Asking Engineers and Buyers to forecast costs for post-order modifications is an excellent cost control tool and procurement skill.
This usually starts when bid analysis summaries are submitted for subcontractor selection and funding approval. These recommend placing an order on a vendor or contractor with an original order cost.
Ask the authors of the bid analysis to forecast an outturn cost (using their experience) by estimating the expected growth post-order due to future modifications (POMs allowance).
If agreed grant authorisation to place the order/subcontract and use the agreed POMs allowance to manage growth without applying for extra funding.
Encouraging the use and ownership of this system was not easy:
- Buyers tended to be only used to funding approvals for exact amounts, i.e. the original order value and multiple order amendments when occurred
- Engineers tended to think this was not their area of expertise and should be left to “commercial people”
- Both sometimes thought that if the original control estimate for the project had say a +10% accuracy, then that is what the POMs should be. However this is not the case as the project has moved on and with it the detail
Typical POMs allowances that I came across (but depends on the complexity and design completeness and contract type) were:
- Catalogue items 0% (standard multi-supplied items)
- Equipment packages 4% (e.g. design reviews introducing bespoke changes)
- Civil contracts at least 10% (e.g. impact of unknown ground conditions and weather)
- M&E contracts not easy to forecast. I have seen them grow by as much as 40%. Heavily depends on the thoroughness of the tendered design
New forecasts (order value plus POMs allowance) can then be fed into the overall project cost forecast. When orders are completed and closed out, they are replaced by actual order amounts, hopefully returning any excess allowance to the project.