that price comparisons are realistic.
Subject to foregoing qualifications, advice with respect to the preparation of cost estimates for a major capital project includes the following: the program cost estimate should be considered the equivalent of the total project purchase price.
It should incorporate reasonable allowances for all costs and the value of any resources needed to complete the work, design, securing of any requirements right-of-way access, mitigate any environmental conditions, communicate and consult with the public, as well as the design and building costs for construction.
It should include the costs of overall project management, specific management plans (e.g., transportation management plans) and allow appropriate reserves for unknowns, as well as costs which will be incurred in utility adjustments, environmental or other compensation, and or road or railway relocation.
After the overall cost estimate is prepared, it should be broken down into year-by-year expenditure, and on a contract-by-contract basis if there are multiple contracts involved.
Key components costs should also be disclosed. An inflation rate per year should be built into multiple-year costing.
Year-of expenditure estimates should reflect a realistic time frame, taking into account project planning and development durations.
Inflation rates may be different for specific cost elements (e.g., construction vs. right-of-way). Potential schedule slippages can also be accounted for in the form of a project contingency. Estimates should be developed using the best information available.
When preparing any estimate, appropriate engineering or other professional advice must be obtained in regard to any assumption made.
After all these considerations have been taken into the final evaluation, it is very possible to have the staff report overturned by a council which chooses to go with the cheaper cost of existing building refurbishment rather than just building a new one.
It has been my personal experience as a municipal purchasing manager, that once you open up an old building to rebuild it, the costs start to mount up no matter how well you thought you had prepared the budget.
I suggest you keep this quote in mind when retrofitting an old existing building, “be prepared to not be prepared.”
When the construction begins on an old building, all the unexpected issues start to mount up in the way of change orders. It can’t be helped and it is often not the fault of the contractor or the municipality.
Stephen Bauld is Canada's leading expert on government procurement. He can be reached at email@example.com.
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