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Tips For Professional Estimating Users of D4COST

Designing Within The Budget:

A Responsibility Shared By Owner And Architect

By Arthur F. O’Leary, FAIA, MRIAI

It is a traumatic experience for the owner and architect alike when the project is priced and the lowest responsible bid exceeds the available funds. Sometimes it will result in a canceled project and much disappointment, ill-will, and legal repercussions. Usually, the owner will hold the architect entirely responsible for the whole unfortunate situation.

However, it is very difficult for an architect to design within a stated budget without the active cooperation of the owner. This important concept is recognized in the AIA Owner-Architect Agreement (Document B-141, Fourteenth Edition, 1987).

The owner is required to "establish and update an (overall budget) for the project, including the construction cost, the owner’s other costs, and reasonable contingencies related to all of these costs (paragraph 4.2)." Architects should insist that owners comply in full with this provision to help minimize misunderstandings as to which elements are included in the architects’s design budget and which are not.

Often owners do not realize the magnitude of related and incidental costs and their impact on the budget The actual building cost can be and often is less than 50 percent of the overall budget including land acquisition costs. Even without the land, many overall budgets would allocate less than 60 percent to the general building cost.

A suggested format for an owner’s overall budget accompanies this article. This can be used as a guide for owners who need help in compiling their cost figures. Some of their costs will be known or already have been incurred, such as land acquisition costs. All other anticipated costs will have to be estimated. If the owner does not have the means to estimate the rest of the costs, consultation should be sought with a knowledgeable building contractor, real estate appraiser, or building cost estimator. Some of the information will be obtainable by consultation with the owner’s insurance advisor, banker, accountant, and lawyer. Some architects maintain a file of current costs to assist their clients in preparation of their overall budgets.

After reviewing the owner’s overall budget form in blank, it is obvious that architectural design should not be commenced before the overall budget is fairly well developed, the total determined, and it is acceptable to the owner.

If the overall budget is comprehensively considered before any funds are committed, it would still be possible to make beneficial adjustments in the individual components as a value engineering technique and for controlling the total cost. As time passes, and more funds have become committed to specific items, it becomes less possible to make effective and acceptable adjustments.

Hand in hand with the budget is the owner’s program. The budget depends on and is an expression of the owner’s program. Many of the budget items cannot be realistically estimated before the program is finalized. A number of assumptions will have to be made in estimating the quantity, quality, and current prices of the various budget line items. The form should be checked for completeness, adding supplementary items as appropriate to a specific project.

Every line item should be analyzed as carefully as possible, multiplying numbers of units by unit costs where applicable. When estimating, it is better to err on the high side, but excessive error will yield a distorted picture and possibly a discouraged owner and an aborted project. An erroneously high estimate will demand cutbacks in scope and other economies which will later be regretted when the true costs are then known and it is too late to revise the project.

The owner should also prepare a provisional time schedule compatible with the program and budget. It should state the key dates for starting and ending each of the major events such as design, bidding, construction, and completion. Reasonable time allowances should be included at all stages for reviews and approvals by financiers, government, and owner.

The program, budget, and time schedule, all prepared by the owner, should be presented to the architect for evaluation each in terms of the other, as provided in subparagraph 2.2.2. It is only after the reconciliation of these three documents to the mutual satisfaction of owner and architect that attention should be turned to commencement of architectural design.

Schematic Design

It is probable in many cases that the architect will have completed the schematic, at least provisionally, in order to validate the program and thereby allow that portion of the over all budget to be completed. The AIA architectural services agreement provides that during the Schematic Design Phase the architect will prepare "a preliminary estimate of construction cost based on current area, volume, or other unit costs." (Subparagraph 2.2.5) At this state the architect must have firm knowledge that the owner’s designated program will fit in the building area allotted in the budget and that the quality corresponds with the assumed unit prices. The assumed quantities must not exceed the budget description of the elements being designed by the architect.

The assumed unit cost must be compatible with the quality of construction as determined and controlled by complexity of structure and systems, expense of materials, and refinement of detailing and workmanship. If the quality designated by the architect is too high, then the size of the project will have to be reduced to compensate. If the designed building area is excessive, then the quality must be reduced accordingly.

Sensitive design judgment must be exercised in determining the appropriate balance between quantity and quality consistent with the owner’s program and budget. It is essential that the owner and architect are in complete agreement at each point along the way as to the contents and meaning of the program, schedule, and budget. Only effective and open communication will make this possible.

Design Development Phase

As the project design is developed in an increasingly detailed manner, the architect must be very careful not to increase the size or number of any element of the project. And if the complexity and quality remain unchanged, the program, schedule, and budget will still be intact. The architect must be ever alert to inform the owner of the economic and time impact of any requests for deviation from the previously approved schematic design. Moreover, the architect must resolutely fight the urge to elaborate on or enlarge the project without the owner’s informal approval and with appropriate adjustments to the program, budget, and schedule.

The owner-architect agreement at this point requires the architect to "advise the owner of any adjustments to the preliminary estimate of construction cost." (Subparagraph 2.3.2) If the owner and architect are still in accord with the design and all are in agreement with the program, budget, and schedule, they are getting closer to a successful project.

Construction Documents Phase

If the design development documents were realistic and complete, it should not be difficult to prepare the construction and bidding documents without violating the sanctity of the programs, budget, or schedule.

Although the owner has the unquestionable authority to make (and pay for) deletions, changes, and additions to the scope and quality of the project at any time, the architect must constantly alert the owner whenever these decisions produce some effect on previously approved programs, budgets, and schedules.

If the architect does not immediately raise the alarm when appropriate, the owner might not realize the consequences of what might have seemed harmless adjustments. Needless to say, the architect is not authorized to increase costs by enlarging or embellishing the project. The owner’s informed approval must be obtained for all changes in the previously approved program, budget, or schedule.

Bidding Or Negotiation Phase

At the end of the construction documents phase, the owner and architect should once again be in complete harmony and both secure in the knowledge that the program has not been amended except with the owner’s knowledge and consent. The portion of the owner’s overall budget which is comprised of components designed by the architect should still be valid if all changes in quantity and quality have been ratified by the owner and the budget adjusted accordingly.

The estimated time schedule will still be intact if all events up to this point have taken place on time and the schedule adjusted to reality where necessary.

At the bidding or negotiation phase the construction documents will be tested in the market place. The budget for the portion being bid should be adjusted if necessary to account for inflation from the date of the estimate to the date of tendering. Receiving of bids five or ten percent over or under the estimate would not be unusual. An additional variation above the low bid among competent bidders is to be expected. When bidding documents are skillfully prepared, variations among bidders will diminish.

When variations among the main body of bids are small, exceptionally high or low bids are probably erroneous.

Cost Estimates Not Guaranteed

The architect’s estimates of cost submitted to the owner in the schematic, design development, and construction document phases should be based on realistic current costs which are available in several local, regional, and national estimating publications to which reference can be made. These estimating factors should be carefully applied, using reasonable skill and judgment. Avoid the temptation of wishful thinking or unrealistic expectations that a favored design will somehow materialize.

Architects do not and cannot guarantee such estimates and the AIA architectural agreement makes this clear in subparagraph 5.2.1 which states in part, that the architect’s estimates "represent the Architect’s best judgment as a design professional familiar with the construction industry. It is recognized, however, that neither the architect nor the owner has control over the cost of labor, materials, or equipment, over the contractor’s methods or determining bid prices, or over competitive bidding, market or negotiating conditions. Accordingly, the architect cannot and does not warrant or represent that bids or negotiated prices will not vary from the owner’s project budget or from any estimate of construction cost or evaluation prepared or agreed to by the architect."

Fix Limit Of Construction Cost

The architectural agreement clarifies that there is no fixed limit of construction cost inherent in the contract unless the owner and architect specifically agree otherwise in writing. If a fixed limit is so established, the architect will be allowed to include contingencies for design, bidding, and price escalations.

The architect would also be permitted to determine what materials, equipment, systems, and construction types are to be used and to adjust the scope of the project as necessary. The architect would also be allowed to include alternate bids for adjusting the price to meet the fixed limit. Fixed limits would be adjusted to account for inflation. (Subparagraph 5.2.2)

If the fixed limit, after all allowable adjustments, is exceeded by the lowest bona fide bid or negotiated proposal, the owner is given four options for proceeding: approve an increase in the fixed limit, approve rebidding or renegotiating the project within a reasonable time, abandon the project, or cooperate in revising the project scope and quality as required to meet the fixed limit of cost. (Subparagraph 5.2.4) If the fourth option is chosen, the architect is obligated to revise the contract documents at no additional cost to the owner. This is the maximum extent of the architect’s responsibility arising out of the establishment of a fixed limit of construction cost. (Subparagraph 5.2.5)

Elimination of Cost Estimating From Architectural Services

Some architectural offices would prefer to eliminate all cost estimating services from their contracts along with all of the attendant responsibilities. This can be easily accomplished by amending the AIA agreement to eliminate all references to budgets or cost estimates in subparagraphs 2.2.2, 2.2.4, 2.3.1, 2.4.1, and 2.5.1. Also, eliminate subparagraphs 2.2.5, 2.3.2, and 2.4.3 in their entirety. Eliminate paragraph 4.2 and all of paragraph 5.2. This will be acceptable to many clients who are interested primarily in their chosen architect’s design ability and the production of the contract documents. Such a client would rely on other experts for controlling budgetary aspects of the project.

Various provisions of the AIA standard architectural services agreement have been paraphrased or quoted in part. The reader is urged to refer to the entire document for the complete and exact wording in the proper context.

Any who are contemplating entering into an agreement based on the recommendations in this article are advised to confer with an experienced construction industry lawyer for realistic and authentic advice.

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