Cost exposure
Hidden cost exposure
The budget held through design. Then it moved twice in six weeks once the packages came back. Nothing had gone wrong. It had simply become visible.
The situation
The number moved, but nothing had changed
A residential scheme carried a cost plan the board had approved and the funder had underwritten. Every reported position through design showed the scheme on budget. Then subcontract packages returned and the number moved, first by a manageable amount, then again.
The client asked the obvious question: what has changed. The honest answer was that nothing had. The exposure had been present since Stage 3. It had been sitting inside provisional sums, inside items marked design by others, inside exclusions in the contractor's qualifications, and inside a contingency that was being reported as a single figure with no view of what it was already spoken for.
A budget can be accurate and still be misleading. Accuracy describes the number. Transparency describes what the number is carrying.
What we found
A total, not a risk position
The cost plan was competently produced. Nevertheless it reported a total rather than a risk position, which meant the client could see what the scheme cost but not where the cost was uncertain.
Provisional sums were carried at their original allowance, several stages after the information needed to convert them had been available.
The contractor's qualifications transferred defined risks back to the client, and those transfers had not been priced anywhere in the client's own position.
Contingency was reported as a percentage. Consequently no one could say which known risks it was already covering and which it was not.
Elements described as design by others had no owner and no budget holder.
What changed
Separate what is measured from what is assumed
The cost position was rebuilt so that the board no longer received a moving number. Instead it received one number and a clear statement of what could still move it, which is a different conversation entirely and a considerably shorter one.
Give every provisional sum a date and an owner
Each sum received a conversion date and a named person responsible for closing it, so an allowance could no longer sit untouched through three design stages.
Price the contractor's exclusions as client risk
Exclusions in the return were valued and shown on the client's own position, rather than left as a gap between two documents that nobody reconciles.
Turn contingency into a register
Contingency stopped being a single line. It became a list of identified risks with values against them, so drawdown could be explained rather than noticed.
Give design by others a budget holder
Every element described that way was assigned to a party and a budget, which is the only thing that stops it arriving as a surprise at package stage.
Why this happens
Exposure hides between documents
A cost plan, a specification, a contractor's qualification schedule and a design responsibility matrix each describe part of a scheme, and the risk lives where they disagree.
Cost planning and estimating addresses this by mapping provisional sums, exclusions and design by others as a standing part of the cost report rather than an appendix to it. Additionally, tendering and procurement determines how much of that exposure a client retains before packages ever go to market.
Questions
Asked about what a total conceals
What does hidden exposure actually look like in a cost plan?
It looks like an ordinary line with a round number against it. Preliminaries stated as a percentage, an allowance for builder's work in connection, a single figure for external works on a constrained site: each is a total standing in for work nobody has quantified. The number is not wrong, it is unexamined. Exposure is hidden not because anyone concealed it but because the format of a cost plan makes an assumption and a measurement look identical on the page.
If the cost plan is accurate, why does the number still move?
Accuracy describes how well the arithmetic reflects the inputs. It says nothing about how firm the inputs are. A cost plan can be entirely accurate and still be carrying a dozen assumptions that will each resolve upwards, because the assumptions were made at a point where resolving downwards was not physically likely. What a client needs alongside accuracy is a statement of which lines can move, by how much and in response to what.
Should preliminaries be a percentage or a build-up?
A build-up, wherever the site or the programme is unusual, which covers most schemes worth doing this exercise on. Percentage preliminaries carry the profile of whatever projects the percentage came from, and a constrained urban site with a long programme does not behave like the average of those. Building preliminaries from staff, plant, site set-up and duration takes a day or two and frequently changes the total materially. It also gives you something to test a contractor's figure against.
How do we test whether a budget is carrying enough risk allowance?
By building the allowance from named items rather than checking the percentage against convention. A risk register with a probability and a value against each line can be interrogated, reduced as items resolve and defended to a funder. A single percentage cannot do any of those things. Where a client asks us what the right percentage is, the answer is that the question cannot be answered without the register, and the register is the deliverable.
Can this be reviewed on a scheme that is already committed?
Yes, and it is worth doing at any point where further money is still to be spent. The exercise identifies which allowances are already exhausted, which are carrying work that has not yet appeared, and where the remaining budget is genuinely uncommitted. What it cannot do is recover expenditure already made. Clients most often ask for this before a funding drawdown or at the point where the cost report has stopped matching the forecast.
Related scenarios
Where this connects
Suspect the budget is carrying more than it shows?
Send the cost plan and the contractor's qualification schedule. We will tell you where the exposure sits and what it is worth.
Insights