Control the Risk and Optimise the Cost
Projects are undertaken to provide a benefit that exceeds the trouble of undertaking the project. Monetary benefit – financial profit – is the rationale behind most projects.
The goal is simple when deciding to embark on a project: minimise input costs while creating a facility, such as an information system, process plant or a building, that would provide benefits that would exceed the input troubles such as cost, risk, environmental and political factors.
The financial cost is usually the driving element. If the financial cost-benefit relationship is optimised and meets expectations, the project is successful.
The way in which project costs are currently managed, require a thorough review. Why do most projects suffer from:
The predictability problem was traditionally addressed by applying a contingency allowance, which lead to clouded decision-making and was merely addressing the symptom. It could not solve the problem of casting a shadow of doubt and a lack of refined evaluation of the project feasibility.
Increased costs were the result of the lack of full control over the data and information of the project: suppliers and/or erection contractors owned the detailed data and information of their portions of work, which allowed them to dictate to the client how variations or unforeseen circumstances were to be costed.
In the traditional model, the client carries the risk and provides the funding, yet he is mostly dependent on external parties – each with their own (valid) profit goals – for data and information.
Aggressive cost management is used to solve these basic problems: the client obtains the capability to gain control of costs independently of the technical and resource requirements that have to be obtained from suppliers and contractors.
Cost needs to be managed with the client being ahead of the external parties in cost planning and cost data and information.
The following is required to achieve this level of control:
The benefits of aggressive cost management are very visible in the execution phase of the project, when variations occur.
In the construction situation, procedures would typically prescribe that the variation order would be issued, the contractor then has to provide a quotation which would be verified by the engineer (who sometimes employs a quantity surveyor to advise him).
When aggressive cost management is adopted, the cost manager acting for the client, is actively involved from the point that the possibility of a variation occur. The information system flags the event, and the costing is done primarily by the cost manager, leaving the contractor to respond to the research from the cost manager, in a format that suits the project cost plan. The agreement process is led by the cost manager, thus being retained within the control of the client.
Aggressive cost management could be introduced into a project an any stage, but it is optimised if it is built into the project from the onset. Modern information technology provides the tools and equipment to built heavy-duty “plants” for cost management: a live cost model with a variety of products and by-products and with continuous bottom-up and top-down analysis capability, which tie the initial estimating and planning right through to the close-out report.
The entity that is in control of the information, is in control of the project. The client must empower himself with the best information management and cost analysis capabilities, but even the best systems would fail if it is not applied aggressively.
Leonard van der Dussen