Bridging the Gap Between Contract Administration and Budget Management

Adam Rome
Visibility and control issues often arise in the construction process due to the isolation of budget control processes with the administration of construction contracts. These issues are often due to the risk management approach taken throughout the construction phase.

Civil engineering projects frequently attract a high level of financial risk provision due to 'unknowns' such as statutory undertakers or ground anomalies. The reporting and management of this budget risk provision in an auditable and transparent manner can present difficulties to clients when using publicly sourced funds, as is common in the highways and civil engineering sector. The difficulties are often compounded by the linear nature of many engineering projects meaning that the risk provision cannot be finally adjusted until the very latter post-contract stages of a project.

QRA is a process of evaluating a risk through both measured appraisal and probablitity factoring.

The management and reporting of budgets, both cost and risk, can become unreliable where the processes are artificially segragated from the contract administration procedures – particularly in the post contract phase. Visibility and control are lost if a silo mentality is adopted by team members; where construction, programme and cost sit as individual and distinct reporting lines. Quantitative Risk Assessment (QRA) can be used to break down such silo thinking and bridge the gap between budget management and the works management. QRA is a process of evaluating a risk through both measured appraisal and probablitity factoring.

There is a tendancy for project appraisers to be overly optimistic in their planning and scoping for works delivery and such optimism can present significant problems later in the construction process. The OGC Green Book guidance acknowledges this problem and suggests that a process of optimism bias be utilised to overcome its effects. The Green Book also outlines suitable methodologies for use at the early stages and advises the use of a QRA process throughout the lifecycle of the project.

These 'tools' should be introduced to the project teams in the planning/pre-contract phase and carried on throughout the project duration with instruction and direction as to their purpose and benefit: there are a significant number of projects where proactive risk management falls away in the construction phase, being relegated down the contract administration adgenda due to a perceived need to reduce admin costs or due to the inexperience of the project team in the use and understanding of the processes.

Common engineering construction contracts such as the ECC NEC3 aim to bridge the gap between the management of risk and the management of the works but the procedures for budget control still need to be addressed.

Construction contracts are not drafted specifically to manage budgets. However, most now recognise 'risk' and some do formally support mechanisms for risk management, being a cirtical element in budget control. Common engineering construction contracts such as the ECC NEC3 aim to bridge the gap between the management of risk and the management of the works but the procedures for budget control still need to be addressed. This continued separation of the two processes poses risk to accurately portraying outturn costs.

Faithful+Gould has evolved industry approved methodologies of QRA and has integrated these into processes for the management of risk and budget; supporting clients through regular, accurate portrayal of forecast outturn costs.

Faithful+Gould's Cardiff office will be discussing the issues facing the sector and approaches developed to tackle these issues in a CPD webinar. You can find out more information and register on our dedicated event page.

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