Cost Plans – why are they needed?
As a developer, you have criteria that inform what you want your project to deliver. These are called Employer’s requirements and outline the performance specification, which is used to inform the supply chain that any design or product must deliver on the stated outcomes.
If you engage with a designer, they may provide different options for your consideration that they believe meet your requirements. To determine which of these options provides the best value and fits within your budget, you’ll need to have cost plans prepared on your behalf.
Once you have selected your preferred option you can instruct your designer to progress the design, usually to a preliminary type status with enough details to progress to the planning stage. You’ll want updates on the cost plan to check you’re still on course to realise the benefits and the project is still within budget. As the scheme progresses and you place orders with Contractors to deliver the works, your risk profile reduces, costs become more secure and you can continue to update the cost plan up until the final account stage.
To put the above into a more formal context, let’s reference the RICS New Rules of Measurement Part 3: Measurement Rules for Cost Planning. These Rules describe the cost planning stages and how they align with the RIBA Plan of Work and the OGC Gateway Process i.e. cost plan stages for RIBA:
- RIBA Work Stage C: Concept
- RIBA Work Stage D: Design Development
- RIBA Work Stage E: Technical Design
- RIBA Work Stage F: Production Information
The other uses for a cost plan are:
- It can be used to identify, assess and determine value-engineering opportunities
- Once the design has progressed to a preliminary status, approximate quantities can be taken to assist with tendering on a design and build project or to inform better cost appraisals
- They can be used to benchmark or inform tenderer’s returns when used as a contract sum analysis comparison
A cost plan should not be considered as a cost estimate as these are used purely to predict the costs of construction. A cost plan can be used to determine the benefit cost ratio of a project by analysing the estimated costs during both the pre and post construction phases of a project. To maintain its usefulness, a cost plan needs to be managed and updated throughout a project’s lifecycle in the same way that other documents are updated as the scheme progresses.
What information do you need to put a cost plan together?
If you are starting out in putting cost plans together, you will need to appreciate the differences between the design at the concept stage compared to the design development and technical design. There is not a one size fits all approach to each project. It is the skill of the cost planner to use the information available to make the best and most appropriate choices to ensure the best possible cost plan.
At the concept stage, you might be putting a cost plan together on an overall m2 rate for a type of building to the desired level of finish, plus the usual on cost in terms of preliminaries and allowances for risk. However, when the design progresses, you will be able to take approximate quantities and, for detailed design, you will be able to provide more accurate quantities and reduce the uncertainties.
Apart from the quantities, what else do you need to consider?
The RICS NRM2 refers to the content of cost plan preparation as the application of unit rates to measured quantities in order to generate the base cost of building works. It also refers to the method of dealing with Contactors preliminaries, main Contractors overheads and profits, design fees, other development project costs such as lands costs and agents fee etc plus risk allowances, inflation, and capital allowances. Notwithstanding these points you will also need to consider:
• What sort of environment are you planning to construct within? For example, green or brown field site?
• Is the project being constructed as part of a joint venture property development? This could affect presentation and format
• How have you taken account of the complexity of the project? For example, you have applied a rate p/m2 but what constraints are you delivering within and how do you plan to deal with these?
• Do you have a planned start of works date?
• Is there a date the works must be completed by?
• Is there a specific handover regime?
• Have you made allowance for any project specific contingencies?
Is there more than one way to value the works?
For the initial concept stage of the design process, where the benefit of a detailed design is not available, producing a cost plan will be based on assumptions, such as the size of the building, in order for you to apply a rate p/m2 for the floor area for example or by a functional unit method. These assumptions can be drawn from the Employer’s requirements (ER’s). For example, if the ER’s say the requirement is for a hotel that will have 100 bedrooms, you will be able to estimate the footprint of the building to work out the gross internal floor area. Once you have this you then need to add on lands costs p/m2 plus percentage additions for variable costs as described in NRM.
Once the design is developed you will be able to prepare an approximate quantities cost plan, which is a development of your concept stage cost plan. If the concept stage cost plan is at a fairly high level with assumptions, your preliminary of developed design cost plan will be a more accurate representation of how the costs are distributed as you can prepare an approximate bill of quantities. It is at this stage that you start to consider value engineering or spend profile projections.
For the technical design stage, you work with a greater level of detail as you can work with a detailed bill of quantities or contract sum from a contractor, plus you will have more certainty of the variable costs.
What are the variables?
After producing your cost plan for the physical building works, dependent on what stage the development is at, you will need to consider and make allowance for a range of variables from capturing, assessing, and producing a risk and opportunities register. You will need to add allowances for inflation based on the projected increase or decrease, which is typically profiled to the point of construction but can go beyond. This can change once you are in contract with a Contractor as they will take over the inflationary risk for design and construction at this point.
You’ll also need to consider fees, such as legal fees in reviewing documents and negotiations with stakeholders, or planning application fees and general consultant’s fees for ad-hoc advice and support where not provided by others.
For time bound variables, consider what allowance should be made for site establishment costs and then general running costs or Contractor’s Preliminaries. There may be funding conditions that dictate at which points of the build funding will be released and your cost plan should clearly present them.
You only have a very high-level design or outline specification – does this matter?
There are many ways to make an assessment for a cost plan and these are to use a functional unit which is a method of measurement whereby you use a rate per house or per bed space. For example, if you are working on a retail development, a rate per m2 can used and you then multiply this by unit to calculate your base cost.
Another way is to simply use a gross internal and external floor area, which could be calculated by assuming dimensions from your unit specification. For example, take the number of units, and then assume a dimension for each unit, which draws up your gross internal floor area. Following this you can calculate the build cost by using a rate per m2 that allows for the total building cost less main contractors prelims, overheads and profit etc. that you will need to add on.
Accounting for uncertainties
Risk allowances should be made at separate stages and by different parties, albeit they should all be captured on a project risk register. These stages are typically design development, detailed design, and construction. The risks should be captured and assigned by employer or contractor.
Risks should be assessed after the results of a formal risk analysis, but if you are at the earliest stage of setting your cost plan, it is not uncommon to use standard percentages in the order of between 15% to 30% which would decrease as the cost plans mature and the unknowns become known.
The Contractor will be take on inflationary risk from the detailed design stage, assuming you are intending to use a design and build form of contract. However, before this design stage and at early cost planning, you will need to make allowance. This is usually done by establishing the base year of your cost plan, then adding a percentage uplift which is projected and compounded year on year up until the estimated point of works starting on site or even to the estimated point of completion.
Do you need to establish a programme?
In accordance with NRM2, you will need to give consideration for time related main contractor preliminaries as a sum per week. Dependent on what stage you are preparing, a cost plan will dictate how you can value these, but add on percentage to the functional unit rate is usually sufficient and in the order of between 15% to 25%.
You should assess preliminaries as a rate per week in more developed cost plans. This means you will need to establish a programme or at least some high level key dates such as:
- Design duration
- Construction start date and duration
- Completion date
- Handover date to the occupier
Your programme will assist in calculating inflation plus, once your cost plan is complete, you will be able to assign a value against each component, which may be a condition precedent for a development funder.
What about life cycle costs? Should you take these into account?
Whole life cost is defined in NRM3 as:
“all significant and relevant initial and future costs and benefits of a building facility or an asset throughout its cycle while fulfilling the performance requirements”
Depending on the brief from the Employer, you may need to consider the whole life costs of the development.
Whole life costings differ from the standard cost plan, which typically accounts for the costs to completion and handover. They include future costs such as:
- Operating costs
- In some cases, dismantling and disposal over the life cycle of the asset.
Once the whole life costs are established, these are used to inform the viability of the project including the overall attractiveness to the development funder.
What tools are available to help me?
The RICS NRM2 forms a good guide as to the structure of cost plans and at what stage they should be prepared. In terms of pricing index, the Building Cost Information Service or BCIS provide many pricing books dependent on the nature and value of the works you are planning.
Conclusion and take away thoughts
It is straightforward to put together a cost plan at the stages recommended by RIBA, OGC or the RICS if you follow the process laid down in the method of measurement for cost plans. However, what the cost plan informs, and its general use, is important to note.
In the case of Riva Properties Ltd & Ors v Foster + Partners Ltd (2017), the TCC found that consultants Foster & Partners provided negligent advice in suggesting a cost plan could be value engineered by up to £100m, even after the planning application was made and they were subsequently held liable for paying the Client £3.6m of their costs spent in developing the scheme.
The advice here is that if the cost plan does not fit within the budget, start looking for solutions at the appropriate stage of planning and design.
About Dean Suttling
A member of the Royal Institution of Chartered Surveyors, Dean has twenty years of experience in commercial management and quantity surveying, undertaking roles for contractors, clients, and consultants.