The Chal­lenge of Cost Con­trol of Build & Fit-out in In­dia

VM&RD - - COLUMN - Sudhir Soundal­gekar

“There is one rule for the in­dus­tri­al­ist and that is: Make the best qual­ity of goods pos­si­ble at the low­est cost pos­si­ble, paying the high­est wages pos­si­ble” – Henry Ford.

IVice Pres­i­dent Projects Shop­pers Stop learnt this, walked through ex­actly the same jour­ney and ex­e­cuted the projects with 3 con­straints i.e. Cost, Time & Scope; which re­sulted in best yield of Qual­ity works through­out my ca­reer. In to­day’s time of rapid tech­no­log­i­cal change, tough global and domestic com­pe­ti­tion, this is ex­pected be­hav­iour from a good Project Man­ager. The to­tal cost man­age­ment is cen­tral to sus­tained cor­po­rate prof­itabil­ity and com­pet­i­tive­ness. The man­age­ment mantra to­day is con­quer­ing your costs, be­fore they con­quer you. The cost means to­tal cost for the or­ga­ni­za­tion & not adding up any hid­den cost post the ap­provals. The cost lead­er­ship strat­egy is never a com­pro­mise on ei­ther qual­ity or tech­nol­ogy or prod­uct dif­fer­en­ti­a­tion. When there is a man­age­ment dik­tat for a low costs that doesn’t nec­es­sar­ily mean the cheap­est; as there may not be any ad­van­tage if they are not happy af­ter buy­ing the prod­uct of the cheap­est cost. In other words it clearly means a se­lec­tion of the low­est from the set of best ven­dors to achieve the de­sired re­sults. Cost man­age­ment shall be al­ways driven with or­ga­ni­za­tion as the main fo­cus is to ar­rive at the tar­geted ROCE. In In­dia for cost con­trol­ling the first chal­lenge is that though the ma­te­rial & labour cost doesn’t fluc­tu­ate more than 10% ev­ery year, but tax­a­tion does vary which is really un­pre­dictable. It’s be­com­ing in­creas­ingly dif­fi­cult es­pe­cially when we bud­get any cost es­ti­ma­tions; as the var­i­ous tax­a­tion struc­tures of VAT, Ex­cise, Ser­vice Tax and En­try Tax keeps hov­er­ing around us. Sec­ond chal­lenge is we are de­pend­ing on the de­vel­op­ers to com­plete the en­tire mall in­fra­struc­ture also along with statu­tory ap­provals in place; hence though we are ready with all fit-outs done but can’t launch the store for months due to want of th­ese re­quire­ments. This de­layed pe­riod it re­sults in a dead capex in­vest­ment (with­out in­ter­est) and we keep on spend­ing on the main­te­nance of the stores else store de­pre­ci­ates. Third chal­lenge is a con­tin­u­ous rise in fuel prices within year only keeps on push­ing trans­porta­tion cost which is largely af­fect­ing all of us; hence when we com­pare like to like projects we may eas­ily see a large dif­fer­ence in fi­nal clo­sures. Fourth chal­lenge comes from fluc­tu­at­ing Forex rates which drives all our im­ports. And fifth prob­a­bil­ity might be if the ini­tial es­ti­ma­tions/quan­tifi­ca­tions are not cor­rect then it may cre­ate a ruckus at the fi­nal billing which is nei­ther ap­pre­ci­ated by ven­dors nor man­age­ment. Whether you are work­ing on a new project or an ex­ist­ing one, cost man­age­ment starts with a thor­ough un­der­stand­ing of the project ob­jec­tives. Tak­ing ac­count of risk, pro­gramme, qual­ity, de­sign and bud­gets forms the ba­sis of fea­si­bil­ity and pro­cure­ment strate­gies. One shall work closely with other col­leagues in or­ga­ni­za­tion to get an over­all view of the project. Cost man­age­ment is nec­es­sary to en­sure that the planned devel­op­ment of a de­sign and pro­cure­ment of a project is such that; the price for its con­struc­tion pro­vides value for money and is within the lim­its. Fit-out work is a ma­jor cap­i­tal ex­pen­di­ture, which or­ga­ni­za­tions do not com­mence un­til they are cer­tain that there is proper fea­si­bil­ity done & seen clear ROCE. Pre­con­tract es­ti­mat­ing sets the orig­i­nal bud­get fore­cast­ing which would be the likely ex­pen­di­ture to man­age­ment. This bud­get should be used pos­i­tively to en­sure that the de­sign stays within the scope of the orig­i­nal scheme. Most cor­po­rates are work­ing within tight pre-de­fined bud­gets; how­ever if on ac­count of se­lec­tion of the low­est cost; the qual­ity of works may suf­fer re­sult­ing into the scheme fail­ure. The prepa­ra­tion of the first es­ti­mate would be based on a va­ri­ety of tech­niques, for ex­am­ple, his­toric data or ap­prox­i­mate quan­ti­ties. Many projects of­ten have sub­stan­tial el­e­ments that are unique and for which there is no rel­e­vant his­toric data. In th­ese cases it is nec­es­sary to an­a­lyse the project in de­tailed line by line work sec­tions. Dur­ing this stage it is wise to con­tact po­ten­tial con­trac­tors and man­u­fac­tur­ers es­pe­cially with re­gard to or­der-of-cost es­ti­mates for spe­cial­ist sec­tions. Un­for­tu­nately due to un­cer­tain­ties men­tioned above the es­ti­mates of the cost and time are pre­pared and re­vised at many stages through­out the project cy­cle. As th­ese are all pre­dic­tions and should not be con­sid­ered 100% ac­cu­rate. Con­se­quently, as the de­sign de­vel­ops till last mile­stone may be dur­ing on-site ex­e­cu­tion, the ac­cu­racy of the es­ti­mate should im­prove. Other mat­ters that have an ef­fect on cost and need to be ad­dressed in­clude lo­ca­tion of project and ac­cess thereto, non-stan­dard works, struc­tural works; avail­abil­ity of labour and the pos­si­ble need of ac­com­mo­da­tion for work­men, off-site con­struc­tion and tem­po­rary works. It may also be nec­es­sary to con­sider al­lowances for more de­sign devel­op­ment, con­sul­tants, com­pany costs and gen­eral con­tin­gen­cies. We cre­ate monthly MIS up­date of cost plan which is the ve­hi­cle whereby the team is made aware of the cur­rent cost of the project. This also helps ma­jorly in track­ing cash flow for the or­ga­ni­za­tion. We also do have all the doc­u­men­ta­tion for­mat­ted in the same way it can be com­pared and rec­on­ciled. This is a ta­ble that sum­ma­rizes and rec­on­ciles be­tween each mile­stone. A mile­stone report is nor­mally a report such as…

Orig­i­nal bud­get

Line by Line item costs

Con­trac­tual sum

Fi­nan­cial state­ment

Fi­nal ac­count clo­sure.

The main-group costs are tabled to­gether

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