Project Management Institute

Surplus Of Caution

Cost-Conscious Practices Can Build A Reserve That Staves Off Late-Stage Budget Overruns

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By Sidd Mukherjee, PMP

Midsize to large engineering and construction projects have a reputation for overrunning their budgets. On a recent project, I was determined to finish under budget. So I started the project by building a war chest. My idea was to reduce expenditures at the front end, especially during engineering and procurement phases, and develop a reserve fund that could be spent toward the end of the project when resource (manpower and equipment) requirements peak and expenses mount.

The US$25 million project was to construct a plant in Saudi Arabia for a major mining company. I had a combination of roles—contracts manager, project controls manager and deputy project manager—so I was empowered to take steps to control spending. Moreover, since I started on the project on its zero date, I had an advantage in trimming costs.

My analysis of the budget estimate revealed there was very little opportunity to save on procurement costs. However, I saw other ways to save money. For one, the construction budget had a few redundant items. Typically, when redundancies are discovered, teams get relaxed and spend more than necessary at the front end. So instead of communicating these cost savings to the team, I focused on creating a cost-conscious mindset among team members.

Additionally, though the project plan called for more team members than necessary, we combined roles at the top and hired people who could multitask. Moreover, we had a good sum of money budgeted for the engineering contractor to bring various specialized engineers into the team during the construction phase. We knew this would be expensive, so instead we handpicked just one person from the engineering contractor and had some of our own resources report to him. All of these contributed to our savings.

Other steps I took to build the war chest included:

  • Whenever possible, fabricating components locally as opposed to importing
  • Aggressively negotiating on purchases and making sure each piece of equipment was purchased well under budget
  • Ordering imported components earlier to allow enough time for them to be shipped by sea rather than by air
  • Keeping accurate records of manufacturing and fabrication defects that were rectified on-site and charging those costs back to the manufacturer/ fabricator

Together, these actions shaved 10 percent off the budget. Later in the project, we discovered we had to pay a premium to the contractors to finish the work on time. It wasn't a problem: We could dip into the war chest as required. In fact, the whole project ended up 5.5 percent under budget—proof that large construction projects are not fated to run over budget. PM

img Sidd Mukherjee, PMP, is a commercial manager at SNC Lavalin International, Calgary, Alberta, Canada.

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