Should Project Budgets Be Based on Worth or Cost?

Glenn Ballard1

1Research Director, Project Production Systems Laboratory (p2sl.berkeley.edu), Civil and Environmental Engineering Dept., 214 McLaughlin Hall, University of California, Berkeley 94720-1712, USA, Phone +1-415-710-5531, ballard@ce.berkeley.edu

Abstract

Two opposing objectives drive construction project budgets. Budgets are driven higher by the objective of providing sufficient funds to achieve project goals in conditions of uncertainty, and driven lower by the objective of spending no more than necessary to accomplish project goals. These two risks, running out of money and leaving money on the table, are in tension and finding the balance point between them is a challenge not always met—some might say ‘infrequently met’. Projects can and do fail both ways. In this paper, it is proposed that these two objectives be pursued through two different financial elements rather than a single financial element. The objective of providing sufficient funds to achieve project goals is to be met by specifying as the project budget the most a client is willing and able to spend to achieve the goals of the project. This allowable cost is based on the worth to the client of the asset to be constructed and is the most conservative basis for budget setting consistent with project economic viability. The objective of spending no more than necessary is to be met through shared savings.

Keywords

Lean construction, project budgeting, project cost management, target costing, target value design, value

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Reference

Ballard, G. 2012, 'Should Project Budgets Be Based on Worth or Cost?' In:, Tommelein, I.D. & Pasquire, C.L., 20th Annual Conference of the International Group for Lean Construction. San Diego, USA, 18-20 Jul 2012.

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