Quantifying the Business Problem
Reviewing secondary sources, as well as information gathered through several interviews conducted with key decision makers (primarily general contractors), we have developed a simple model for quantifying the waste incurred from unnecessary estimation cost contingencies, change orders, and RFI's. These impacts are isolated to general contractors but span the design and construction phases of a given building project. We have separated these waste cost factors into two broader categories:
- Operating costs – costs for managing RFI's and change orders
- Project costs – costs of estimation contingencies and the net value of change orders
Operating Costs—RFI and Change Order Management
Operating costs include costs that impact the bottom line of the general contractor. In our model, we have narrowed the analysis to focus on the two operating costs that can be most easily addressed during construction: RFI management and change-order management. In 2004, the National Institute for Standards and Technology (NIST) published a research report titled "Cost Analysis of Inadequate Interoperability in the U.S. Capital Facilities Industry." In this study, the NIST developed a cost model for a number of business processes that impact building projects and generate waste. We refer to this study to determine general contractors' RFI cost metrics during the design and construction phase of building. According to the NIST study, general contractors waste approximately $0.12 per square foot and $0.16 per square foot during the design and construction phases of building, respectively, with RFI management. For general contractors the "design phase" essentially involves the processes of estimating and bidding. In order to measure the waste associated with change-order management, we extrapolated a separate cost from the RFI management metric during the construction phase, using a 2:1 ratio, or $0.32 per square foot for change-order management.
Project Costs – Estimation Cost Contingencies and Change Orders
The second waste category includes project costs, which refer to the hard materials and supplies and labor costs that are required to meet the specifications for cost estimation or unexpected change orders. Based on interviews with construction executives, cost estimation contingencies vary based on the project complexity and the clarity of the documentation provided in a bid request. For moderately complex capital building projects, contingencies of 10 to 20 percent are considered common without the use of BIM or color 2D construction documents. Secondary research reveals that, industry-wide, between 5 percent and 7.5 percent of a given project budget will account for change orders. Anecdotally, in discussions with business leaders, this percentage can be 30 percent or higher, depending on the complexity of a project.
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