C ERTIFICATION PAPER

The Contractors Role in Building Cost Reduction After Design (Bringing a Project Into Budget)
Todd W. Waddle, CCC
ABSTRACT: Having a building project fully designed, let out for bids, and then discovering the low bid is over budget, can be an extremely discouraging experience for an owner. It can also be costly for a building contractor to spend the time and effort required to submit a bid and not have the project awarded because of over budget issues. Many projects have been successfully brought into budget through negotiations between owners and building contractors after design. The intent of this article is to stimulate contractors, owners, and design teams to work together to find acceptable cost saving solutions and alternatives to bring projects into budget. This paper examines some of the avenues building contractors can use to reduce project cost. The use of value engineering, scope reduction, and scope deferral are methods that are discussed. The importance of the building contractor establishing a relationship with owners and design teams based on trust and openness is also discussed. Emphasis is placed on examining the various components and systems within a building project through the work breakdown structure (WBS). Three different types of building projects that were successfully brought into budget through this process are also illustrated. With the continued growth in construction activity and inflationary pressures in most regions of the country, the incidence of building projects coming in over budget is not expected to cease. Owners are not limited to abandoning their projects or costly redesigns. In many cases, project cost can be lowered through careful analysis of building components and systems by the building contractor working with the design team. The increased value that could be gained if this cost review process was performed in the early stages of the design is recommended for future research. KEY WORDS: Bids, budget, contractors, cost, design, project, scope, and value engineering

is the ratio of function to cost. Value can therefore be increased by either improving the function or reducing the cost. It is a primary tenet of value engineering that quality not be reduced as a consequence of pursuing value improvements [1]. VE is a process originating at General Electric Company (GE) during World War II. Because of shortages of skilled labor, raw materials, and component parts, engineers at GE looked for acceptable alternates and often found substitutions that resulted in reduced costs and/or product improvement. GE developed a systematic process that they called value analysis. Over the years the name gradually changed to VE. The basic steps of VE include the following. Information gathering: project requirements defined, function analysis. Alternates: various ways of meeting the requirements and functions. Evaluation: assessment of alternates on how well they meet requirements and costs savings. And, Presentation: selection of best alternatives to be presented to client for decisions.

t has become evident from recent news articles that inflationary pressures and increased construction activity are causing many building projects to come in well over owner's budgets [2,3,4]. This trend has increased dramatically over the past few years, as much of the construction industry has been impacted by an unprecedented increase in the cost of construction. The historical rate of increase in construction cost has been under five percent per year, as reported by the Engineering News Record [1]. Over the last few years, the industry has seen a significant increase from historical escalation rates, up to 10-15 percent per year in many regions of the US. These increases have been caused by a variety of factors, including the following.

Rising oil prices leading to higher manufacturing and transportation cost. and, Rising labor cost because of increased construction activity [2,3,4,5].

To be successful in having over budget projects awarded, the building contractor has had to take a proactive role in working with owners and design teams to reduce project cost to amounts that owners are Scope Reduction able to award. Scope reduction involves identifying This cost reduction is normally areas of the project scope of work that can accomplished through the following be reduced in quality, quantity, or both in a methods. manner that is acceptable to the owner. Scope reduction items of work often value engineering; consist of material or equipment scope reduction; and substitutions that lower the cost of the deferral of scope items until a later project, but may not be an equal substitute. date. An example of quantity scope reduction would be to reduce the guttering system on Shortage of steel resulting from rapid Value Engineering Value engineering (VE) has been a pitched roof from the entire roof growth in China. Demand for materials in the US defined as a systematic method to improve perimeter to entrances only. A quality resulting from increased hurricane the value of goods and services by using an scope reduction example would be to examination of function. Value, as defined, damage.
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True VE evaluates life cycle costs such as initial cost, maintenance cost, operational cost, life span, time value of money, replacement cost, and frequency of replacement. VE can be undertaken at any stage of the building design process; however, it is most effective in the early stages, since it is less costly to make changes to preliminary documents [6].

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provide vinyl composition floor tiles (VCT) structure of functional systems used to classify the project on a level-by-level basis in lieu of ceramic floor tiles. [7]. This breakdown structure facilitates the evaluation of each system of the Scope Deferral Scope deferral involves identifying project; from the building foundations to areas of the project that can be delayed for the completed sitework. The engineering future completion. This also includes system WBS was chosen over the considering what specific building Construction Specification Institute (CSI) elements that would need to be installed WBS since it facilitates the evaluation of during the initial construction to facilitate each building system rather than the future completion. An example of this individual component breakdown used in would be installing structural framing for the CSI format. future installation of retractable partitions. Questions to Ask and/or Areas to Consider by WBS Standard Process This section provides a list of areas for After a project has been determined to be out of budget because of high bids, the the building contractor to examine and/or project is normally either cancelled, re- questions to ask in the WBS system level designed and re-bid, or negotiations are format for cost saving alternatives. Some of held with the low bidder to reach an these changes can be accomplished without major re-design cost and acceptable contract amount. For the building contractor that is incorporated into the construction selected for negotiations, this is an documents in the form of an addendum. opportunity to move toward project award Other changes listed would require and to also build a relationship of trust and extensive re-design and time delays that openness with the owner and design team would need to be priced by the design team. that could lead to future projects. First, the building contractor should SUBSTRUCTURE meet with the owner and design team to fully understand the owners project requirements, priorities, life cycle Have alternate types of foundation system been considered? considerations, and budget. Next, the building contractor's role is wood piles in lieu of precast; to use his estimating and construction drilled caissons vs. piles; and, expertise to analyze various components mat foundations in place of piles or caissons. and systems within the project for alternate solutions. The contractor should also bring in key subcontractors and suppliers who Evaluate sand base in place of gravel or are often able to identify alternate materials stone under slab on grade. and/or systems within their specialties. SUPERSTRUCTURE Each division of work should be examined and evaluated for VE solutions, scope reduction, and scope deferral. In past years, Have alternate types of building this process and service was considered part structures been evaluated? of the building contractors overhead. structural steel, precast concrete, cast in place concrete, reinforced masonry, However, in today's market, some light gauge steel framing or wood contractors will negotiate rates and be framing systems. reimbursed for the time and effort that they spend in this process in the event that the project is not awarded to them. These Compare Alternate Stair Systems. services are often called pre-construction steel pan stairs vs. precast concrete or cast in place concrete. services. The work breakdown structure (WBS) EXTERIOR CLOSURE can be a helpful tool to the building contractor in analyzing the various components and systems within a building Evaluate exterior wall systems. Light gauge metal framing in lieu of project. reinforced concrete masonry units. The Tri-Service automated cost engineering system WBS is a tree-type Can wall widths or gauges be reduced?

Compare sheathing systems. Fiber sheathings in place of cement boards. Review alternate wall insulation systems. Batt insulations, rigid insulation materials, loose fill block insulation. Consider alternate exterior wall veneers. Conventional stucco versus exterior insulation finish system. Brick or precast in lieu of stone. EIFS or poly copings and trims in lieu of stone. Evaluate alternate glazing systems. Can exterior glazed areas be reduced? Storefronts in lieu of curtainwalls if code allows. Painted aluminum in lieu of stainless steel or brass framing. Is the glass color specified a premium color? Review exterior entrances. Manual entrance doors in place of automatic entrances. Automatic entrances in lieu of revolving doors. Cedar entrance doors rather than mahogany. Examine exterior railing systems. aluminum or cable systems in lieu of glass; standard designs in place of custom elements; and anodized finish vs. kynar or powder coat. ROOFING Evaluate the specified roofing with alternative materials. Poured roof insulation vs. cellular insulation or polyisocyanurate rigid insulation. Combined metal decking/insulation systems in lieu of separate systems. Interior batt insulation in place of rigid roof insulation. Built-up roofing vs. single ply membranes. Fiberglass or concrete tiles in lieu of clay tiles. Painted metals in place of copper.

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Can the specified gauge of metal roofing be lowered? Eliminate or reduce the guttering system? Can skylights be reduced or styles changed? Are standard warranties specified? INTERIOR CONSTRUCTION

Particle board in lieu of plywood frames. Maple vs. cherry or mahogany. Manufactured solid surfaces vs. stone. Standard cabinet hardware in lieu of custom. Consider alternate trim products and profiles. Pine, fir or plastics vs. premium woods. INTERIOR FINISHES

Examine interior wall systems. Can light gauge metal-framed walls be used in lieu of concrete masonry units? Can wall thicknesses or gauges be reduced? Are drywall systems being used in lieu of plaster? Examine interior doors and hardware. Are the specified doors standard sizes or custom? Have alternate wood door species been considered? Have alternate hardware styles or manufacturers been compared? Can manual doors be used in lieu of automatic? Are the doors pre-machined for hardware installation? Compare pre-finishing doors with finishing on-site. Review interior specialties. Have alternate types of toilet partitions been considered? Prefinished metals vs. plastic laminates. Plastic laminates or solid plastics vs. woods or stone. Can vinyl corner guards be used rather than metal? Is standard signage specified or custom? Metal lockers vs. wood. Have special partitions been evaluated? Plastic veneers in lieu of wood. Can the sound rating be reduced? Defer installation? (Install structural supports and track for future installation of the partitions). Has the access flooring system been evaluated? Standard floor finishes rather than custom?

Have alternate manufacturers been considered? Are standard fixtures and equipment specified or custom? Can cold-water pipe insulation be deleted except where exposed to weather? Can PVC piping be used in lieu of copper or cast iron? Compare instant vs. circulated hot water systems. HVAC Direct expansion (DX) split-system's vs. chilled water systems. Air-cooled packaged units vs. water source heat pumps. Can increasing the size of equipment reduce the quantity of equipment? Local control systems vs. direct digital controls. Can duct board be used rather than sheet metal duct? Are standard warranties specified? FIRE PROTECTION SYSTEMS

Evaluate interior wall finishes. Painted wall finishes in lieu of wallcovering. Epoxy coatings in place of tile finishes. FRP instead of stainless steel. Are textured drywall systems being used rather than plaster? Examine interior floor finishes. Resilient flooring vs. ceramic or wood. Ceramic flooring in lieu of stone. Tile or stone in place of terrazzo. Thin set method of installation vs. mud set. Alternate carpet manufacturers. Direct glue-down in lieu of carpet pads. Rubber or wood base vs. ceramic or stone base. Review alternate ceiling finishes. Acoustical ceiling systems vs. drywall. Alternate acoustical ceiling grid systems. Standard ceiling tiles vs. custom. Fiber ceiling tiles vs. metal. Textured drywall systems rather than plaster. CONVEYING SYSTEMS

Wet systems vs. dry systems. Has plastic pipe been compared to steel? Can semi-recessed sprinkler heads be used rather than concealed? Verify fire pump horsepower is not oversized.

ELECTRIC POWER AND LIGHTING Review alternate light fixture packages. Are the electrical trim and devices custom or standard? Can metal clad (MC) cable be used in lieu of conduit and wire where allowed by code? Can polyvinyl chloride (PVC) be specified rather than rigid steel or electrical metallic tubing where allowed by code? PVC floor boxes vs. formed steel boxes. Can air condition pull-out disconnect switches at air handler unit compressors, air handler units, and water heaters be used rather than heavy duty disconnect switches?.

Review specified elevators and escalators. Have alternate manufacturers been considered? Are standard interior elevator cab finishes specified or custom? Can standard finishes be used on the doors/control/lanterns? Can glass walls be eliminated? Are standard warranties specified?

PLUMBING Review finish carpentry and millwork. Consider alternate cabinet Review specified plumbing fixtures and equipment. manufacturers and finishes.

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ELECTRIC SYSTEMS Review alternate electrical system manufacturers and products. Fire alarm, nurse call, telephone, sound, clock, television, security, dimmer and other communication systems. Can reducing areas of the building for emergency power downsize the capacity of the emergency generator? Compare cost of diesel engine driven generator set vs. natural gas driven engine generator sets. EQUIPMENT

FURNISHINGS Examine specified project furnishings for alternate manufacturers and products. SPECIAL CONSTRUCTION

SITE IMPROVEMENTS Can paved areas be reduced or more economical paving materials used? Can parking bumpers be used in lieu of curbs and gutters? Has resurfacing existing parking areas been considered rather than new parking construction? Have alternate types of retaining or enclosure walls been considered? Have landscaping alternatives or substitutions been considered? Seeding in place of sodding. Reduce or change tree and plant materials. Use existing trees and other existing landscaping. SITE CIVIL/MECHANICAL UTILITIES Have alternate utility piping materials been evaluated?

Review project equipment for alternate manufacturers and products. Are standard warranties specified?

Evaluate swimming pools or other special construction items for manufacturer and design alternatives. SELECTIVE BUILDING DEMOLITION Can existing systems be used rather than replaced? Can areas of hazardous material removal be avoided? SITE PREPARATION

Has a site work analysis been performed to balance cuts and fills?

Table 1 Bank Cost Reduction Example

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Table 2 Bank Cost Reduction Summary

Table 3 Restaurants and Retail Tenant Finish Cost Reduction Example

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Can existing site utilities abandoned rather than removed? SITE ELECTRICAL UTILITIES

be

CONTRACTOR OVERHEAD AND PROFIT

Have alternate exterior lighting packages been compared? Have alternate utility piping materials been evaluated?

Can phasing be reduced to shorten the project duration? Can the start of the project be timed to avoid cost impact of winter conditions? For high-rise projects; have crane and hoisting options been compared?

Can the contractor's performance and payment bond be waived if the major subcontractors are bonded? Can the Owner include the Builders Risk policy?.

Table 4 Restaurant and Retail Cost Reduction Summary

Table 5 Condominium Cost Reduction Example

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Table 6 Condominium Cost Reduction Summary

EXAMPLE PROJECTS Bank Building The first example is a 30,000 square foot bank project that was constructed in the Florida panhandle in 2001. The project consisted of a four-story cast inplace concrete structure; stucco veneer over light gauge framing and sheathing; clay tile roof shingles; high-end interior finishes; and exterior paving. The owner originally put the project out to bid and all of the bids came in over budget. The low bidder was selected for negotiations and asked to work with the design team to present a list of VE options and other cost saving changes. Table 1 breaks out the items of cost reduction by WBS that were accepted by the owner. Table 1 shows a total cost reduction of $244,958 or approximately six percent of the base bid amount. The costs savings were achieved through changes in the roof framing, exterior doors and windows, roofing materials, interior doors, specialties, interior finishes, fire protection, mechanical system, paving material and site lighting package. The percentage of the total savings by WBS are broken down in table 2. Alternate mechanical systems accounted for the highest percentage of the total savings followed by changes in interior finishes, exterior closure and roofing. These changes were incorporated into an addendum and the building contractor was awarded the project. Based on the relationship that developed between the building contractor and the owner during the cost reduction process and throughout the project, the owner chose to negotiate his next new bank building with this contractor.

Restaurants and Retail Tenant Finish The second example is 12,350 square foot of restaurants and retail tenant finish space that was constructed in the Florida panhandle in 2003. The projects consisted of interior construction, finishes, and mechanical, electrical and plumbing (MEP) systems in buildings that already had completed shells. The bids received by the owners were over budget and rejected. The low bidder was selected for negotiations and asked to assimilate a list of VE and other cost saving changes. Table 3 breaks out the items of cost reduction by WBS that were accepted by the owners. As can be seen in table 3, the owners were able to reduce the project construction cost by $178,044 or approximately 14 percent of the base bid amount. The costs savings were achieved through changes in the interior doors, trim materials, countertop materials, specialties, flooring finishes, wall finishes, ceiling finishes, mechanical systems, lighting packages, and general condition savings. The percentage of the total savings by WBS are broken down in table 4. Alternate mechanical systems and ductwork accounted for the highest percentage of the total savings followed by changes in interior finishes. These changes were accepted by the owners, incorporated into addendums and the projects awarded to the building contractor. Condominium Project The third example is an 80,600 square foot condominium project that was constructed in the Florida panhandle in 2004. The project consisted of an 11-story cast-in-place concrete structure; stucco veneer over light gauge framing and sheathing; standing seam roof, high-end interior finishes, parking deck and swimming pool. Bids were solicited and

came in over the owner's budget. The low bidder was selected for negotiations and asked to work with the design team to assimilate a list of VE and other cost saving changes. Table 5 breaks out the items of cost reduction by WBS that were accepted by the owner. As indicated in table 5, the owner was able to save $790,184 or approximately eight percent of the base bid amount. Considerable savings were achieved in modifying the stucco specifications including an integral paint finish; changing cabinet manufacturers and styles; changing tile sub-contractors; and incorporating "unseen" electrical changes. The percentages of the total savings by WBS are broken down in table 6. Alternate interior construction systems accounted for the highest percentage of the total savings followed by cost reductions in electrical, exterior closure and interior finishes. These modifications were incorporated into an addendum and the building contractor was awarded the project. ith the increasing global demand for building materials and continued growth in construction activity in most regions of the country, the occurrence of building projects coming in over budget is not expected to decline. However, owners are not limited to abandoning their projects or resigned to costly redesigns and re-bidding. Building contractors working with design teams have avenues to bring a considerable portion of these projects into budget and to award without major redesign costs and time delays. As shown in the above examples, breaking down and analyzing the components of a building project through the work breakdown structure can aid in

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reduction summaries also reveal that the MEP systems typically offer the greatest opportunity for cost savings due to their total significance to a project. The MEP systems normally make up between 30 to 50 percent of a building project's cost. The owners of the illustrated projects accepted cost reducing changes ranging from 6 to 14 percent of the original low bids. These reductions allowed them to meet their particular budgets and have their projects constructed by incorporating the changes into addendums. Some projects may be so far over budget that substantial structural and/or building redesigns are unavoidable. However, as demonstrated in the above examples, building contractors can play a major role in bringing projects into budgetusing their past experience along with their subcontractor and supplier networks to develop cost reduction alternatives that may not have been previously considered by owners and/or design teams. REFERENCES 1. ENR Annual Average Cost Index, 1/1/1981 - 1/1/2006 2. Hayden, Susan, Director of Public Affairs Community Colleges Facing Increasing Construction Costs, Fewer Bids. (http://www.so.cc.va.us/ aboutvccs/news_releases/bids.html) 3. Kucher, Karen. Bids are Busting Budgets. The San Diego Union Tribune, 2/21/2005 4. Langdon, Davis. Construction Industry Market Report, Mid Year 2006. 5. Squire, Simon. Get a Handle on Escalating Costs, (June 23, 2006) (http://djc.com/news/co/11176940 .html) 6. Value Engineering - Wikipedia, the free encyclopedia http://en.wikipedia.org/wiki/ Value_engineering) 7. Work Breakdown Structure - Tri-Service Automated. Cost Engineering System, 1992.

ABOUT THE AUTHOR Todd W. Waddle, CCC, is a senior cost estimator with L-3 Communication / Titan of Niceville, Fla. He received his Certified Cost Consultant certification in 2007. He can be contacted by sending email to todd.waddle@L-3com.com.

Survey Results Listed Online

AACE International Members may want to check out the wealth of information that is available at the AACE International website at www.aacei.org. Currently listed are results from a 2007 Annual Meeting Survey Summary and results from a Women in Project Controls Task Force Survey Results.

Girls Are Ready for Engineering if Engineers are Ready to Share

Faced with a profound lack of women engineers, the National Engineers Week Foundation is calling upon its professional community to discard the myths of whats holding girls back and focus instead on fighting the problem during Introduce a Girl to Engineering Day, slated for Thursday, Feb. 21, part of Engineers Week 2008, February 17-23. On Feb. 21, and in programs throughout the year, women engineers and their male counterparts will reach as many as one million girls with workshops, tours, on-line discussions, and a host of hands-on activities that showcase engineering as an important career option for everyone. The Engineers Week coalition comprises more than 75 engineering, professional, and technical societies and more than 50 corporations and government agencies. Co-chairs of Engineers Week 2008 are the Chinese Institute of EngineersUSA (CIE-USA) and IBM.

ACKNOWLEDGMENTS Delta Construction Management Dave Andrews, L-3 Communication, Titan Corporation

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