February 09, 2015
Owners expect that construction will cost more and take longer than promised because of design discrepancies and latent conditions. If this is true, then there is an opportunity for builders to offer a higher price for a Warranted Lump Sum as an alternative to a hard dollar build only contract.
For builders this is a huge leap because they sit in a highly price competitive market and experience says – build only contracts are always decided on price.
Tradition dictates that resolution of design inconsistencies is not a reasonable risk for a builder to carry without novation of the designers, but the establishment of BIM as a robust virtual design and construction (VDC) process means under-pricing of risk should be a thing of the past.
Fast and reliable tools now exist for interrogation, validation and review of extensive design information. BIM provides the greatest level of certainty the industry has ever known and at all levels of design and construction. If adopted early and the entire supply chain is engaged, it becomes the critical tool in managing risk and cost overruns during construction.
Yet, builders continue to offer the same marginalised product. As if it were an excuse – a recent Australian Construction Industry Forum (ACIF) framework document stated “Industry is but a servant of those who commission new assets or decide to refurbish existing ones. It will adopt new technology and systems when its clients demand them…”.
Warranted Lump Sum – Head Contractor Risk and Return
Just over a year ago, KPMG released its global survey on the construction industry and of the 165 senior executives personally interviewed for the survey, 77% reported under-performing projects due to delays, poor estimating processes and failed risk management as the key challenge for the sector.
We know that typically 83% of a contractor’s price is made up of the subcontracts. We also know that controlling time and cost will generate significant savings. Our goal as an industry must be to bring decisions forward and identify issues and clashes early in the process when the ability to change elements is high and the risk to the programme and to budgets is low.
BIM and the technology supporting every member in the supply chain have a direct impact on creating cost, design and time certainty. Poor risk estimation and management should be a thing of the past. Builders have a unique opportunity to take on known risk and push the project programme to ensure that visualisation technologies can create a virtual build and identify clashes and design changes much earlier and for much less than dealing with problems during construction where rework, delay and disruption explode costs.
From the development industry perspective this will generate significant project savings because a more certain industry means that the total funding required for any form of a development is reduced. Banks require a contingency for every development loan. A $100M apartment building typically requires an extra $8M in contingency and this translates into a need for an extra $1.6M – $2.4M in equity, depending on the risk profile, to make the project happen.
The Builder that masters VDC can turn this expectation into an opportunity by offering a higher alternative price (perhaps half or more of the expected contingency ie 5% to 8%) for a Warranted Lump Sum in lieu of a traditional lump sum. The alternative could be as simple as altering the standard clauses that appear in most hard dollar contracts and entitle the Builder to additional payments for:
- an inconsistency, ambiguity or discrepancy in a contract document; and
- a material difference in a physical condition to that which could be anticipated by a reasonably competent contractor.
What about Subcontractors and the Supply Chain
In Australia, most of our construction contracts are hard dollar (either traditional or D&C). With traditional design + bid + build procurement there is no ability to engage with subcontractors during design other than some limited interactions driven by progressive designers.
To engage the supply chain one obvious approach is to go back to the old school nominated subcontractor (NSC) clauses which were common in the 1980’s in Australia. With the advent of BIM those NSC clauses are likely to have far more upside than downside.
With design + construct there is a far greater ability to engage with subcontractors during design but there is no contractual obligation to do this. The issue here is more about culture.
Often the behaviour is to avoid letting a subcontract early because there is a perception a better financial outcome will be achieved by maintaining competition for as long as possible. The cultural problem means that any head start and lead time is lost because subcontractors are unlikely to handover information and expertise without a guarantee that the subcontract will be won. For example, there is no incentive for a mechanical subcontractor to have racks designed prior to commencement of construction and where construction has started it is impossible to place blue banger hangers in a formwork deck where the concrete has already been poured.
Knowledge and understanding of the certainty offered through early collaboration is the missing ingredient here, not so much the contractual frameworks. There are plenty of design & construct (D&C), construction management (CM), early contractor involvement (ECI) and alliance contracts that can accommodate early involvement of subcontractors. The problem lies in the appropriate level of risk taken on by the head contractor. Traditionally, risk has been shifted down the chain of supply. This has always resulted in tight margins for head contractors and less incentive to become immersed in the virtual build.
The first builder to own the risk and become famous as Australia’s “BIM Builder” stands to gain significantly, not only in the successful delivery of their projects but in the increase in profit margins in correctly identifying the level of risk and certainty available in the design information and prior to allocating any risk to sub-contractors.
For more information please email me direct at [email protected]
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