Last edited 19 Jul 2016

Possible remedial actions during budget reduction

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Contents

[edit] INTRODUCTION

This article will evaluate the potential risks that might affect project financing/budgeting along with examples from personal experience and possible remedial measures if a project is subject to a budget reduction during each of the strategy and implementation stages.

Published by ROMAN GORYAINOV.

[edit] PROJECT FINANCING DEFICIT AND BUDGET REDUCTIONS

Factors like recession, inflation, changes in government regulation, political instability and so on can negatively impact the financing of ongoing projects (both international and domestic).

Negative effects on the ongoing project's financing can cause budget deficits that may require halting the project or undertaking remedial measures.

[edit] POSSIBLE RISKS

Yescombe (2002) divides risk into tree main categories:

  • Commercial – those inherent in the project itself or the market it operates in. Sub-components of the commercial risks are expanded by the Yescombe (2002) as: commercial viability , completion, environmental, revenue and force majeure risks.
  • Macro-economic – financial risks or economic effects not directly related to the project , such as inflation , interest rates and exchange rate risks.
  • Political – related to the effects of government action or political force majeure events (Yescombe 2002) , such as investment risks and change of law risk

[edit] EXAMPLE

More than 70 % of the income in to the Azerbaijan Republic economy depends on Oil and Gas prices that significantly decreased during the period of 2014 – 2015. Due to low prices, the local economy experienced major budget deficits that forced the government to devalue the local currency (Azerbaijan New Manat).

Due to the budget deficit, most of the government funded Projects being initiated were suspended. Projects that were under construction also experienced a significant budget deficit which required undertaking remedial measures such as changing material specifications (in our project, for example, specification of the site run cable trays was changed from stainless steel to the galvanised steel which is approximately 75% cheaper).

Differences in exchange rates also affected many ongoing Projects as more than 80 % of all materials and equipment that were being used in the local Projects were procured from abroad.

[edit] REMEDIAL MEASURES

Budget reduction might be requested during any stage of a Project and remedial measures that will be implemented will be directly dependent on the current Project stage.

[edit] STRATEGY STAGE

In the Strategy stage projects are flexible in terms of accommodating changes. The following remedial measures are suggested to be implemented by Project Manager:

[edit] Design and Quality Specifications:

Design and material specifications are one of the major factors that are affecting the total cost of construction and future facility operation and maintenance costs. Selection of alternate designs and materials might represent a potentially viable cost saving strategy; however the following recommendations are suggested:

  • Incorporating materials with better quality will promote a longer life and reduce future maintenance costs;
  • Use of BIM models that will allow identification of all potential clashes during design stage. This option will require some spending for hiring and/or training project stuff and obtaining of required software, but it still will be cost efficient for the implementation stage as less reworking will be required;

[edit] Project Scope:

While reviewing Design and Quality, it is also suggested to review the Project scope to identify “nice to have” areas which could be removed from the construction programme.

For example, during the selection of project site, priority could be given to areas with the existing access roads, as in such case construction of the new access road could be removed from scope.

[edit] Project team;

It is well known that most significant costs in construction projects are associated with labour ratios. As the Strategy stage is the stage where project teams are being formed, the following options are suggested to be considered:

  • Hire employees from areas close to the construction site to minimise transportation costs;
  • In cases when specific training will be required, it is suggested to obtain training for one of the supervision personnel that could direct and provide instructions to others in the future;
  • Employment of part-time or temporary staff may achieve long-term cost savings by reducing costs related to employment benefits that would have to be paid for full-time project staff;
  • Priority shall be given to experienced personnel.

[edit] Site conditions:

Site conditions such as poor soil, contaminated materials, utilities such as underground pipelines and cables, overhead lines, ground water, archaeological sites and etc. should be clearly identified in design documents as any unidentified utilities can increase the project cost during the construction stage.

[edit] Construction Procurement route:

Procurement routes can influences project costs. A Design & Build procurement route can have the following advantages:

[edit] IMPLEMENTATION STAGE

Reduction of the budget during the construction stage of the project is a major risk that can significantly impact project implementation, however if a budget were subject to a reduction, the following remedial measures are suggested:

[edit] Project time schedule;

Developing a detailed and a comprehensive schedule for construction projects can save time and money during the implementation stage. Therefore, it is suggested to develop more detailed schedules (Level 5 schedule) and highlight and concentrate on critical path activities.

[edit] Procurement;

Procurement and logistics can be one of the main factors that delays the construction schedule, which subsequently increases project costs as any delay causes downtime / standby of labour and equipment. The following actions are suggested:

[edit] Labour:

As already highlighted, labour holds a major part of the project costs, and poor performance of labour can significantly affect construction schedules and increase cost, therefore employee productivity should be increased and efficiency maximised by setting deadlines and providing daily targets.

[edit] Rework:

Rework can prolong the schedule and require extra expenditure, such as material and labour. Preventing or minimising rework is an effective solution for cost saving.

Using Building Information Models during the design stage could be an efficient tool for cost reduction in implementation stage of the project as it will allow early identification of clashes. Buildability reviews can be undertaken with relevant disciplines and contractors before starting construction works to identify any potential areas of concern.

Hiring of an experienced contractor can also avoid rework.

[edit] Reuse demolition material

Utilisation of demolished materials, such as concrete debris, instead of importing and disposing of new materials, for example, in the construction of temporary roads or for soil stabilisation.

[edit] Equipment:

Depending on project scale, hiring of equipment instead of buying can reduce fuel, maintenance and other associated costs.

[edit] Discounts:

It is always worth asking for a discount from material suppliers and service providers. Most of them will agree to reduce up to 10-15% of total costs to build a long term cooperation / supply-agreement.

[edit] Offsite fabrication:

Offsite fabrication can be an efficient way of relocating activities. Priority can be given to local facilities to reduce transportation / shipping costs.

[edit] CONCLUSION

It is clear that any reduction of the estimated project budget during any stage of the project will require the implementation of remedial and preventative measures to minimise effects that in the worst cases can cause project failure.

It can be beneficial to undertake a study that defines possible remedial measures and their effectiveness. However, implementation of the Risk Management process at the early stages of the project is strongly advised due to it's effectiveness if properly undertaken to identify potential risks and plan response actions before they occur.


[edit] REFERENCES

  • Urmila A Mahadik, September 2015, Volume 3,. Cost Reduction in Construction Projects. International Journal of Engineering Technology, Management and Applied Sciences, pp.397-400.
  • Sara Møller Toft; MSc. Finance and International Business - Project Finance and Political Risk - An empirical study of the relationship between project finance and political risk.
  • CIOBCode of Practice for Project Management for Construction and Development, Fifth Edition.
  • Ivan Damnjanovic, Stuart Anderson, Andrew Wimsatt, Kenneth F. Reinschmidt, and Devanshu Pandit, January 2009. Evaluation of ways and procedures to reduce construction cost and increase competition, Texas Transportation Institute
  • Sara Yngvesson , 2007 Planning a Cost Reduction Event , DISSERTATION ,International Project Management, CHALMERS UNIVERSITY OF TECHNOLOGY .NORTHUMBRIA UNIVERSITY. Gothenburg, Sweden
  • HAMZAH ALSHANBARI, 2010 , Impact of Pre-Construction project planning on cost savings , UNIVERSITY OF FLORIDA
  • Yescombe (2002) , Principles of Project Finance