How to Use Target Costing to Achieve Success in Construction Projects

Any construction project essentially has three objectives: the budget, the schedule, and the scope, usually part of an equation with one unknown. In a good number of cases, the scope and schedule are specified, allowing the contractor to derive the corresponding budget. However, for some clients, the budget is the essence and the main constraint: How could target costing be used to set and control cost objectives in construction projects?

Firstly, there is a need to have benchmark cost data regarding the project to be built. This documents the financial possibility and probability of the construction. Let’s say you want to build an apartment building with specific features, and you have recent data indicating $300 per square foot and about $350k per apartment. This information will help set your target cost and any associated sensitivities.

Secondly, to set your cost goals, it must be remembered that target costing is essentially a top-down approach. In this case, the Uniformat II classification is most convenient. In fact, the total building cost must be distributed down to level 1, level 2, and sometimes level 3 building systems and project fees. Of course, using benchmark data and allowing the design and construction team to specify the systems corresponding to each cost goal. Let’s say you set $25 per square foot at level 2 for interior finishes; that is the goal to be monitored and controlled during the design and construction phases.

Thirdly, the type of procurement or project delivery method chosen by the client must ensure an appropriate risk-sharing and associated level of control. The design-build and construction management delivery methods seem to be mostly used. As a motivation for both contract parties, a guaranteed maximum price contract with profit-sharing can be used. Then the designer needs to select each system so it corresponds to the theoretical cost goal, and the contractor needs to ascertain the possibility and report on the actual cost. If the possibility is negative, various iterations may include selecting different building materials, equipment, and systems, or the redistribution of sublevel cost goals. In some instances, critical client decisions may be required, and value engineering could be put into the balance.

Is there any organization that does not want to achieve and deliver on their cost goals? Using sound benchmark data, an appropriate building classification system, and selecting a proper project delivery method, along with a great project team, is an effective way to set and control cost goals in construction projects.

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