How can you use target costing to set and monitor cost goals in construction projects?

Target costing is not merely a cost-cutting endeavor; it's a strategic approach ingrained in the project's DNA. By focusing on design and planning, it aligns project goals with client expectations, fostering collaboration among stakeholders. Early identification of cost drivers and risks ensures a resilient financial foundation. Beyond economics, target costing intertwines with sustainability, guiding the industry towards environmentally responsible practices. It's a journey towards delivering value, eliminating waste, and shaping construction projects that stand the test of time.

In my experience, target costing serves as an integrated cost management strategy. Its purpose is to set and control the cost structure of a project once its features and scope are clearly defined through benchmarking and historical projects. It is imperative to define this strategy before initiating the design phase, and early involvement of the contractor is crucial to ensure feasibility throughout the process. The ultimate goal is to achieve a balance and meet both scope and budget requirements not only during the design phase but also upon the project's completion.

The Target Cost is a tool for integrating cost management in the planning and pre-construction stage of the project, it is that cost that directs the design and not the other way around as it usually is, all the team's efforts must be focused on the design stage to achieve this cost, one of the most useful tools is the Target Value Design.

Setting a cost target isn't a static task; it's a dynamic process requiring a multifaceted approach. Beyond traditional market research, it involves competitor analysis, profit margin considerations, and strategic foresight. Embracing technology enhances precision, and ongoing customer engagement ensures relevance throughout the project. Transparent communication and a commitment to continuous improvement weave together a narrative of adaptability, aligning the project with ever-evolving market dynamics.

Any construction project essentially has 3 objectives: the budget, the schedule, and the scope, usually part of an equation with 1 unknown. In a good number of cases, the scope & schedule are specified, allowing the contractor to derive the corresponding budget. However, for some clients, the budget is main constraint. To set a cost target, there is a need to have benchmark cost data regarding the project to be built. This documents the financial possibility and probability of the construction. Let’s say you want to build an apartment building with specific features, and you have recent data indicating $300 per square foot and about $350k per apartment. This information will help set your target cost and any associated sensitivities.

To establish a target cost we must start changing the perception of estimation from deterministic to probabilistic, based on cost models based on a historical benchmark and find the possible ranges according to the characteristics of our project and how our benchmark can be as close to reality as possible. It is important to take into account what considerations are taken into account in the estimation of the benchmark to have traceability for cost changes by design when the design is developed in detail, in addition to having calculations for contingencies and risks.

Secondly, to set your cost goals, it must be remembered that target costing is essentially a top-down approach. In this case, the Uniformat II classification is most convenient. In fact, the total building cost must be distributed down to level 1, level 2, and sometimes level 3 building systems and project fees. Of course, using benchmark data and allowing the design and construction team to specify the systems corresponding to each cost goal. Let’s say you set $25 per square foot at level 2 for interior finishes; that is the goal to be monitored and controlled during the design and construction phases.

The "Target Value Design" tool is very useful to be able to achieve the target cost of our project, based on value engineering ideas, lean tools such as choosing by advantages and set based design, early involvement of construction teams and key subcontractors, you will be able to have an optimal design that allows you to achieve the expected cost, also taking into account the calculations of costs for contingencies and risks.

Thirdly, the project delivery method chosen by the client must ensure an appropriate risk-sharing & associated level of control. The design-build & construction management delivery methods seem mostly used - with a guaranteed maximum price contract with profit-sharing included. Then the designer needs to select each system so it corresponds to the theoretical cost goal, and the contractor needs to ascertain the possibility and report on the actual cost. If the possibility is negative, various iterations may include selecting different building materials, equipment, and systems, or the redistribution of sublevel cost goals. In some instances, critical client decisions may be required, and value engineering could be put into the balance.

It is important to have a cost standardization format (UNIFORMAT OR COST MASTER, for example), to have the main items of the project and its changes in quantities and unit prices as the design develops, now it is also important to have a cost control system, in modern projects BIM tools are used, based on software such as presto for the 5D control of the budget and have the quantities and items linked in the model, With this visual management, it helps the team a lot to lose traceability of the cost based on the development of the model and therefore its costs.

By having an optimal design based on an objective cost, as long as the right tools have been used and correct risk management has been carried out in the design stage, cost overruns due to errors in the design or redesigns due to late value engineering are greatly reduced, as well as the use of risk contingencies analyzed prior to the construction stage.