Hello, my name is Sam Spata. Welcome to Lean in Cost Control. The contents today, we're going to talk a little bit about money, estimating, what values means and how lean pulls it all together. And stop at the end, as we always do for an opportunity for feedback. Let's talk about money. 400 years ago, Francis Bacon made an observation, that's very appropriate today to estimators. "If money be not thy servant, it will be thy master." the purpose of this course is to help you master money, as an estimator involved with capital project delivery. More recently the developer, Bruce Eichner, in a really wonderful little book, noted that, "you don't always get what you pay for in life, but you almost never get what you don't pay for". Great little book High Rise, I recommend you read it. And in popular culture. Well, Cyndi Lauper saying, "money changes everything," and one of the things that we learn in business, is that you can put a dollar for your own, just about anything. Money changes time, we say time is money. Money changes quality. Quality, is something that we can measure, in terms of Dollars and Cents, Euros, Pounds. So, how do we get a hold of it, in the process of estimating. Let's take a moment and think just how important this is, in terms of values to the owner. This is recent data Dodge Analytics, with the Lean Construction Institute and you'll see that. For most projects on the typical project, cost performance is much less than schedule performance. But when lean is applied, cost performance gets much, much better. The best projects that you see here, do much better than a schedule. It's a big swing when we pay attention to our processes, for estimating and value on a project. And it's important as you can see, it's the second highest ranked value stated by owners today. And estimating, is subject to pressure and my Rule # 2, "100% of projects estimates too high never go ahead". That's where the pressure comes from. Because the estimate is the key soul document, in terms of whether or not a project will proceed. Let's talk about estimating. First of all, what is an estimate? I like to define it as a Predictive Cost Model, that determines the future market value of a design intent using incomplete ambiguous data, incomplete, ambiguous data. If your data is complete and unambiguous, then you're producing a quantity survey or a bid and that is not an estimate. The estimate is a Predictive Cost Model, where we gaze into a crystal ball it sometimes feel. And as Yogi Berra pointed out [LAUGH] to us, "it's tough to make predictions, especially about the future". We've got better tools than a crystal ball. With BIM in 3D, 4D, and 5D, we take some of the ambiguity out of a design indent. But the completion actually, may be much less than it appears to be in a BIM model, so we are predicting using incomplete, ambiguous data. The reason we predictive, is we want to help designers in the selection of building systems. The Predictive Cost Model, helps with procurement. We identify those systems, where there's the potential for cost overruns and look to see other alternative approaches. Can we maximize competition, in that bidding environment? The cost is, a criterion in decision making and you will see later on in the discussion of target value design. But simply thinking along the lines of good, better, and best can drive better decision-making and cost control. And project delivery. The Predictive Cost Model, is what allows us to meet the budget for allowable cost, an important term in target value design. Let's look at some scenarios at bid. If that vertical line is a single value, the estimated cost below to one direction and above to the other. You might get a bid scenario like this, where 5 bids come in, one's right on, and others above, and some are below. Or you might get a scenario such as this, where you get a tight cluster of bids that are mostly above the estimated cost. Well, on the one hand, you've got something that is accurate, you got a bell curve there, and the other that's precise. But neither is what you want your estimate result, in terms of the bidding. The precise grouping of bids, are too high. They're above the estimated costs and the apparently accurate bids, have a very wide spread which means. People are interpreting the design attempt, on those documents very differently. What we want in our Predictive Cost Model is, a situation that delivers bids that are ideally precisely accurate. We had a tight cluster of numbers, along the line of the estimated cost. There are many variables, that an estimator must consider, and the team of designers, and owner must consider and instructors. First is Time, we're projecting out into the future. So what is the cost of money? How is it changing? What is the escalation factor? Next, we have to think about the Location, what are the market conditions? Is there competition? Is it a hot market? Do they have the availability, for the types of labor and materials necessary? Another is the Typology, what is the building? Is it a laboratory, a hospital, a high-rise residence? What are the functional expectations, that the designers and the trays, the builders, and the owner. Must take into consideration that affect cost? Scope certainly, and when we look at Scope, we're going to look at a technique I call "segmentation," where we break Scope out into major segments. Chunks of site, the base building, and fit-out. With this segmentation model, you can get much better control on your Predictive Model for Cost. There's the Schedule, is there a date certain finish? Liquidated damages perhaps? Is the start time known? Will trades be available? Are you in an environment, where there are many schools? Both higher education, K-12 that do a lot of work, from May to August and you're trying to do your project at that same time. Do you fit in during the peak, or the lulls of seasonal construction? Then there's the Procurement. What process will we be using, to actually solicit bids? What is the buyers reputation? That buyer can be the owner themselves of the institution, or the construction production manager, or the general contractor. What's the Reputation? Does it affect the way that prices come in. And what about the items, that are below the line? Are they under control? We're going to look at these variables. And the way we're going to look at them, is to begin with what I call the estimator 2-step. First, we benchmark, and then we normalize, and normalizing itself has three separate steps. So let's take a look. First, there's the escalation factor. This is 100 years of change and construction costs. The vertical lines, represent a change upward in cost over prior year, and the red, or downward lines, represent deflation every periods. When the cost, was less in a succeeding year than the year before it. Wars, Great Depressions, Baby Booms, things have a big macro impact will affect construction cost. In general, you can see that the median value changes always upward, plus 4.5% each year in median. As opposed to the year before. Sometimes, that 4.5% number gets blown out of the water. In the run up to the Great Recession, let's look at three indices. The Consumer Price Index, is what you and I pay for groceries and gasoline, and that bounced around 3% or so. At the same time, the Construction Cost Input, which is an input index, shows some spikes. Particularly, after the 2001 Recession. Now, an input index is one that primarily measures the cost of materials and labor going into a project where the cost to build. The Turner Index on the other hand, is a very useful output index. It's measuring for the industry as a whole, particularly here in North America. What are the bids coming at us? Are the bids changing upward or downward, from one year as compared to the next. Let's just look at those two indices. The Input Index, which is how much it costs to build a project, and the Output Index, which is how much bidders are saying they want to deliver it. You can see that around that 2001 Recession, we had a buyer's market. Because the Construction Index, what it costs to build, was going up at a greater rate than the bids. The bids were coming in less than that, good time to be a buyer. But in that run-up to the Great Recession, we were clearly in a sellers market. That the bid prices, and this is bidders for everyone across North America, those bid prices were coming in significantly higher. Than the cost of material and labor going into a project. That's a timing thing, that has to be considered when we're doing that Predictive Cost Model. To figure out what should it cost at some point, in the future to deliver our project. Now in addition to the short term spikiness, the fundamentals do evolve. We have evolve from a industry, that in the past was about expensive material and cheap labor. To today, where we have expensive labor and relatively cheap material. What the future holds, can't say but we know there's certain factors that are big factors. The globalization of commodities, when economy such as India and China start buying rebar and copper. That price goes up everywhere in the world. Work forces, are aging in many industrialized country. There is a movement towards less unionization and the internet of things, is affecting projects. In some cases, leveling the playing field making the pricing, for certain commodities and manufactured goods, known to everyone.
