Keeping abreast of the day-to-day costs of a project provide contractors with a framework to ensure that projects are not only delivered on budget but also ring-fences contractors from liquidity issues and reputational risk.
This is the view of Joseph Mahendran, Regional Manager, Sub-Saharan Africa at Black & Veatch. Mahendran says that while signing on as a contractor for large-scale capital-intensive projects is the dream of every engineering and construction firm there are a number of considerations that need to be taken to ensure contractors are not sunk by unforeseen costs incurred over the life of a project.
“The chances of schedule and cost overruns on large capital projects are very high since there are so many avenues that could result in project delays or over expenditures or both. Unless contractors keep a tight handle on the project costs from the beginning of the project, they are going to lose control,” he explains.
Making provision for unknown costs
According to Mahendran a job is broken into manageable units, called the work breakdown structure, which needs to be linked to specific cost accounts and while most contractors would perform a detailed cost analysis prior to submitting their bids, many fail to make provision for “unkown costs” that cannot be accurately forecasted and that may have a significant impact on the budget.
“Contingencies would have to be allocated for these “unknowns” and these need to be documented,” he notes.
Mahendran says another crucial element in maintaining control over project costs is estimating inflation and escalation over the life of a project.
Since capital projects run over a number of years inflation and escalation costs can easily push project costs beyond budgets. During the initial cost analysis phase, contractors should factor these in for the duration of the project and account for the expected inflation in their budgets.
The most important piece of advice Mahendran can offer is that contractors get the fundamentals right from the outset, particularly with regards to developing effective cost models.