A Discussion of How Value Management and Risk Management Approach Facilitate the Creation of an Effective Cost Forecasting Framework

Introduction

All proficient construction project managers understand that effective cost forecasting is crucial for the success of any project. While several modern techniques seem to overrule traditional methods, they have proved that they are still quite effective and applicable. Traditional cost planning techniques followed a three-phase process to ensure the bid figure was close to the first estimate. These processes would allocate funds to the diverse components and sub-components of the construction project. As a result, they gave the client a clear picture of whether the project was feasible. Today, the techniques still predominate cost forecasting in the early stages of several construction projects. Nevertheless, cost overruns have become a norm for several construction projects. Any excess over the actual and approved cost can be considered a cost overrun (VU et al., 2020, 1). These cost overruns deteriorate the industry’s performance and continuously scare away potential investors.

Startup Stages of a Project

All development projects conform to nearly similar project stages. The main project phases traditionally include initiation, organising and preparing, execution, and the closing stage (PMBOK 5th edition, 2013, 39). As such, the startup stages of construction projects primarily include the initiation and planning phases. Planning continues throughout the development. As such, let us consider the pre-contract planning that occurs before the commencement of the construction work. While the Project Management Body of Knowledge today acknowledges that lifecycles can be predictive or adaptive, it posits that in the predictive cycle, also referred to as the waterfall or traditional life cycle, the scope of deliverables, project duration, and costs must be determined in the startup stages of the project.

Traditional Methods of Cost Forecasting

The three phases that govern the traditional costing techniques are the outline design, scheme and detailed design phases. The outline design phase entailed creating the client’s brief and establishing the budget. The next phase prioritised cost forecasting and design control, and the last focused on controlling costs of the procurement and construction stages (Kirkham et al., 215, 7). As such, the design and procurement processes are the fundamental processes that determine the project cost within the initiation and planning phases. Traditional techniques begin by bracketing costs depending on the specific phase in the early stages, such as schematic and detailed design stages.

Functional Unit Method

The functional unit method is one of the earliest applicable cost estimation techniques in a project's initial stages. It entails the selection of a standard unit or item and multiplying the number of units with an estimated cost per item. As such, it can be easily implemented for the design costs and bid estimates. It is based on the close association between the construction costs and the number of operational units it can accommodate (Kirkham et al., 2015, 51). The significant merits revolve around its speed of implementation and less involvement; that is, it requires minimal information. Nonetheless, it has drawbacks that make it relatively unreliable. For instance, it is not based on standard design drawings. As a result, providing allowances is also tricky.

Superficial Area Method

The superficial area technique is also a popular preliminary cost estimation method. It was first used in the 1940s for projects where specific features, such as storey heights, were almost uniform, such as schools. It obtains the project cost estimates by identifying an estimated cost for each unit of the floor area (Kirkham et al., 2015, 51). As such, it begins by computing the sum of the floor areas of a building. Similarly, it is also easy to compute and faster to produce than the actual Bills of Quantity (BQ). Also, it is more accurate as it relies on sketch drawings. However, it must consider the external works and changes in shapes, plans, and storey heights.

Elemental Method

The elemental method refines the functional unit method. It considers the significant components and sub-components of a building. It forms a more reliable basis for cost forecasting and controlling. Furthermore, it enables the cost management team to prepare a cost analysis scheme for the design and development stages (Kirkham et al., 2015, 28). Also, it can be used to ensure that the bid amount is relatively close to the initial project cost estimates. Hence, the technique can determine and discern the expected and the acceptable standards.

Value Management and Risk Management

Value Management

Value management (VM) entails selecting a methodology that ensures value is achieved and continuously improved. It is a style of management that promotes and motivates effective teamwork while developing individual skills that maximise the organisation's potential performance. However, the styles of value management vary depending on the intended outcome. Nevertheless, the different styles aim to maximise the product's associated benefits. In construction, those who commission the project aim to maximise the project's overall performance while minimising the resources by applying strategies, tactics, and operations that align with the project objectives (Dallas, 2006, 10). Still, VM is more than simply reducing the cost.

Value Study Types

Value study types analyse the typical VM opportunities by interrogating the project span stages. There are two types of value study—need verification and project definition that occur during the early stages of the project, respectively.

Need Verification

The main output from the need verification is a strategic briefing document that addresses several factors that justify the project. Some include the development of a new item, ownership of a new venture, a change in regulations, or an opportunity to venture into new markets (Dallas, 2006, 194). During the need verification, the main questions seek to justify the appropriateness of the project, what it entails, and why it is being undertaken. The main participants include the value study leader, the developer’s senior managers, and the key shareholders. The main activities in a construction project’s need verification include collecting information, analysing risks and the project and product functions, and establishing value measures. The results of the need verification are significant in developing the business case.

Project Definition

If the business case justifies building construction, the next stage is the project definition for the construction project. The project definition entails interrogating the project’s goals and specific features required to ensure the project functions optimally. Usually, it is done in the conceptualisation stage. In addition to the participants of the need verification, other participants for this study include the client’s project manager (PM), the operational team, the user, the designers, and the facility maintenance team. There are two studies within the project definition. These are stakeholder conferencing and the conventional workshop.

The two vary depending on the number of stakeholders. Stakeholder conferencing favours several stakeholders, up to fifty, who can be in groups of twenty people and allows a facilitator to coordinate the proceedings (Dallas, 2006, 203). The latter favours an average of ten to twenty participants. Proceedings may differ, but both study types focus on agendas, such as collecting information, analysing possible risks, assessing the functional requirements, deciding on the procurement strategy and proposing options for satisfying the space requirements. The conventional workshop entails preparations for the project tasks, the actual workshop, presentations, value profiling, risk analysis, stakeholder assessment, review of issues, a wrap-up meeting and a report. Consequently, the main output is the project briefing document, which includes the confirmation of the project, a functional model, a detailed risk register, a stakeholder register, a decision-making matrix and a project understanding forum.

Risk Management

An effective risk management plan is vital to the project’s successful completion. It ensures the implementation team is fully prepared with a risk register, reducing the chances of firefighting. Risk management (RM) can be considered a process where a systematic approach is applied to management policies, procedures, and practices to influence the outcome to the desired result. Thus, understanding the components of risks, classification, and study types is crucial for risk management because risks can be positive or negative. Speculative risks enable senior management to commission projects whose risks can be controlled while maximising the project’s rewards (Dallas, 2006, 5). Furthermore, risks are independent of time and can occur at any time.

Strategic Risk Study

A strategic risk study is explicitly tailored to the phases of the construction project. For instance, the inception stage strategic risk study focuses on identifying and mitigating any loopholes in the business case. The strategic risk study's categories include the commercial, planning, operating, political, acts of God and project-specific risks (Dallas, 2006, 219). While capital-intensive construction projects may require several workshops, smaller projects may entail short workshops involving senior management and fewer stakeholders. During the workshop, the discussions primarily revolve around the principal risks and their likelihood of occurrence. The impacts of the risks on the project timelines and planned costs are also aired. Progressively, the risks are analysed and entered into a register, and a report is drafted for the subsequent stages.

Initial Project Risks

Initial project risks go concurrently with the project definition. While defining the project's essential features, such as the design and procurement processes, a practical study leader must consider the risks due to any aspect needing clarification. The study leader must address the three risk families: business, operational and project-specific risks that can hinder project success in the initial stages. Like the other studies, they must conduct a workshop where the risk register is circulated. Also, the project team must validate and quantify the risk during the workshop. Consequently, the risks can be allocated to action owners, and a timetable can be drafted to ensure they are mitigated effectively.

Risk Study Process

The risk management process varies according to the project stage and context. In the initial stages, the attention must be on events that could interfere with successful business operations and value achievement strategies. The generic risk study process comprises seven stages. These are preparation, identification, analysis, evaluation, treatment, reporting, implementation and reviewing (Dallas, 2006, 43). The identification stage is structured in a systemic manner that attempts to identify all the risks in the early stage within the external, internal and project contexts. Some techniques to identify this stage's risk events and causes include individual brainstorming, expert judgment, focus groups, and ticking off checklists.

The risk analysis stage extends beyond the events and the causes. It analyses the level of risks in the register and prioritises them on the merit of the probability of occurrence and their consequence qualitatively and quantitatively. A qualitative risk analysis prioritises the project risks and their mitigative measures (PMBOK, 2017, 420). Conversely, the quantitative analysis delves into the numerical effect of the project hazards. While the former identifies the high-priority risks, the latter quantifies the overall exposure. The main tools and techniques employed for risk analysis include interviews, computer modelling such as the Monte Carlo simulation, and diagrams such as the fault, event and decision trees. A qualitative risk analysis results in updates in the assumptions log, issue log and lessons learnt.

Risk responses are based on analysing and evaluating the probability of a risk, its impact, and its consequences. Some inputs required for planning for the responses include the project management plan, project documentation and organisational process assets. The responses fall into four main strategies: avoidance, reduction, transfer and acceptance. Avoidance or termination entails the selection of a different course of action. It requires prior information on available and feasible options. Reduction or Treating entails reducing the impact and consequences of the risk. Specific fire-resistant techniques can be employed in construction projects, such as using a thick concrete cover to reduce the probability.

Finally, the implementation and control stages ensure that the risk register remains updated. It is achieved by ensuring no other risks have materialised over time. In case of a risk, the study leader ensures the countermeasure taken as per the risk register. Additionally, the implemented countermeasures and their level of effectiveness are recorded, and the lessons learnt are updated. New treatment options are researched and proposed for future reference if they fail. Another way to ensure the monitoring stage is effective is by holding regular meetings whereby audits on the effectiveness of treatment are conducted, and a report is prepared with colour codes indicating the level of effectiveness and stage of implementation.

Application of Value Management and Risk Management to Improve Cost Forecasting

Evaluation of a project’s success solely relies on identifying the achieved client’s objectives. Understanding value can be elaborated as clearly comprehending and achieving the client’s needs and goals (Khalife & Hamzeh, 2019, 619). VM has several tools, like the function analysis system technique (FAST), that quickly give a visual representation of the functions by illustrating the missions and goals of a project. Another tool is the simple multi-attribute rating technique (SMART) that rates various objectives. Together, the two tools quickly build an in-depth understanding of the project and ensure all team members remain updated on the project value.

VM also encompasses value engineering (VE), ensuring that value is planned, interrogated, and defined through the stages of value study. VE, a systematic approach that guides projects towards achieving value for money by providing and presenting all available functions at minimal costs, optimises using balances of resources for the initial construction costs by identifying other viable options (Mahdi et al., 2020, 2). Similarly, RM has numerous advantages. First, it provides the team with a clear comprehension of the risks. Next, it guides them to develop an effective strategy to mitigate risks. Also, it informs the selection of a strategy that maximises opportunities by providing a clear understanding of events that translate to losses.

Secondly, RM maintains a record of previous projects, the risks it was exposed to, and the successful mitigative measures. As such, the project team can accurately identify risks in the three prominent families, business, project, and operational risks, and respond appropriately. Also, the various parties in the project team can enjoy achieving their specific success criteria. For instance, avoiding business risks increases the financing organisation's chances of recovering its investment over a shorter payback period. Decisions likely to cause operational risks can be avoided, and cost overruns as well. Therefore, integrating VM and RM is an essential step towards value achievement.

Conclusion

In an industry where millions and billions are invested, every coin matters. Independently, VM and RM have benefits that provide a solid bedrock for project decision-making and success. They contribute strategic outputs that influence the project toward the desired outcomes. Moreover, they boost the confidence of the project team and continuously hone individual skills. Considering the effectiveness of traditional cost forecasting techniques in the early stages of construction projects, integrating them with VM and RM can improve their effectiveness and efficiency. Jointly implementing the techniques can significantly improve the construction industry and promote a fair balance between stakeholder needs and opinions.

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References

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