It’s a basic, straightforward, almost simplistic statement, so obvious is it:
The price of things depends on what they are.
There are some important corollaries to this statement that should be considered when developing any project.
Corollary 1: Managing cost involves managing what things are.
If the price of things depends on what they are, then managing cost means managing what things are.
Managing the cost of a project in order to achieve a goal can’t be done by screaming at Excel, forcing and reinforcing works contracts, or prohibiting the cost to change.
If the price of things depends on what they are, then managing the cost involves doing a great job defining things. Do we want this or that? Is it this or that material? What solutions are we adopting? Etc.
It’s also essential to be very aware of what we’re talking about when we talk about cost. Before setting a target for the cost of the project, we have to establish what things the project has to pay for. Before interpreting an estimate, we have to understand which object is being estimated.
Corollary 2: The design phase is where the money is spent!
If the price of things depends on what they are, and things are defined at the design stage, then the price is defined at the design stage.
It’s the design phase that we have to pay attention to. That’s where the money is spent. That’s where you define the product – what things are – that you’re going to pay for later.
There’s no point in developing a project that’s oblivious to the cost and thinking that when we contract and negotiate the work we’ll be able to manage its value.
It’s in the design phase that the money is spent!
Corollary 3: It makes no sense to ask for price proposals for things that are not defined.
If the price of things depends on what they are, it doesn’t make sense to ask for price proposals for things that aren’t defined.
It doesn’t make sense to ask for fixed-price contract proposals when the product is not yet defined.
It makes no sense to ask for “guaranteed maximum price” proposals when the object is not defined and the contractor does not control its definition.
It doesn’t even make sense to ask for a price for a door if you don’t know which door you’re talking about.
It doesn’t make sense to ask for proposals based on a previous study thinking that it will be a reliable, closed and minimally competitive proposal.
Some additional considerations:
What about the contracting phase?
But isn’t it when the work is contracted that the price is really set? What about the importance of contracting and negotiating?
There’s no doubt that the contracting process is important, but the price variation at this stage is +/- 5%.
Whether something will cost 100, 200 or 300 is defined in the design, contracting will only tell us whether it will cost 98, 100 or 102.
We need to change the way the industry works
The industry works as if price didn’t depend on what things are.
An inordinate amount of attention is paid to contracting and negotiating the work, because that’s when the proposals come in with explicit, high figures. An inordinate amount of attention is paid to cost management during the construction phase – extra work, value engineering, optimization and discussions.
Too little attention is paid to money in the design phase, both by the designers and the owner.
We can’t overestimate the power of this statement: it’s in the design phase that money is spent!
Conclusion
The price of things depends on what they are.
It’s in the design phase that money is spent, and we must act accordingly.
There’s no point in managing cost only from the Excel and contract side, trying to set figures by decree when there is vagueness or volatility in the definition of what things are.
Illustration by Ana Salvado | All rights reserved.
