Accurate Cost Escalation Plays a Vital Role in Estimating and Funding
Creating an accurate cost estimate in the present is challenging enough but extending that estimate into the future presents an even steeper incline. Whether it's a year, one year, or even a ten-year outlook, pinpointing the accuracy of costs can feel like an uphill battle. The complexities involved beckon construction and project management and portfolio owners to seek innovative solutions to assess the ‘estimate of probable cost’ properly. Acknowledging past influences and trends can illuminate the path forward, easing the uncertainty that typically envelops any forecasting process.
Historical Data Combined With Reliable Escalation Informs Sound Planning
When developing cost estimates, reflecting on past projects is essential. Examining the costs associated with labor, materials, and equipment across various scopes of work can reveal valuable insights. While mining through historical data may seem tedious—tracking, updating, and analyzing trends—it plays a pivotal role in developing a more accurate prediction. Software encompassing historical data and tools for calculating, analyzing, planning, and prioritizing could be key in saving time and money and preventing costly mistakes.
Cost escalation is an unsettling reality in project management. Defined as the rise in costs associated with a product, service, or commodity over time, escalation operates similarly to inflation but is specific to particular cost categories. Understanding escalation is critical for project managers and facility planners, especially concerning labor and building materials. These rates could vary significantly from general economic inflation, stressing the need to represent expected cost increases accurately.
As projects are planned, anticipating future costs, it becomes vital to track price fluctuations and escalation rates using reliable data. For this reason, many organizations now depend on specialized software dedicated to monitoring these ever-changing costs. Such tools offer consistency and help maintain accurate data, ensuring teams can make informed decisions regarding budgets and forecasts.
Clarity and Transparency Can Be Found With Integrated Tools
An escalation analysis is a practical reference for understanding how economic events impact project costs. Significant global disruptions, such as those seen during the COVID-19 pandemic or changes to international trade agreements, can wield immense power over material and labor prices. The ability to understand how a single event can impact otherwise typical trends can be accomplished with graphs and an adjustable trendline and is vital to forecasting future escalation values.
Owners and contractors must lay out current expenses and forecast future costs transparently. With adequate planning and foresight, projects can stay on budget and avoid the need to request additional funding or reduce the level of built work. Elevating budgets in alignment with escalation will prove vital when preparing for future financial needs.
The most effective approach to navigating future project costs is utilizing software that integrates escalation tracking with estimating, planning, and funding tools. This comprehensive methodology offers complete visibility into current and prospective costs while prioritizing ongoing projects.
For example, consider a client in charge of a multi-billion dollar portfolio with significant deferred maintenance issues whose leadership determined they had underestimated and underfunded their deferred maintenance over the years. Underscoring this situation was the cost of large-scale construction of a new flagship asset. When board members are left to wrestle with resource allocation, they can face the harsh reality that their facilities management team lacks a robust forecasting strategy. This would prompt anyone with a fiduciary responsibility to gather and analyze all available data. Imagine this happening right before the onset of the pandemic.
As costs surge and policy changes restrict labor mobility, an organization could find itself struggling to produce reliable insights into the implications of its decisions. This uncertainty may not only spark concern among decision-makers about financial allocations but also should lead to a broader quest for transparency and understanding of the rationale behind funding increases.
Through the collection and integration of all available data, modeling tools can help to illustrate deferred maintenance deficiencies identified during facility assessments clearly. Despite the uncertain backdrop of a pandemic or other major economic upheavals, projecting costs based on a total cost of ownership model sheds light on short- and long-range funding needs. Undertaking this strategic work before initiating additional funding requests leads to a solid foundation for planning rooted in irrefutable evidence.
The stark contrast between budgeting a nominal fixed annual percentage in deferred maintenance versus the reported 35% increase1 resulting from the pandemic underscores the pressing need for accurate reference tools.
Accounting for accurate escalation also presented a challenge to budgets and estimates for new construction and renovation projects. When construction is delayed a few years after the initial budgeting process, an accurate escalation markup is essential to the total project budget. Too often, not accounting for escalation during these delays results in the reduction of the original project scope of work, which can substantially affect an organization’s overall goals.
By extracting relevant data and applying precise percentages, decision-makers now clearly understood how to allocate escalation in budgets systematically.
Well-Designed Software Solutions Support Financial Stability
Accurate cost estimation is an evolving challenge that requires a strategic approach grounded in historical analysis and supported by reliable reference tools. By integrating robust software solutions into the planning phase, project managers can better navigate the complex landscape of escalation and funding needs. As organizations increasingly recognize the importance of transparency and data-informed decision making, they proportionally enhance their capacity for effective asset management and maintenance planning in an unpredictable world. Investing wisely in forecasting today ensures not just the preservation of assets for tomorrow but the realization of long-term financial stability and success.
Over the last 15 years, Facility Optimization Solutions has grown from a small, driven team to a major, multi-office entity within CannonDesign — consistently recognized as one of the premier integrated design firms in the world.
Today, FOS has assessed more than 1 billion square feet of physical assets and performed work in every major market sector across the United States and Canada. Our diverse team of subject matter experts provides professional consulting and services, including physical asset management, cost estimating, capital planning, and job order contracting, which are backed by industry-leading software solutions.
More than just software, FOScore® is expertise honed from industry use. Scalable and customizable for everything from billion-dollar portfolios to mid-sized design and construction firms and contractors of all sizes, more information about FOScore® can be found at www.foscd.com.
