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10 Apr 2024 • Tom Haley

Quantity surveying fundamentals: managing the budget

In this next mini-series we will focus on quantity surveying fundamentals, which is relevant because the adoption of technology relies on the application of solid QS rules and methods.

Whilst the mini-series will help both quantity surveyors and non quantity surveyors , Quantik is a contractor-side quantity surveying business, working for main contractors and specialist subcontractors so the article is informed by that experience.

We will kick-off this mini-series with budget setting. It is not quite the start of the quantity surveyors involvement in a project which is, often, pre-contract stage, but it tends to be the beginning of the commercial project lifecycle when the contract has been signed and the starting gun for project delivery has sounded.

Getting the basics right

It surprises me how often the importance of budget setting is overlooked, and some of the basics are not done.

The common mistake I see is a starting budget that either doesn’t align with the contract sum (i.e. the bottom-line number is different), or the components of the budget don’t align with components of the contract sum (e.g. there is an amount of £1m for preliminaries in the contract sum but the starting point for the budget is £2m).

The consequences of not getting that starting point right may seem small but they can be disastrous. This is because you immediately forego your ability to measure gains and losses with some degree of accuracy and, as the old saying goes, you can’t manage what you don’t measure.

In my experience, the most common reason this occurs is post tender negotiations leading up to the agreement of a contract sum. Make sure you capture the audit trail from tender to contract sum agreement so there are no black holes.

Baseline documents

Once you have got the basics right, you need to make sure you know the basis upon which every amount included in the contract sum is calculated.

You might expect that this information will come in a neat bundle, clearly signposting everything for you, with a ribbon wrapped around it. Unfortunately, the constrained tender period does not allow for these niceties.

What you will often get are voluminous folders with the full history of the tender or, at the other end of the spectrum, very little information at all because it is scattered in different places. If you are faced with either situation, you need to push for this information and extract as much as you possibly can from the tendering team.

What you are looking to understand is whether the amounts are based on a subcontract quote, a first principles estimate, a metre square rate, or some other basis. Often, you will find multiple approaches adopted to suit the particular element of work priced.

You need to obtain all the documents which informed the calculation of the amount included. These might be quotations, measures, wage rates, production rates etc. Effective project commercial management relies on having this infromation and using it.

Put the information in a controlled file, and make sure you reference everything appropriately. If you set this up correctly, this will become a constant reference point for you when you are looking to understand why a gain or loss has occurred.

Budget setting

Budget setting is the process of converting price information prepared for submission to a client (e.g. a priced bill of quantities) into information that will allow you to measure performance against internal cost data.

It is often the case that the data structure of your budget will be led by the structure of the financial system and, to keep things simple, the most common heads tend to be labour, plant, materials, staff, and subcontract.

As well as aligning with the finance system, the budgets must also align with the project’s design, procurement, and delivery strategy. These are often a development of the strategy outlined at tender so, for example, the project team might look at self-delivery rather than subcontracting packages.

As a final, and often overlooked, point to consider when budget setting, you should generate contingencies in the budget setting process. For example, do you retain an amount of self-perform budget for rectifying snags, do you hold back budget from subcontract packages for inevitable scope growth / design development post subcontract award, or do you look to target the project team with tighter budgets with a target to improve project profitability?

As you work through the process, you will identify areas of risk in the budget and areas of opportunity. A prudent approach would be to document these in a plan to improve profit and lead the project team to secure as much of the upside as possible and avoid the downside. For me, when I see this kind of approach, it demonstrates exemplary commercial control.

Managing budgets

As the project progresses, it is inevitable that things will change. For example, you might see shifts in the market that force you to reconsider your procurement, which would mean budget being transferred. Alternatively, variations might be instructed which results in the budget increasing or decreasing.

Any changes to the baseline budget should be tracked and should be fully auditable. Every movement should have a reason for the change and every reason should be logical and transparent.

Do not commit the cardinal sin here where budget is transferred to offset losses. Any good commercial person will shudder at this thought. It might seem clever to manipulate the numbers in this way and avoid the team getting as hard time from management, but you are depriving yourself and your business of the opportunity to learn.

Final Reflections

I have tried to cram as much into a five-minute article as I can, but there is so much more that I could say on this subject!

The overriding message is the importance of budget setting as a cornerstone of QS and commercial management excellence. Every distressed project I have been asked to recover had one thing in common; it either got the budget setting process wrong or it had completely lost connection to the baseline. Consequently, no one could explain why losses were occurring only that loss was occurring. This is not a coincidence.

I hope this has given you some ideas that might help you improve the way you, your project, or your business work. In the next article, we will keep working through the commercial project lifecycle with an exploration of procurement and tendering.

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