Discover how to manage cost increases when your project is on the go. Take three "must do" actions and survive unexpected catastrophes.
This is the second instalment of the topic I introduced in the previous Blogpost - focusing on getting to a budget you can afford and getting the most out of your budget. Today we're addressing what happens when costs start to increase once the works have commenced on site.
Just as you always should, you finalise your budget before work commence. You appoint contractors or sub-contractors to carry out some or all of the works and you pull the trigger. Work starts and you're off to the races !!
And then something happens that you weren't expecting ... a discovery perhaps. Let's say the project included replacing the tiles on a kitchen floor. You assumed the floor was concrete and screed and commenced hacking up the tiles. But underneath the tiles, there's a dragon lying in wait. The screed falls to pieces and you realise that the concrete underneath is damp and crumbling. This is a long term problem that the old tiles have kept hidden from view. It's too late to just put the old tiles down again and you’re forced to solve the problem before the works can progress.
Your budget allowed for the removal of the tiles and then supplying and laying new tiles. But there's nothing in there for removing the screed and repairing the concrete slab, potentially including a new damp proof layer and then re-screeding before the new tiles can be laid. That's a job that could cost thousands.
These things happen. They happen more often on older properties and on properties that are in worse condition. They also appear more regularly when you are doing more invasive demolition and alterations. And you should also be looking out for them particularly on specialist installations like electrical, plumbing and drainage, hot water, heating, air conditioning. And, no surprise, problems with those installations are typically more costly to solve. You need to always be prepared for the unexpected.
That brings me to Rule No. 1 : Include a Contingency Sum. A Contingency sum, by definition, is a portion of your budget set aside, unallocated, for unforeseen circumstances. The stuff you don’t know you don’t know. Typically a sensible contingency should run anywhere from 5 to say 15% of the total budget. The higher percentage being recommended for those more complex projects or older properties, I've just mentioned. So, if you were planning to spend a total of $ 50,000 then you might include a contingency of around $ 5,000 which is about 10% of the budget.
Here are a couple of tips about managing your contingency. A contingency sum is really about risk. At the beginning of your project, before works have commenced, the risk is highest. Generally, as the project progresses the risk profile changes and the likelihood of unexpected things, that you have no control over, reduces.
The shifting risk profile can mean that, although you decide to set aside 15% of your budget at the outset, as the project progresses you may feel comfortable reducing that reserve to 10% and even down to 5% and eventually to nothing as the project closes out.
And now, rule number two. Follow the money. You absolutely must track any cost changes from the first moment your project starts on site. This will give you the earliest possible red flag that costs are moving in the wrong direction. At the start, you should be commencing work with a clear and contracted fixed price with your contractors and sub-contractors.
And if there is anything which is still a budget, you must regard that budget as "not to be exceeded". So, when you come to place any order for any item against a budget reserve, it's no good committing to more than the budget. Of course, that doesn't stop you deciding to increase your budget for a must-have item that you know you can afford. That also happens often. But then your budget increases and you place the order in line with the increased budget. Which is not a problem.
Real problems arise when you fail to track shifting costs, place orders without tracking against the budget and suddenly, to your horror, discover that you've spent all the available funds and the works still have a ways to go.
This is particularly important when managing contractors and sub-contractors, manufacturers and suppliers.
Here are a couple of expert strategies you must rely on. When you appoint your contractors, make it clear you will not pay a dime over the contract sum or order value unless you have agreed in writing in advance of any cost increase. Which means they must warn you if a cost is going to increase and seek your approval. This way, they can't highjack you with a surprise increase you weren't expecting a month after it has happened. And when it's way too late for you to take action to mitigate or avoid or reject the increase.
A process we always follow with our construction professionals, is to require them to provide end of week updates on any changes they think have happened and any cost they think may have increased as well as providing a look ahead and early warning of any anticipated changes from the contract sum or order values. With advance warning and reporting at the time of any cost changing events, means they get dealt with in real-time and not, as is so often the case, after the end of the project, when you get given a shopping list of changes and a 35% cost increase on what you were expecting.
And this brings me to Rule No. 3. Take immediate action.
By tracking the changes at least weekly, you can take action to resolve the problem or at least find a workaround - whether it's increasing the budget and finding the extra cash to pay for it or changing the product choice for something cheaper, to sidestep the cost increase.
When dealing with sudden discoveries, they may very quickly become significant. This may lead to having to take drastic action. Even to the extent of stopping work on site while you work out what to do to solve the problem.
And finally, here's a simple strategy you can apply when you do need to take action in the face of rising costs and when increasing the budget is not an option. Just like I recommended in the last Blog Post, this will require you to make pragmatic decisions. To find a practical, workable solution.
Now you may be stuck with a cost increase you can't afford unless you do something drastic, like reducing the cost of the remaining works or actually omitting scope or changing the scope. A practical starting point is to have a workshop with your contractors. Get them around the table, explain the problem and ask if they have any suggestions for ways you can save money. It's important to make clear how serious the situation is and that the project cannot progress at full speed until the problem is resolved.
Ask them to offer options of how they might alter their scope to reduce the overall cost. It's likely they will suggest things you wouldn't want to accept but collective thinking may open up options you weren't even aware of. I will often ask them to tell me what they would do if this was their project. For example, maybe you had settled on a particular air conditioning system. But maybe the specialist sub-contractor suggests an alternative brand name that, in his opinion, will do the same job and be just as reliable but for a lower cost. Well, that's worth considering.
What you are looking for is a list of options. Then you can rank those options in terms of impact, relative preference, how much you like or don't like them and so on. It really helps you to make an informed decision. Probably the worst solution is to say, "we are now 15% over budget and I have to cut 15% out of every work element or work package". Just as I explained in the previous episode, this usually just makes everything cheaper and overall, is likely to be disappointing.
Sometimes it can help to state the problem as a total amount rather than as a percentage. Like saying, "Costs have increased by $ 12,000 and that's a real problem. So we have to find ways to save $ 12,000 before we can commit to progressing further with the project." Promote lateral, out-of-the-box thinking. Brainstorm. Unlock the power of the expertise in the room.
And the final tactic I've often used. When you have no other option but to reduce costs, target items that are less important to the aesthetic or function of a space while retaining at least one or two "hero" elements.
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