The Challenge of Cost Control of Build & Fit-out in India
“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…
Line by Line item costs
Final account closure.
The main-group costs are tabled together