Cost management: The new rules

01 / introduction

Over the past two years the RICS has been developing a suite of measurement rules to support the cost management and procurement of construction projects from cradle to grave – dealing with cost estimating and cost planning, works procurement and post-completion procurement.

First to be published is the “RICS new rules of measurement: Order of cost estimating and elemental cost planning”. This will deal with the total costs of a project, not construction costs alone. They represent the essentials of good practice and will enable more effective and accurate cost advice to be given to clients and other project team members, as well as facilitating better cost control.

The rules for cost estimating and cost planning will form an essential part of a value-for-money framework for central government, local government, and other publicly funded organisations that have an obligation to demonstrate that value for money has been achieved in construction projects.

Moreover, the rules should give greater confidence to banks and other lenders that provide funding for construction projects.

02 / background

Since 1922, the standard method of measurement (SMM) has provided cost managers with rules of measurement for building works. However, these rules were specifically drafted to advise the cost managers on how to measure building work items for inclusion in bills of quantities, which in turn were used to obtain a tender price for a building project. No specific advice on the measurement of building works for cost estimates and cost plans existed. In the absence of such rules, cost managers have generally adopted the principles described in the SMM to prepare estimates and cost plans, resulting in an inconsistent approach. This makes it extremely difficult for clients and other project team members to fully understand what is included in cost estimates, limits or targets advised by the cost managers. Clients need cost certainty and improved accuracy throughout all stages of projects.

03 / the rules

The rules for cost estimating and cost planning not only provide fundamental guidance on the measurement of building works, they also advise on how to deal with other items forming part of the construction costs. Such items that are not reflected in the measurable building work including preliminaries, overheads and profit, risk allowances and inflation. Essential guidance is also provided on dealing with non-construction related costs such as consultants’ fees and other development costs (the cost of acquiring land and property, fees and charges, planning contributions, decanting and relocation costs, marketing costs and the cost of finance). Advice on how to deal with VAT, tax allowances, taxation relief and grants is also included.

Although based on UK practice, the underlying philosophy of the rules can be applied globally.

04 / the benefits

• Provides a common and consistent basis on which to measure areas and building works items – for new works and rehabilitation works
• Presents a clear framework that facilitates a systematic approach to compiling cost estimates and cost plans
• Establishes formal cost estimating and cost planning stages that are aligned to both the RIBA Plan of Work and the OGC Gateway Process
• Covers modern construction methods including modular units and complete buildings
• Defines preliminaries that can be used for any procurement or contract strategy (including prime contracting and PFI)
• Defines categories of risk, dispensing with the term “contingency”
• Promotes the view that risk allowances should not be a standard percentage, but a properly considered assessment of the risk
• Helps with value engineering
• Gives transparency to cost estimates and cost plans
• Acts as an aide memoir
• Helps with improving the accuracy of cost estimates and cost plans
• Promotes clear and effective communication between the employer and project team members and ensure that risks associated with the project are identified, analysed and responded to
• Provides a method for codifying elemental cost plans so that they can be converted to works packages for procurement and cost management during the construction stage
• Performs part of a value for money framework
• Provides robust basis for capturing historical cost data in the form required for future cost estimates and cost plans, thereby completing the “cost management cycle”
• Can be integrated into an organisation’s quality management system.

The ‘RICS new rules of measurement: Order of cost estimating and elemental cost planning’ is now available. They will become effective from 1 May 2009.