Overcoming the Hurdle of First Cost: Action Research in Target Costing

Abstract

Advocates of sustainable and evidence-based design initiatives argue that building owners can secure favorable internal rates of return when full life cycle building costs are considered. While the argument has merit, these decision-makers express concern about overcoming the hurdle of first cost. To reduce first cost, a number of lean construction practitioners are exploring a planning and design process called target costing. Target costing in construction is a collaborative cost management process that relies on business plan validation to determine what is to be delivered and what the client is willing and able to pay for a project—before establishing the allowable cost. When warranted, a target cost may be set even lower than the allowable cost in order to spur innovation. Once a target cost has been established, the project is collaboratively designed to that target cost. This case study examines the target costing techniques used during the design of an 850,000 square foot (approximately 79,000 square meters) medical center. Qualitative and quantitative outcomes are explored, as well as implications for future projects.