Cost planning

The level of detail contained with your cost plan will vary depending on the project stage, chosen procurement model and the project's size and complexity.

Broadly, the cost plan should contain:

• an estimate of the cost of the works, reflective of the level of design undertaken
• appropriate contingencies and risk allowances (again reflective of the current specificity of project scope)
• other costs, which could include elements such as:
  • specific allowances for TAFE procured equipment that is not part of the contractor’s scope but is required for the project
  • enabling works (or other non-main works packages) to allow the contractor to commence (or generally complete) the main works
  • project management allowances, and
  • related project costs (such as land acquisition if required)
• other relevant fees, and
• escalation.

A contingency is an allocation of money set aside in case of a possible, yet uncertain, future event or events.

Contingency should be established and managed in accordance with the delegations and approvals determined as part of project governance. The total contingency allowance will change over the life of the project, generally decreasing as the specificity of project scope increases, and is likely to include:

• design contingency
• construction contingency, and
• project-specific risk allowance.

You may also include some identified specific project contingencies for any particular areas of significant uncertainty or risk that warrant a separate project budget management allocation.

Design contingency

Design contingency is an allocation of money set aside for unexpected costs during the design development stage. Design contingencies should be determined based on project-specific requirements.

Design contingency should decrease as the level of design increases and should disappear entirely at the conclusion of design development.

Construction contingency

A construction contingency is an amount of money set aside to cover any unexpected costs that may arise during the project delivery phase.

The level of construction contingency is likely to be higher for refurbishment works than new works, as there are a larger number of unknown factors. A minimum construction contingency would normally be approximately 5% of the construction budget.

Risk allowance

A risk allowance is the total sum of money set aside to cover specific risks, identified in the project’s risk register, which may arise on the project. Each risk will need to be costed, taking into account the relevant risk’s likelihood of occurrence and potential consequence. To help quantity these risks and depending on the project's complexity, you may wish to engage a commercial advisor and/or quantity surveyor.

Depending on the project, these additional risk items may include existing services or structural capacity, demolition, external work and special site-related costs (e.g. asbestos or soil contamination). Best practice guidance on risk quantification can be found within the Department of Treasury and Finance’s (DTF) risk management guidelines. Guidance on risk registers is available.

Tender options

Whilst not a form of contingency, tender options may provide project budget flexibility by asking tenderers to price specific non-essential components of the construction works separately. the Office of TAFE Coordination and Delivery (OTCD) recommends that tender documents are constructed with a base tender plus tender options equivalent to 10% of the construction budget component. These tender options could include items such as landscaping, interior fit-out, and certain material options which are not essential to the functionality of the building but may be considered for inclusion if competitively priced. You can then choose to accept or reject the inclusion of these options depending on whether they fall within the project budget. This strategy may assist you in achieving value for money (VFM) outcomes and assist in negotiations with short-listed tenderers. Prices received at tender are likely to be more competitive, providing best value-for-money, than those received during post-tender negotiations or during the construction process.

Depending on the project's size and complexity, you may consider engaging a quantity surveyor to develop the cost plan. The larger and more complex the project, the more likely engaging a quantity surveyor will be beneficial.

At the master planning phase, high-level analysis of options is undertaken using indicative pricing (amongst other criteria), which helps to provide a cost ranking of various options. The main purpose of cost planning at this stage is to provide decision-makers with the information necessary to decide on whether to move forward with a certain high-level strategic solution option.

Typically, during master planning and early concept design development, cost estimates serve to initially assess project feasibility. These cost estimates are prepared when little or no design information is available and often rely on benchmarked cost and program data from similar precedent projects.

At this phase, cost plan accuracy is low as there is limited design information and is typically -50% to +50% accuracy.

The OTCD typically referred to this estimate as cost plan A.

The pre-concept and concept design cost plan progresses the feasibility study. While more detail is available at this level of design, compared with the master planning phase, the cost plan is still based on limited design and scope information, often prepared within a very limited amount of time and with relatively little effort expended.

Cost plan accuracy at the pre-concept and concept design levels are typically -25% to +50% and -10% to +35% respectively.

The OTCD also typically refers to this cost plan estimate as cost plan A (noting in some instances industry may refer to this as cost plan B).

The schematic design cost plan builds on the previous plan’s level of detail and aims to increase certainty and inform design development.

Cost plan accuracy at this level is typically -10% to +25% / 30% and may include a cost element breakdown with approximate quantities at component or work item level with priced unit rates.

The OTCD typically refers to this estimate as cost plan B (noting industry may sometimes refer to this as a cost plan C).

The detailed design cost plan continues to build on the previous plan’s level of detail. The purpose of this cost plan is to increase certainty and continue to inform design development.

At this level, cost plan accuracy typically varies from -10% to +20% up to -5% to +10% and will likely include a refined cost element breakdown.

The OTCD typically refers to this estimate as cost plan C.

A fully documented design may be prepared, depending on the selected procurement model, to support market engagement and to prepare for the procurement process.

This level of cost estimate is often a first-principles estimate and requires accurate knowledge of the direct costs of resources (i.e. plant, labour, materials and subcontractor prices) as well as indirect costs (i.e. site preliminaries and overheads). This level of cost estimate involves the greatest level of detail and requires significant effort to prepare and is normally only undertaken for the most critical areas of the project. All items in the estimate are usually costed on a per unit basis from actual design quantities.

The OTCD typically refers to this estimate as cost plan D.

At this level, cost plan accuracy is typically -5% to +5% and may include firm bills of quantities in accordance with the method of measurement priced using unit rates.

During the project definition, funding and approvals phase, you will need to develop a cost plan which will form the basis for the amount of internally or externally funding sought. For business-as-usual projects, the cost plan may be a relatively simple benchmarking process.

Given the limited design and scope information available at this phase, the level of detail required for the cost estimate is typically either cost plan A or B.

The Department of Treasury and Finance’s (DTF) Investment Lifecycle and High Value High Risk (HVHR) Guidelines section 3.2 Cost Accuracy, outlines best practice expectations for successfully delivering a project on budget, and provides broad guidance on which types of cost estimates and the level of cost accuracy DTF expects at preliminary business case and full business case stages.

The HVHR cost accuracy guidelines can be used as best practice guidance for all project classifications.

During the procurement phase, you will need to develop a cost plan which will assist in assessing the market’s responses relating to pricing. For business-as-usual projects, the cost plan may be a relatively simple benchmarking process.

Depending on the procurement model and the associated level of design produced, typically a cost plan C or D will need to be prepared.

Cost plans are not typically included in the tender documents, however, you may wish to include the costing of some items where it may be difficult for tenderers to provide an accurate estimate. All tenderers will include these as identical allowances against the specific items. Your OTCD representative can help advise when this may be appropriate during consideration of a go-to-market strategy.

The Department of Treasury and Finance’s (DTF) Investment Lifecycle and High Value High Risk (HVHR) Guidelines section 3.2 Cost Accuracy, outlines best practice expectations for successfully delivering a project on budget, and provides broad guidance on which types of cost estimates and the level of cost accuracy DTF expects at a project’s procurement stage.

The HVHR cost accuracy guidelines can be used as best practice guidance for all project classifications.

Effective cost management during the delivery phase aims to ensure value for money is achieved and that the project is delivered within the approved budget. To ensure value for money, you should establish cost management processes to monitor project costs and provide an early warning of potential financial problems.

Guidance on managing costs throughout the delivery phase is available.