This content explores cost estimation in procurement and the growing role of digital technologies such as AI, machine learning, and blockchain. It highlights how Industry 4.0 innovations improve forecasting accuracy, risk management, and sustainable project outcomes.
Cost estimating in procurement can usually be defined as the activity of estimating the total cost of acquiring goods and services for a specific project in a particular period. Budget control has become an essential part of each organizational project for its efficiency and risk management, as well as decision-making throughout the whole project life cycle. In such industries, irregularity and fluctuations due to extensive stakeholder interference are unyielding to efficient predictions by conventional procurement strategies. Hence, the adoption of different emerging technologies like artificial intelligence (AI), machine learning (ML) and blockchain education is now a strategic focus in procurement. They include improved real-time data analysis, better producible forecast, and automation of different procurement processes, leading to an efficient cost estimation process. Further, integrating such processes such as BIM and advanced data techniques can assist in observing project indicators comprehensively, thereby decreasing risks when it comes to reasonable estimations. Hence, the changes having occurred in procurement practices due to Industry 4.0 have enhanced cost estimate practices, improving resource allocation in organizational systems. For example, cost optimization can be achieved through analysing past records on costs to estimate future variability and blockchain for the secured execution of contracts. Since the focal industries have gone a long way in digitization, procurement cost estimation ways will be the factor to define the success and profitability factors of those projects; which make this field of interest in both academics and practitioners. An understanding of these new approaches is important in expanding the knowledge on how to develop procurement efficiencies for sustainable development.
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Procurement Process Overview
Procurement is the act of obtaining goods, services and or works from outside through a competitive bidding or contracting. It is a process that has various stages to encompass such as, the identification of the need for the product or the service to be offered to the final buying and receiving. Procurement is the most important process so as to meet an organization’s objectives, within a given time frame and at the least cost and while at the same time ensuring good quality of the resources (Perluka, 2024). The procurement cycle begins with the fulfillment of a need assessment to ensure that the correct specifications of a certain product or service are established. After that one is done identifying the needs; the next step is to prepare the procurement plan which involves stating the goals, cost estimate, and schedule on the particular project. This may include a market review in the context of suppliers in order to determine its attractiveness to the industry. Following the planning stage, the tender stage activates in which suppliers are called upon to provide offers for a certain procurement opportunity (Ojo et al. 2022). There are different categories of procurements and these may comprise of open tenders, restricted tenders and direct procurement. In open competitive tendering, any supplier can compete while in the restricted competitive tendering only a few suppliers are chosen.
Tendering in Procurement
Tendering is a business proposal that is conducted and managed in a highly technical structured way as a result of which the suppliers or contractors produce their bids. HAC’s role in the procurement process is strategic given that it covers a very critical area that deals with price determination, fairness and competitiveness. Tendering is normally characterized by laid down procedures especially in cases of public tendering with an aim of minimizing instances of corrupt practices in the procurement process (Althabatah et al. 2023). This is done through tendering, where a tender notice is advertised to allow other bidders to know the various aspects such as the extent of work, requirement, time frame, and conditions for the intended contract. Currently, the suppliers who want to join the tender offers prepare and submit their bid which contains offers, estimates, certifications of the supplier, and supposed experience. The bidding process may be of two forms depending on the magnitude of the project; this includes open bidding whereby all the interested suppliers can bid for the project or the closed bidding whereby only the suppliers that have qualified are allowed to bid for the project (Parsamehr et al. 2023). When the bids have been given, they are reviewed depending on factors like price, quality, time of delivery, and experience of the supplier. Depending on the type of project the bid can be evaluated in terms of technical offers that check conformity with the requirements specified in the tender announcement. The bids are therefore compared, and the best bid is chosen. This means that the selection must be done in a most appropriate manner and evidence must be taken to avoid compromising the situation. Tendering also aims at encouraging competition so that one can be able to get better price or even quality service delivery.
Challenges in Procurement and Tendering
Tender and procurement are crucial tools in the success of projects, notwithstanding the various challenges that accompany their implementation. These processes are, therefore, best planned, implemented and managed to realize the intended goals in the most appropriate and optimal manner. Other risks associated with procurement and tendering processes are supply chain risks, lack of transparency, and risk of evaluating offers (Hallikas et al. 2021). It agrees with the author about the purpose of this paper where one of the major hurdles of procurement is identified to be supply chain disruption. Some of these factors include political instabilities, natural calamities and shocks that affect the supply and prices of various products and services. Such incidences may result in lapse of time and costs in addition to being a challenge in terms of timeline for completion of various projects. To avoid this, organizations should stabilize their procurement strategies, develop a strong association with suppliers, and incorporate emergency solutions to their procurement relationships. They include but are not limited to lack of transparency in the tendering process since it may be difficult for a bid to be awarded to a particular company (Xu et al. 2022). This was the case because if the process is not well-structured or if there are ambiguities in the tender documents; there is a high likelihood that bidders will be confused and in extreme cases go to an extent of claiming that there was favoritism or corruption. This implies that flow of information must be maintained among suppliers and other stakeholders if there is to be trust. This involves information sharing for there to be proper communication, proper establishment of the criteria to be used in the evaluation process, and impartiality when awarding the bids.
Construction procurement strategies, decision making processes, contain significant impacts on overall success of delivery process, costs, and satisfactions of stakeholders. The procurement choices also have several considerations which are very vital in determining which method is best suited to the procurement undertaking depending on the particularities of the procurement project. This means that complexity of the projects to be undertaken is the key factor that affects the decision. Some of the procurement methods that can be used in such projects include the design and build or the construction management at risk where the contractor participates in the design of the project thus minimizing possible errors in design and time delays. For smaller projects, customary procurement systems like Lump Sum or DBB can be used sufficiently effectively and efficiently (Omar et al. 2021). This has to do with the amount of money that is available and/or needed to implement certain strategies or purchase requisites. If cost is a deciding factor, then Fixed-Price or Lump Sum Contracts shall be valuable as they tender a particular price for the project and give the client the sum required to complete it. However, if there could be adjustments in scope or things that arise in the course of the project, then Cost Plus or Time and Material type could be suitable providing more chances of overrunning the costs.
This means that the type of procurement method to be adopted again depends on the amount of time that one has to offer on the project. One way to save time on a project is to go into Design and Build or Management Contracting where you can set design and construction phases to run simultaneously as this would save more time as compared to a normal construction project done through normal process. As compared to such approaches, more traditional ones, such as DBB, might be less efficient because the process is indeed carried out step-by-step. This depends on how much control the client is willing to exercise in the flow of liquor in his business (Abioye et al. 2021). For clients that wish to have intensive control over the project, then procurement mechanisms such as design bid build or construction management makes it easier to manage the design and contractor’s choice. However, there could be cases like Design and Build or Turnkey Contracts which seems most appropriate for the clients who want a large percentage of work to be transferred to the contractor so that the entire process becomes relatively trouble-free. Such risks include risk allocation which also has an influence in the procurement method selection. Each of these types of procurement arrangements transfer certain risks from the client to the contractor and the designer. For instance, the Design-Bid-Build (DBB) method means that a great amount of risk lies with the client, especially concerning design faults and cost increase. In contrast, some of the delivery methods such as design and build or construction and management arrangement and risk (CMAR) are more favored to transfer many risks to the contractor side since they are fully responsible for design and construction. Before a client embarks on a certain method of performing an audit, one has to weigh the acceptable level of risk that they can undertake. Another factor; it is the experience and capacity of the project team or the human capital of the project management team (Chen et al. 2022). Such a decision is normally based on the expertise of the team that is handling the procurement method. In those situations that the client does not have an in-house design capability, then options like the Design and Build offers the client with design and build within a single contract. On the other hand, if the client has an experienced team of personnel, then they can opt for contracts that enhance better design freedom and freedom in selecting the contractors such as the DBB or Construction Management. Other activity factors include the level of stakeholder involvement. Some procurement methods that take an agreement of the many by many in different stations than involvement necessitate active participation of the many parties such as the CM or MC methods that allow the client, architect, and contractor to be involved in the procurement process of the project. For the contracts requiring lesser interaction with other people mostly from the third party, it is better to opt for Lump Sum of Design-Bid-Build. it should be noted that contractual relations and terms and conditions attached to each method of procurement are also quite important (Okereke and Zakariyau, 2022). For instance, there is Lump Sum or Fixed-Price Contracts where a clear picture of the total cost is given to the client yet very little room is left for changes while on the other hand, Design and Build or Cost-Plus Contracts though possesses high flexibility in as much as they allow changes midway, the total cost of the construction project is not clearly stated. Legal and regulatory factors may also affect a decision made on the procurement method to be used.
Cost control and estimating, in general, are significant elements of construction management, that addresses the issues of creating resources’ costs and the required amount of finances to accomplish a project. Cost estimation of construction is also useful in the case of a multi-storey five-star hotel in London since it gives details of the cost breakup of the project, which is very useful during planning and controlling of the project. Cost estimation is therefore determining costs per unit area; this depends on location, labour cost, material, equipment and time (Allal-Chérif et al. 2021). In this case, the area of the hotel project is 23,800sq.m, and the cost is from £3.45 – £4.65 per sq.m. This translates to the entire project cost ranging between £82.11m and £110.67m where factors such as design and construction finishes, elaborate designs, the type and cost of construction materials, and sophistication of construction techniques are considered. Budget estimating is critical because it enables prospective directors to study the potential cost-related problems, assign the resources properly, and keep the costs within the framework during the course of the project (Flyvbjerg and Bester, 2021). The common costs per square meter include material costs, construction and Labour costs as well as market fluctuations in price depending on the phasing of the project. Also, the regulatory requirements, environment and the scope of the project can dictate the overall cost. Contingency amounts are usually added to cost estimates with an aim of catering for additional anticipated expenses or project time overruns.
| S.No | Item Description | Unit of Measurement | Low Cost (£/m²) | High Cost (£/m²) | Total Low Cost (£) | Total High Cost (£) |
| 1 | Site Preparation and Excavation | m² | 3,450 | 4,650 | 82,110,000 | 110,670,000 |
| 2 | Foundation Construction | m² | 3,500 | 4,700 | 83,300,000 | 111,160,000 |
| 3 | Structural Steelworks | m² | 3,450 | 4,600 | 82,110,000 | 109,080,000 |
| 4 | Concrete Works | m² | 3,400 | 4,600 | 81,320,000 | 109,080,000 |
| 5 | Roofing and Waterproofing | m² | 3,450 | 4,650 | 82,110,000 | 110,670,000 |
| 6 | HVAC System Installation | m² | 3,550 | 4,700 | 84,440,000 | 111,160,000 |
| 7 | Electrical Wiring and Lighting | m² | 3,500 | 4,650 | 83,300,000 | 110,670,000 |
| 8 | Interior Finishing and Fit-Out | m² | 3,600 | 4,750 | 85,680,000 | 113,300,000 |
| 9 | Plumbing and Water Systems | m² | 3,450 | 4,650 | 82,110,000 | 110,670,000 |
| 10 | Flooring and Tiling | m² | 3,400 | 4,600 | 81,320,000 | 109,080,000 |
| 11 | External Cladding and Facade | m² | 3,500 | 4,650 | 83,300,000 | 110,670,000 |
| 12 | Landscaping and Exterior Works | m² | 3,450 | 4,650 | 82,110,000 | 110,670,000 |
Table 1: Cost table
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(Source: Self-created in Ms-Word)
The figure presents a Construction Cost Indicator most probably a tool for estimating construction costs in multi-storey hotels in London. For choice of the location the user can choose Locality (London) for the building type the user can choose Building type hotels multi-storey and for the rating the user can choose five-star, and the cost unit is measured in GBP/m². After this, the user can enter the floor area of the building, and the tool will estimate the construction cost based on the low cost and the high cost per sq.m (Sharma and Chandel, 2021). This type of tool assists the construction professionals and developers in getting the necessary and pertinent information about the cost estimates of their projects easily and with the maximum possible accuracy.
The picture shows a construction cost estimating for a five-star multi storey hotel in London where the area has been provided as 23,800 square meters is entered by the user. It computes the probable amount which has the low cost at £3,450 per square meter and the high cost at é4,650 (Alshboul et al. 2022). The total approximate cost for construction of the hotel is finally obtained by summing up the above rates with the corresponding floor areas. Hence, the cost of low estimate is £82.11 million while that of the high estimate is é110.67 million to ensure that there is a clear conception of cost estimates to be used for budgetary control for the project.
Understanding the Project Scope
The planning phase of construction projects starts with assessment of the scope of the project to which all the following steps are anchored on. Basically, below the mechanical concept of the scope, it focuses on the goals to be accomplished, the tasks to be handled and the resources needed to accomplish such a project. It contains information on work and scope of work, schedule and milestones and quality assurance (Fridgeirsson et al. 2021). A well written and definite scope resolution also minimizes the occurrence of scope creep, a situation in which more work is added or changes made without analyzing if they add value or not, thus, leading to additional expenses and time to accomplish the project. Evaluative activities that take place at this phase include initial site visit, feasibility study and consultation to ensure that all activities are well understood. Project scope plays the role of a roadmap and it helps the project teams to understand what needs to be accomplished, both in terms of functionality and cost. If the scope is not defined properly, it becomes rather vulnerable with major problems related to poor performance.
Time Management and Scheduling
Another major element of planning procedures, which plays a constructive role in construction projects is time management. Thus, the true development of the project schedule is crucial when assigning a certain amount of time to each step of the project. Project planning and scheduling involve using and creating tools like Gantt charts or even project management software like the Microsoft Project or Primavera that helps in dividing the whole construction procedure into small chunks of work and assigning timeframes for those. Time management also aids in the coordination of the contractors and helps in the department of workload as well as the coordination of interdependency of the tasks within a given period (Koulouris et al. 2021). Therefore there is a need to look at the critical path early on in order to be able to develop strategies to deal with such a situation. For example, the webs and rains and some other factors like material constraints or work stoppages may affect the time scale. Hence, a method of contingency planning is ensured, to involve flexibility that would mean a plan may be altered without necessarily causing a project failure (Asthariq et al. 2022). This way, through a proper schedule analysis the construction managers would be able to gauge whether the project if proceeding as planned and necessary corrections made in case of a derailment.
Cost Estimation and Budgeting
It is therefore very important for every project planning process in construction to embrace cost estimation and budget planning. Budgets that need to be provided are for material, labour, plant and other expenses such as overheads need to be figured out. A major activity of the project should be the accurate estimate of the cost that should be incurred so that the project does not exceed the fixed financial capacity (Carlson et al. 2022). It starts with cost estimation where each material that is needed to complete the project is estimated based on amount of requirement, cost of raw materials, cost of sub-contractors among many more. These are estimates of the cost of payment, based on historical information and current and estimated market size, and canopy of the work (Taboada et al. 2023). Nevertheless, one needs to set an extra amount for contingency in case of the increase of costs due to some emergency situations. It directly supports the handling of sources of funding to reduce concepts such as budget risks that may cause a project to be stalled. Furthermore, so as to enhance the accuracy of the budget estimates, there is the issue of working on control to persevere the original budget estimates in contrast to the expenses incurred (Zhang et al. 2022). Any such variation should be dealt with seriously and measures should be taken to rectify the budget control and maintain control over the financial aspect of the project. Compulsive cost control and management is very crucial in the construction project because it enables the project to be implemented as planned in terms of lay down cost, quality and safety.
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Conclusion
Planning procedures are some of the most important pre-construction phases since they put into perspective several factors that are vital for the completion of a construction project including time, cost, quality and other demand essentials. Therefore, having a well-defined problem statement on a project enables the heads of project to avoid the project scope issue commonly known as scope creep and make sure that everyone involved in the project has the same project goals in mind. Timing and scheduling is an important part of organizing in order to carry out various activities, control all the time-consuming processes, as well as monitor possible time losses during each stage of a project. With the help of scheduling tools and techniques including the Gantt charts, critical path network analysis is made to ensure that all the entire activities remain on track and there are no interferences that affect their time of completion. Also, it is critical to require cost control for the financial aspect of the project where estimates create a budget or give an account of the project cost, and funds should be allocated so as to cover the whole cost and where there is a possibility of a contingency plan. The strategy of reporting the costs on a continual basis allows the project to be financially and temporally responsible for any costs incurred. In its turn, detailed and precise definition of tasks, schedule plans, and accurate cost estimates bring about the best results in managing a project.
Reference List
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