|Main Issues of Controlling Project Cost in China for Foreign Companies September 26
By Yang Shan
Chinese registered cost engineer
China has huge market and social stability which draws thousands of foreign companies. But how to perfectly control the cost of construction projects in China and make sure success of projects, is an important problem facing every foreign investor. With my experience of providing consulting service to many foreign companies, I’d like to share my experience with you here. I hope it would be helpful to you.
For every single project, controlling investment runs through the whole project. But in this process, the following several stages have a noticeable effect on the cost of construction. So it becomes very important.
1. Investment estimation before project decision
Investment estimation before project decision is basic to decision-making and controlling investment. So obviously, it is the most important job in the course of construction. Under normal circumstances, once the investors have intentions to invest, they send over experts to investigate the market of the place where the construction project is located in. Some local governments volunteer price information, even counseling services. But my experience over many years has shown that experts from Europe, America and other developed areas are apt to overestimate the direct cost, while the indirect cost is underestimated because of the omission of expenditure prescribed in local regulations. And generally, they are failed to get all the local prices. To make matters worse, some prices are on the low side. In this way, big errors might occur in the Investment estimation, especially in complex industrial projects. Errors of the Investment estimation before project decision have adversely affected the investment control. A better solution is to commission a professional cost consulting company to make the Investment estimation. But the owners are supposed to provide the prices of capital equipments and materials which are imported.
2. Costing, budget in engineering design
In China, the engineering design of projects is divided into 2 stages. The first one is called preliminary design, whose content depth is close to basic project design a little bit. But its technical schemes is more compendious. And it is more in accordance with the actual condition of the Project construction site in designing public utility and Environmental Protection. Preliminary design’s major role is to crystallize the design for the project construction and submit it to Chinese government organs for approval. The second stage is Construction plans Design. It is basically the same as detailed design. To be line with regulations and save money, foreign companies often choose Chinese design institutes for construction plans design. Two extremes are likely to happen if designs are lack of effective monitoring. One is to design according to local general quality standards and fail to reach the requirement of foreign companies. The other extreme is the construction design is too conservative. And there is a too high standard in the choice of material quality, accuracy, capacity and so on. The technology and other equipment and materials selection is in excess of the actual needs. These two situations will both cause an increase in project investment. Therefore, to test and control the project cost, you can strengthen the examination of design, or, commission a professional cost consulting company to make a budget on the basis of design drawings. to hire a cost consulting company other than design units for making a budget, mistakes in the design drawings may be discovered early and avoid losing money. Of course, optimization designs and preferred plans are always a good way of reducing investment outlay. It needs not only experience but also a cooperation of design engineers and cost engineers. And it cost more time.
3. Setting on a price for construction contracts
Price for construction contracts effects the project cost directly. But it doesn’t mean a conservative contract price is always necessary. A low contract price means risks on quality and progress of the project. There are so many instances and the instances are showing a tendency to increase. Some owners take the average tender price as a base price or reference price. There are also 2 risks: one is the bidders collude or a number of companies to bid in the name of one company. The other one is significant changes in the project which cause the average value departs from reasonable price. To avoid risks of construction contracting, a sounder approach is to commission a professional cost consulting company to calculate a base price as a reference price, and analyse every unit price of bidders.
4. Reach the settlement price
Usually, there are many changes in the process of project construction. And most of these changes need rapid implementation to ensure the construction progress. Therefore, how to determine the impact of these changes becomes a problem to be addressed while controlling the project cost. Generally, before implementing the changes, the contractor will require the owner to confirm increased cost cause by these changes. Management Engineers can also give their opinion on the increased cost. However, Practice has shown that it do not control the cost well because of a lack of professional knowledge and experience. A better solution is, setting principles of increasing contract price caused by the changes in contract or signed recognition on the changes. When changes happen, just confirm the changes of construction capacity. The changes of contract prices can be looked through by professional cost engineers while doing the settlement.
If you have done very well in 4 stages we mentioned above, congratulations, the project cost is brought under effective control. It contributes a lot to the success of the project.
However, how to choose a cost consulting company? In China, almost all the consulting companies, surveillance companies and design Institutes claime that they are capable to offer cost consulting services of all kinds of projects. But most of these companies are familiar with cost consulting services of architectural engineering. For an industrial project, big companies with a large number of employees are not always the first choice. Companies which have related industries background, achievements, and employees with responsibility professionalism are capable to provide better services.