Why securing the funding for a construction project is only part of making a sound investment decision.
An organisation has £5 million available to invest in a new building. The funding has been approved, the project has support and the next task appears straightforward: deliver the building within the budget.
But what if the facility the organisation needs could be delivered for £4 million? Or what if the proposed £5 million scheme won't provide the capacity, quality or operational performance required?
In either situation, the availability of funding tells us very little about whether the proposed investment is the right one.
Yet once a budget has been agreed, it can quickly become the starting point for every subsequent decision. Design teams work towards it. Options are assessed against it. Progress is measured by how closely the developing scheme aligns with the money available.
The conversation becomes focused on how to deliver the project for the agreed amount, rather than whether that amount represents an appropriate investment in the first place.
There's an important distinction here, particularly for organisations responsible for public money or significant capital programmes.
Having the money to build something doesn't necessarily mean it's the right thing to build or the right amount to spend.
Funding and affordability are different questions
An approved budget establishes how much an organisation has available to invest. It may have been informed by an early estimate, a business case, previous projects or the funding that could be secured.
But it doesn't necessarily establish what the proposed scheme should reasonably cost. Nor does it confirm that the intended outcomes can be achieved for that amount.
A project might be fully funded but poorly aligned with the organisation's requirements. Alternatively, a well-developed scheme might have a robust cost plan demonstrating that the original funding allocation is insufficient.
In the first case, the organisation risks committing more money than necessary or investing in a solution that doesn't adequately meet its needs.
In the second, it risks trying to deliver a scheme against a financial constraint that cannot realistically accommodate the required scope and quality.
Neither position is resolved simply by producing a cost plan that matches the available budget.
Good cost planning establishes a credible relationship between what the organisation wants to achieve, what delivering that outcome is likely to cost and the funding available.
Sometimes that confirms the proposed investment. Sometimes it reveals a gap that needs to be addressed.
The important thing is knowing which position you're in before decisions become difficult to change.
Start with what the investment needs to achieve
Construction projects are rarely undertaken simply because an organisation wants a new building.
A local authority may need to increase school capacity, improve access to public services or bring an ageing facility back into effective use. A healthcare provider may need to accommodate more patients or improve clinical environments. A developer may be seeking a particular commercial return.
The building is the means of achieving something else.
If the conversation begins and ends with the available construction budget, there is a risk that the financial target becomes more important than the reason for making the investment.
A proposed scheme might be reduced in scope to meet the funding available, but the resulting facility may no longer deliver the required capacity.
A specification might be changed to reduce capital expenditure, only to create additional maintenance or operational costs.
Equally, a design may include elements that contribute relatively little to the intended outcome but account for a significant proportion of the proposed expenditure.
These aren't simply questions about whether individual costs are reasonable. They're questions about whether the money is being directed towards the right priorities.
For a cost consultant, that means understanding the client's objectives before assessing the financial implications of the proposed solution.
What does the facility need to do? Which requirements are essential? Where is there flexibility? What are the commercial consequences of different approaches?
The answers help distinguish between reducing cost and improving affordability. The two aren't always the same.
A budget should inform choices, not close them down
One of the most valuable stages in developing a construction project is when there is still genuine flexibility over the solution.
Different approaches can be compared, scope and specification tested, and procurement options considered. The balance between capital expenditure, quality, programme and longer-term requirements can be assessed before the preferred approach becomes fixed.
Consider an organisation planning to refurbish an existing building.
The initial proposal may be based on retaining much of the existing structure and services. Refurbishment could appear more affordable than replacement.
But further investigation may reveal that extensive alterations, temporary accommodation, restricted access and the condition of existing infrastructure make the refurbishment considerably more complex than anticipated.
At that point, the relevant question isn't simply how to reduce the refurbishment cost to fit the budget.
It's whether refurbishment still represents the most commercially sensible approach to achieving the organisation's objectives.
A different scope, a phased solution or an alternative development approach may warrant consideration.
That doesn't mean the most expensive option is preferable or that every project requires an extensive options appraisal. It means that where there are material differences in cost, risk or outcome, those differences should be understood before a decision is made.
Relevant benchmarks, market evidence and cost analysis all have a role to play. But they need to reflect the actual circumstances of the project.
A cost per square metre from a comparable building can provide a useful reference point. It cannot, on its own, establish whether a particular scheme represents an appropriate investment.
The value of the analysis lies in helping the client understand what different options are likely to cost, what each would deliver and where the commercial trade-offs sit.
When meeting the budget compromises the outcome
There is understandable pressure to make a proposed scheme fit the money available, particularly where funding is fixed or difficult to increase.
Sometimes that requires difficult but sensible decisions about scope and specification.
The concern is when the changes needed to meet the budget begin to compromise the purpose of the investment.
Reducing capacity might bring construction costs within the approved allocation but leave an organisation facing another investment sooner than anticipated.
Selecting a lower-cost specification may be appropriate in one area and a false economy in another.
For organisations responsible for public assets, these decisions can have consequences for decades, often within constrained operational and maintenance budgets.
The client needs to understand what is being gained, what is being given up and whether the revised proposal still meets the requirements that justified the investment.
Equally, higher expenditure should never be justified simply because it might deliver a better outcome. The additional cost needs to be proportionate to the benefit.
The aim isn't to spend the whole budget or to spend as little as possible. It's to establish what the required outcome reasonably warrants.
Affordability doesn't end with approval
An approved business case is an important milestone, but the commercial position continues to develop.
Design decisions become more detailed. Procurement provides a clearer picture of market pricing. Programme requirements may change. New information can affect the cost of delivery.
The organisation therefore needs to understand whether the developing scheme remains affordable in relation to both its funding and its objectives.
That's different from simply monitoring expenditure against the approved budget.
A project may be reporting expenditure below its allocation while the forecast final cost indicates a potential overspend.
Equally, a proposed change may increase construction costs but be necessary to deliver an essential operational requirement.
In either case, the client needs to understand why the position has changed, what it means for the overall investment and what options remain available.
That requires effective cost planning and commercial control throughout the project, alongside a willingness to revisit earlier decisions when the evidence changes.
An approved budget should provide financial discipline. It shouldn't prevent an organisation from responding intelligently to new information.
The question behind the budget
When considering significant construction investment, organisations need to establish more than whether the money is available.
They need to understand whether the proposed solution is appropriate, whether its cost is commercially justified and whether the available funding is sufficient to deliver the intended outcome.
Sometimes the evidence will support the original proposal. Sometimes it will identify an opportunity to achieve the same outcome more economically. And sometimes it will show that the investment needs to be reconsidered.
As a Chartered construction cost consultancy, Shard Stone helps clients understand those choices and their financial implications, establishing a sound commercial basis for the decisions being made.
Because the real measure of affordability isn't simply whether a project can be delivered for the money available.
It's whether the money available is being put towards a project that delivers what the organisation actually needs.
Sharp facts. Solid ground.
Shard Stone | Chartered construction cost consultancy
