Construction Costs is Killing Victorian Jobs

Wednesday, March 2nd, 2016
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The idea that your construction costs are or can be inflated by anything from 15 to 35 per cent as a consequence of using the traditional tender process adopted almost universally in project bidding and procurement in this state should come as little surprise to the people that are proponents of the system.

Like the original climate change deniers, their denials are wrecking much of the enterprise generated by our skilled trade contractors, destroying Victorian jobs, and often killing the entrepreneurial mindset/vibrancy used in a competitive (but fair) process. They are also now responsible for unnecessarily forcing up building and construction costs.

Whilst there is no accurate way of determining precisely how much this is costing the industry, the need to ‘outsource’ the measure (or quantity surveying element of the tender process) to the trade contractor(s) has created a practice known as price maintenance, originally conceived as a “screw factor,” more recently concealed above the line as the major contributor to a builder’s bottom line.

Various codes of practice have been introduced over the years, but cruelly they exist in words only, have rarely been applied and it would be fair to say, they are virtually never enforced.

The failure of the ‘keepers’ (proponents) of the tender system continues to fail in delivering value to the end users. Capturing value is not hard, as is any challenge providing we go into it with our eyes wide open, unfortunately, the procurement people in Victoria can be said to have their “eyes wide shut.”

The very first thing to do to generate true value into the tender process is to initially seek bids on the elements that the contractor can Ccntrol, those being:

  1. Program
  2. Preliminaries
  3. Construction planning (or building innovation)
  4. Overheads
  5. Margin

These elements represent the true value that the principal contractor can control, and therefore be 100 per cent totally responsible for.

The second thing to do is to co-opt your builder onto the project team, at a fair price based on what he/she can accept responsibility for, and eliminate price maintenance.

Value capture as used overseas is being misunderstood in Australia, and the mentality developed locally has given rise to this price maintenance.

Price maintenance now appears in virtually every bid, and in the distinct absence of commercial awareness, combined with the lack of incentive to improve the process there is not a great deal that can be done other than attempt to highlight the problem(s) and subsequent failures.

Excessive wage demands have been too easily ‘ticked off’ as a consequence due to the lack of commercial awareness by far too many estimators, cost clerks, contract administrators and often the building practitioner him/herself, because they have been able to cover these demands within the price maintenance component of their bids. The bludgeoning acceptance of these costs, in addition to the falling productive outcomes in a compliant Victorian construction organisation, is simply forced on the developer (and thence the end user), under the guise of “that’s the market and we’ve been through a competitive bidding process.”

Projects bid or won on ‘negative’ margins belie the common sense of any half intelligent commercial analyst or average skilled quantity surveyor. It only ends up in conflict or the bludgeoning of the often innocent victim by a bloody-minded and intimidating operative engaged by the builder to bash the subbie over the head with a roll of soggy plans, or a client-engaged project manager, armed with a heavily weighted and unfair contract. The end result is always higher costs, and it seems that the lack of commercial awareness, especially in the Melbourne market, is sustained by the survival tactics generated from price maintenance. It was once explained (or justified) by the builder being ‘whacked by the developer’ who in turn was and is surreptitiously ‘whacking the developer’ in order get some of their profits. It’s a hard way to get their money but that’s the way of the current and now accepted tender system.

“What costs nothing is worth nothing” is a tried and true saying and just because we appear to get a competitive tender” (disguised as a market-based bid), the analyst charged with assessing the value for his/her client, is burdened with the price maintenance element ‘originally used as a “screw factor”, but subsequently misused or concealed as part (sometimes all) of the builder’s margin.

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