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TitleConstruction Cost Management
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Table of Contents
                            Cover
Title
Copyright
Dedication
Contents
List of figures
List of tables
Preface
Abbreviations
Part I Introduction
	1 Introduction and overview
		1.1 Setting the scene
		1.2 Construction overview
		1.3 Cost management in construction
		1.4 Learning from case studies
		1.5 Overview of chapters
		1.6 Conclusions
		1.7 Questions
		1.8 References/further reading
	2 Reports and recommendations
		2.1 Introduction
		2.2 Post-war reports
		2.3 The Latham Report, Constructing the Team (1994)
		2.4 Levene efficiency scrutiny (1995)
		2.5 Construction Procurement Guidance, HM Treasury (1996)
		2.6 Construction Industry Board (CIB) Working Groups (1996/97)
		2.7 The Egan Report, Rethinking Construction (1998)
		2.8 Modernising Construction, National Audit Office, (2001)
		2.9 The Second Egan Report, Accelerating Change (2002)
		2.10 Achieving Excellence in Construction Procurement Guides, Office of Government Commerce (2003)
		2.11 Improving Public Services through Better Construction, National Audit Office (2005)
		2.12 'Never Waste a Good Crisis', Constructing Excellence (2009)
		2.13 'Government Construction Strategy', The Cabinet Office (2011)
		2.14 'Infrastructure in the New Era', Constructing Excellence and Pinsent Masons LLP (2011)
		2.15 Reflections
		2.16 Questions
		2.17 References/further reading
Part II Management of the pre-contract stage
	3 Selecting the consultants and contractors
		3.1 Introduction
		3.2 Selecting consultants
		3.3 Selecting Contractors by Value
		3.4 CIRIA Guide Selecting contractors by value
		3.5 Single-stage tendering
		3.6 Two-stage tendering
		3.7 FIDIC tendering procedures
		3.8 Conclusions
		3.9 Questions
		3.10 References/further reading
	4 Pre-contract cost management
		4.1 Introduction
		4.2 Cost estimating on engineering, manufacturing and process industry projects
		4.3 Cost estimating on civil engineering projects
		4.4 Cost estimating on building projects
		4.5 General comments
		4.6 Action after receipt of tenders
		4.7 Conclusions
		4.8 Questions
		4.9 References/further reading
	5 Cost management on PFI projects
		5.1 Introduction
		5.2 Structure of BOT projects
		5.3 Case study: Nottingham Express Transit (NET) light rail
		5.4 Factors leading to success on BOT projects
		5.5 Risks and securities
		5.6 Case study: Sydney SuperDome, Australia
		5.7 The Private Finance Initiative
		5.8 Alternative PPP models - local asset-backed vehicles (LABVs)
		5.9 The role of the cost consultant in PFI/PPP projects
		5.10 Case study: Stoke-on-Trent schools, UK
		5.11 Conclusions
		5.12 Questions
		5.13 References/further reading
	6 Contractor's estimating and tendering
		6.1 Introduction
		6.2 Stage 1 - decision to tender
		6.3 Stage 2 - determining the basis of the tender
		6.4 Stage 3 - preparation of cost estimate
		6.5 Stage 4 - commercial appreciation
		6.6 Stage 5 - conversion of estimate to tender
		6.7 Stage 6 - submission of tender
		6.8 Questions
		6.9 References/further reading
Part III Key tools and techniques
	7 Value management
		7.1 Introduction
		7.2 What is value management?
		7.3 Value planning (VP)
		7.4 Metropolis United's new football stadium
		7.5 Value engineering (VE)
		7.6 Value reviewing (VR)
		7.7 Case studies
		7.8 Conclusions
		7.9 Questions
		7.10 References/further reading
	8 Risk management
		8.1 Introduction
		8.2 Risk identification
		8.3 Risk analysis techniques
		8.4 Risk register
		8.5 Risk response
		8.6 Strategic risk management
		8.7 Case studies
		8.8 Conclusions
		8.9 Questions
		8.10 References/further reading
	9 Whole-life costing
		9.1 Introduction
		9.2 Understanding the relevance of WLC
		9.3 The basic steps in WLC
		9.4 Money, time and investment
		9.5 Calculations
		9.6 Problems with assessing whole-life costs
		9.7 Whole-life value
		9.8 Conclusions
		9.9 Questions
		9.10 References/further reading
Part IV Procurement strategies
	10 Organizational methods (Part 1)
		10.1 Introduction
		10.2 Traditional method
		10.3 Design and build
		10.4 Guaranteed maximum price
		10.5 Turnkey
		10.6 Joint ventures
		10.7 Consortium
		10.8 Partnering
		10.9 Alliancing
		10.10 Conclusion
		10.11 Questions
		10.12 References/further reading
	11 Organizational methods (Part 2)
		11.1 Management methods
		11.2 Management contracting
		11.3 Construction management
		11.4 Management contracting or construction management?
		11.5 Reflections on the Scottish Parliament building
		11.6 Design and manage
		11.7 EC procurement rules
		11.8 Achieving Excellence in Construction
		11.9 NHS ProCure 21
		11.10 Highways Agency - overlying principles for future procurement
		11.11 2012 London Olympics
		11.12 Selecting the procurement route
		11.13 Achieving Excellence in Construction methodology
		11.14 Which form of contract to choose?
		11.15 Conclusions
		11.16 Questions
		11.17 References/further reading
	12 Payment systems and contract administration
		12.1 Introduction
		12.2 Price-based - lump sum plan and specification
		12.3 Priced-based - bills of quantities
		12.4 Standard schedule of prices
		12.5 Operational bills
		12.6 Price-based - method-related bills
		12.7 Price-based - BofQ with milestone payments
		12.8 Price-based - activity schedules
		12.9 Cost-based - cost reimbursable contracts
		12.10 Cost-based - target cost contracts
		12.11 Conclusions
		12.12 Questions
		12.13 References/further reading
Part V Management of the post-contract stage
	13 Contractors' cost control and monitoring procedures
		13.1 Introduction
		13.2 The external valuation
		13.3 Budget forecast update report
		13.4 Developing a cost control system
		13.5 Method 1: Cost value Reconciliation (CVR)
		13.6 Method 2: contract variance - unit costing
		13.7 Method 3: earned value analysis
		13.8 Relevant observations on use of cost control systems
		13.9 Conclusions
		13.10 Questions
		13.11 References/further reading
	14 Change management - valuing variations
		14.1 Introduction
		14.2 Managing the change control process
		14.3 Contractual requirements - ICE Conditions of Contract, 7th edition, January 2003
		14.4 Contractual requirements - JCT Standard Building Contract with Quantities (SBC/Q 2011)
		14.5 Contractual requirements - The NEC Engineering and Construction Contract, 3rd edition
		14.6 Fixing the rate (traditional contracts)
		14.7 Quantum meruit claims
		14.8 Some other relevant legal cases (reported in date order)
		14.9 Conclusions
		14.10 Questions
		14.11 References/further reading
	15 Claims management
		15.1 Introduction
		15.2 Terms in contract conditions
		15.3 Legal requirements of claims submission
		15.4 Contractor's programme
		15.5 Concurrent delays
		15.6 Proving the delay
		15.7 Disruption
		15.8 Progress records
		15.9 Claims presentation
		15.10 Quantifying the claim
		15.11 Global claims
		15.12 Conclusions
		15.13 Some legal cases
		15.14 Questions
		15.15 References/further reading
Part VI Contracts and case studies
	16 The NEC Engineering and Construction Contract
		16.1 Introduction
		16.2 The NEC family of contracts
		16.3 Objectives of the NEC
		16.4 Design principles
		16.5 Core clauses
		16.6 Secondary options
		16.7 ECC tender documents
		16.8 Conclusions
		16.9 Questions
		16.10 References/further reading
	17 FIDIC standard forms of international construction contract
		17.1 Introduction
		17.2 The new forms
		17.3 Balance of risk
		17.4 Structure of the new Red Book
		17.5 The employer (Clause 2)
		17.6 The engineer (Clause 3)
		17.7 The contractor (Clause 4)
		17.8 Commencement, delays, and suspension (Clause 8)
		17.9 Measurement and evaluation (Clause 12)
		17.10 Variations and adjustments (Clause 13)
		17.11 Contract price and payments (Clause 14)
		17.12 Claims, dispute and arbitration (Clause 20)
		17.13 Conclusions
		17.14 Questions
		17.15 References/further reading
	18 Case study: Heathrow Terminal 5
		18.1 Introduction
		18.2 Project management philosophy
		18.3 T5 Agreement
		18.4 The approval process
		18.5 Controlling the time, cost and quality
		18.6 Logistics
		18.7 3D Project model
		18.8 The use of the NEC
		18.9 Role of the cost consultants
		18.10 Lessons learned
		18.11 BAA's new procurement strategy
		18.12 Conclusions
		18.13 References/further reading
Index
                        
Document Text Contents
Page 2

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. Ankrah is 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 192

Dornan and Davis (2009) identify that alliancing has shown that it can deliver outstanding
results through a payment structure which rewards service providers commensurately with the
performance of the alliance as a whole.

Bresnen and Marshall (2000) examine the use of incentives in partnerships and alliances
through six construction case studies. Walker et al. (2002) describe a case study based on an
alliance arrangement – the National Museum of Australia. A further alliance case study – BAA’s
Heathrow Terminal 5 – in which the alliance partners coalesced into a virtual company, is included
at the end of this book.

Partnering seems the way forward for major organizations, and substantial benefits are being
realized. At the end of 2004 four groups of companies entered into framework agreements with
Yorkshire Water to undertake improvements to the region’s water and sewerage systems over
a 5-year period; Severn Trent Water have had a similar arrangement in place for several years.
In 2005 The National Grid signed a £1.6 billion deal for gas mains replacement using only four
partners to carry out the work.

The Welsh Water Alliance is a strategic partnering team – formed between Dwr Cymru Welsh
Water, United Utilities (contracted to operate Welsh Water’s assets), six strategic design/
construction partners, two cost managers, a partnering facilitator and a supply chain advisor –
to deliver around 60 per cent of Welsh Water’s capital investment programme during the period
2000–2005. The partners are formed into four alliances. The Convivium Partners’ website
identifies that there are three cornerstones to the Welsh Water Capital Alliance approach:

• “Mutual Goals based on a target cost approach with open book accounting, fixed
management fees and pain/gain share incentives managed by an independent cost manager
within the team, and

Organizational methods (1) 171

Panel 10.10 Case study: Partnering Staffordshire County Council/Birse
Construction Ltd

This is one of the first projects that the author (Potts) came across which made him
appreciate the real significance of the partnering approach.

Staffordshire CC was one of the first clients to implement partnering as an addition
to a contract under the ICE 5th Conditions of Contract on the £10.1 million Tunstall Western
Bypass – Phase II, with a planned construction period of 15 months.

This project had all the ingredients of a problem contract – a canal, a railway crossing,
con taminated ground, underpass under a busy trunk road, tight site and numerous structures.

The bulk earthworks for the scheme presented the greatest difficulties and risks. Because
of the heavy industrial use of the site over the previous century, the whole site was deemed
to be contaminated.

In the event, the engineer and contractor, in conjunction with the Environment Agency,
worked to maximize the amount of earthworks for reuse as acceptable fill. Mark McCappin,
the Resident Engineer, admitted that this one issue could have cost the client an extra £6
million, and resulted in a six months’ overrun, if it had been administered in the usual
adversarial manner.

The project was completed within the 67-week contract period and the final account
settled within the budget.

Source: McCappin (1996)

Page 193

• ‘People and Relationship Development through establishing a common culture with
agreed to values and behaviours based on collaboration and ‘no blame’, and developing
technical skills for process improvement, value engineering and risk management and
behavioral skills for meetings, negotiations and stakeholder management, and

• ‘Continuous Improvement through the elimination of duplication and the establishment
and improvement of common processes across the alliances driven by key performance
indicators and by using the European Foundation for Quality Management Business
Excellence Model.”

172 Organizational methods (1)

Panel 10.11 Case study: Birmingham Construction Partnership

Against the backdrop of Rethinking Construction and Achieving Excellence in Construction
and government reports into improving construction provision and procurement in the UK,
Birmingham City Council founded the two-tier supply chain Birmingham Construction
Partnership (BCP). This arrangement created a unique collaboration of three contractors, Wates
Group, Thomas Vale and GF Tomlinson, which together form the first chain of the supply
chain. The second tier comprises 61 companies from whom equipment and services are sourced.
The supply chain was tasked with delivering every project in the city with a budget over
£100,000 over 5 years from 2004–2009 under a £500 million capital-building programme.

The contractor is involved from the very start, at the planning and costing stage, working
with the customer, the design team, subcontractors and key suppliers on the development,
specification, buildability and delivery of new-build and refurbishment projects.

The contractors organize and manage the supply chain to deliver all projects on time
and on budget across all the Council’s services including education, social care, leisure,
sport and housing.

Latest performance indicators show that, in 2004–2005, the partnership scored above
national industry averages for 2004. Key figures include:

• 92 per cent of projects delivered with zero or minimal defects;
• 61.8 per cent of projects delivered within 5 per cent of target cost (national average

38 per cent);
• 62.3 per cent of projects delivered within 5 per cent of target time (national average

60 per cent);
• 77.8 per cent of projects delivered under partnering prinicples, compared to the

government’s target of 20 per cent.

BCP has been featured on the Constructing Excellence website as ‘the first construction
collaboration of its kind in the UK’. Its work with the council’s Housing Department on
improving council homes was selected as a best-practice case study and can be seen on
the website.

It has also been hailed as an example of best practice in local authority construction
in a landmark report launched by the Local Government Task Force. The report,
Transforming Local Government Construction: The power of framework agreements,
highlights the benefits and efficiencies that councils and contractors can achieve through
partnering and collaboration.

Source: Birmingham City Council website

Page 383

6042 fig18_1 ext.eps


randomness 6, 10–11, 16, 187, 261
reform: construction industry 18, 81, 91, 95–8,

100, 107–08, 111
regulation: government 2, 227; self-regulation

185; see also managerialism
relationships 12–14, 76, 105–06, 112–13, 147–48,

150–52, 227
renewables 65, 123, 125–26
reputation 18–9, 85, 112, 118, 175; see also brand

and image
research and development (R&D) 1, 21, 37, 39, 64,

93, 251–52
research: basic 26, 200; blue sky 155, 193, 199;

applied 26, 80; experimental 26; relevance 36,
137; see also universities

resource-based- view of the firm 99
re-thinking construction 102–03, 107–08
return on investment (ROI) 1, 56, 155, 176, 194
revolution: industrial 30, 88, 132, 176; electronic

26, 88
risk: appetite 46, 141, 206–07; bias 18, 210, 212;

distribution 70, 84, 96, 113, 218;
interdependencies 15, 217; management 161,
204–05, 207–08, 216–18, 223, 236; off
innovation 205, 207–09, 223; perceptions 207,
209, 211, 215–16; society 4, 211; see also
complex systems

robots 119
routines: organizational 32, 113; see also

organization
Royal Commission 75–6, 110, 80, 102–03

scholarships 166
Schumpeter, J. 20–2, 24, 31–3
science 6, 11, 26, 29–30, 132, 134, 99–100
scientific management 132: see also Taylor, F.
s-curve 45, 52
secondments 167
serendipity 5–9, 12, 149
service sector 115, 117
shared-value 59
silos 7, 12, 62, 167, 124, 136, 149, 151, 166–67,

226, 228; see also knowledge
skills: clubs 168; shortages 13, 106, 127; see also

competencies
skunks 164
small-to-medium sized enterprises (SMEs) 37,

235
social entrepreneurship 35; see also

entrepreneurship
social: capital 12, 105–06, 145, 150–51;

engagement 144; identity 142–43, 156, 180,
233; media 13, 35, 120, 147, 164; networks 12,

50, 147, 150–51; network analysis 50, 151,
191, 199; networking 164; systems 20, 50

spaces 33, 163, 166–67, 225, 235; see also work
environments

sphere of influence 207
spill-over effects 21, 58, 63, 81, 208
stakeholder: consultation 12, 144, 209;

empowerment 54, 162, 172–73; management
105, 207; perceptions 207; sphere of influence
207

strategic: management 90–1, 105, 112, 132, 134,
143; myopia 189; planning 93, 105,113, 128,
131, 135

strategy: contemporary 113, 128, 135, 144;
convergence 138; decay 138; emergent 128,
143–44; enlightened 84, 141–42; formal 8, 143,
154, 232; fourth generation 135–37; in
construction 35, 135; informal 143, 149, 154,
164; mission 131; modernist 129, 132, 134,
141, 144; myopia 189; tayloristic 128–29;
traditional 6, 12–14, 128, 131–32, 134–35,
144; vision 93, 114, 128, 131, 165, 193

subcontractors 5, 22, 83–5, 92, 96–7, 238–39,
241–42; see also supply chains

supply chains 12, 191; deeply integrated 85;
integrated 14, 87, 109, 148; see also
subcontractors and integration

supply-push 36, 49; see also innovation
sustainability 36, 107–08, 117, 187
swarms 147
switching costs 112, 139, 141
systems 6, 76, 216–23; adaptive 105; closed 39;

dynamics 218, 223; open 39

tactical management 133; see also strategy
Taylor, F. 132
teams 15, 179, 183, 233; see also groups
technology 7, 68, 119–24, 228–29, 244; emerging

122; energy 15, 123–26, 235; digital 26, 56, 89,
187; information 103, 121, 143, 146–49;
materials 26, 81, 90, 122, 126; mobile 56, 89,
122, 149, 186; nano 123–24; role in innovation
190–92; transportation 124; trends 119

tendering 71, 92
the golden circle 51
think tanks 165
thinking 8, 11, 45, 60, 89–91, 101, 128–30, 132,

134, 182, 184, 187–89; convergent 183, 186;
design 186; divergent 9, 158, 160, 169, 183;
intuitive 187; non-linear 188; radiant 188;
structured 160

time: clock 88, 188; digital 26, 187; famine 89;
organic 88, 94, 113

362 Index

Page 384

6042-fig8_2.eps


training 49, 92, 139, 170–72, 183, 197; see also
human resource development

transaction costs 112, 241
trust 70, 76–7, 160–62, 188, 233
t-shaped people 151

unfreezing 52; see also change
unions 81–2, 110, 206, 242–43
universities 164, 195–99; corporate 171; role in

innovation 82–3, 196–99
urbanization 4, 90, 114, 125

value-chain 42, 100, 133; see also Porter, M.
Venturous Australia 64
vision statement 131; see also strategy

waste 5, 21, 38, 93, 103, 106–08
wicked problems 14
work environment 166–67, 173; see also spaces

Index 363

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