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16 APR 2020

The need for cost management in the real estate industry

The construction industry has recently seen a number of large-scale changes and modernization efforts, from the embrace of new technology to a more inclusive workforce to address the skills shortage to the adoption of more sustainable and resilient practices. The industry, as a result, is stronger and more innovative than ever. However, one issue the industry has yet to address in a concerted way is the epidemic of cost overruns and lack of standardized cost management practices.

The State of NY recently conducted a sample study on six projects, and all six projects fell behind schedule when compared with the original baseline dates, and four—with a total budget of $672.2 million—were over budget by a combined $43.2 million.
 
Much of this can be avoided through the use of qualified cost managers, particularly if they're following the International Construction Measurement Standards (ICMS). The problem is that developers and construction firms in the US aren't engaging in robust cost management—and the biggest impediment to more sustainable, standardized and transparent cost practices is educating people about what a cost manager does in the first place.

Part of the issue is that there is no standard name for the job. In the UK, the prevailing term is a cost manager. In Canada, it’s often referred to as a quantity surveyor. In the US, many firms instead have cost engineers. You also sometimes see the job title of construction economist. While the different titles bring some different job functions, it also denotes the considerable breadth of what a cost manager can deliver for real estate and construction firms. However, this international lack of standardization also shows a non-standardized way of approaching cost and adds to the difficulty of succinctly outlining what a cost manager does.

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Darren Cash MRICS
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The construction industry is now beginning to see the value in adopting cost management practices as a standard

But this is changing, as firms increasingly see the need to create transparency and use cost management techniques as a standard. More and more firms are using external cost managers to ensure objective insight, and more of these cost managers are using the ICMS to ensure best practices and a broad standard that allows for objective benchmarks. As opposed to clients exclusively using in-house data, these consulting professionals bring a wealth of independent data and a broader perspective.

Much of cost management is managing expectations for a project. No one can arrive at a business case for a project and expect that to be the final say on the matter. Instead, cost managers map out the journey from business case to out-turn cost. They provide real estate, infrastructure and natural resources clients a plan and KPIs to execute a project in line with their desired output and create fiscal transparency throughout the project cycle.

Furthermore, if there are changes, it’s important to know exactly why and how to manage them. Cost managers take a whole life cost approach, from pre-contract to when the final punch list item is done and past that into asset management and the life of the building.

Reliable international standards are critical to the industry effort to contain protracted projects and cost overruns, while the value of cost management services is highly dependent on the ethics and transparency that come with industry-wide standards.

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Cost managers map out the journey from business case to out-turn cost. They provide real estate, infrastructure and natural resources clients a plan and KPIs to execute a project in line with their desired output and create fiscal transparency throughout the project cycle

Data and experience may vary on each project, and organizations may have different goals, priorities and building strategies, but planning, structure and cost measurement and risk should not change. The principals should be the same everywhere.

Ultimately, cost management is important to a range of important trends, such as sustainability, technology and carbon neutrality, as the depth of expertise helps companies and organizations deliver on these initiatives through robust fiscal planning.

Similarly, the profession is important to evaluating the macroeconomic conditions of cities, urban design and even public health issues—such as the coronavirus—as people consider the supply chain and the workforce and the effects these things have on their projects.

  • Darren Cash MRICS specializes in the delivery of pre- and post-contract cost management services for developers, end users, government entities, architects and lenders. He advises clients in corporate real estate, education, healthcare, technology, manufacturing and hospitality sectors. Darren is on the Americas World Regional Board for RICS.
  • This article was originally published in the Mann Report.