Does the Traditional Project Business Case Still Work? 1

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Monday, February 29th, 2016
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We’ve all seen it: the business case used to assess the viability of a property project.

It is often the pivotal document in the decision to proceed or not with the project, yet it very often fails to depict some of the benefits and costs associated with the project.

There are many versions of the business case being used by different organisations for projects varying in type and size. The business case documentation may be simple, sophisticated or anywhere in between. And most of the approaches will work fine in some situations – most likely for projects similar to those on which the business case assessment has been tried and tested over the years.

But how do we know when the established business case methodology is missing something? There is no universal answer to this question, but we can certainly shed some helpful light on the answer.

Some business cases are little more than a comparison of alternative build cost scenarios, typically across alternative contractors and/or various design options. There probably was a time in the past when this rather myopic approach was defensible, and even sensible. Back then, competing contractors (pre-qualified as to capability and experience) would propose construction methodologies and programs that would be barely distinguishable from one another. In such an environment, it was not surprising that the tender prices became the prime focus. Even today, the so-called ‘value management’ exercise can often be little more than cost cutting where it will be least noticed.

So what has changed to undermine the traditional business case approach?

  • The traditional in-situ construction approach is no longer the only option. Prefabrication and offsite construction offers advantages in reduced program times on site, reduced site disruption, and reduced materials wastage.
  • Organisations, the community, and governments are increasingly attuned to factors such as carbon emissions, energy utilisation, and energy costs. The conventional emphasis on initial build cost can overlook energy efficiency considerations.
  • The ‘life cycle cost’ approach – which explicitly addresses the costs of maintaining the property over its lifetime, not just the initial build cost – is being recognised as appropriate for asset owners and managers. Design, materials and construction methods can all influence life cycle cost. Increased adoption of Building Information Modelling (BIM) technologies affords additional scope for effectively managing life cycle costs.
  • We now have a better appreciation of more subtle aspects of buildings such as occupant health – especially natural light, air quality, ventilation and moisture content. There is also now more discussion around associated improvements in office productivity and better learning outcomes in schools. These aspects are integral to the Passivhaus principles developed in European climates harsher than we experience in Australia.

How are these considerations addressed in the business case? Often they are not, or only partly so.

Consider these two examples amongst many possible scenarios:

The tenant

As well as location, local amenity, building quality and layout and a range of other considerations, tenants in shopping centres and office buildings will  typically assess the total cost of occupancy – rent, outgoings and utilities costs. The more energy efficient the building design and construction, the lower the energy costs incurred by the tenant and the higher the rent the landlord can negotiate for a given total occupancy cost.

Assuming that the tenant and landlord each capture a portion of the difference, both are better off, but the implications do not stop there. Given Australia’s present electricity generation capacity, lower energy usage will lead to lower carbon emissions. And further, lower energy demand will lessen the need for investment in electricity generation infrastructure.

The developer

The disconnect between the initial cost impost borne by the developer and the ongoing savings enjoyed by the occupant over time can eliminate the incentive for the developer to incorporate energy efficient initiatives, irrespective of the net benefit. Only when the purchasers of the project both recognise the value of lower energy costs over the life cycle of the building and are prepared to pay extra to cover the additional costs (design, construction, appliances, certification and so forth) associated with achieving the higher energy efficiency will the developer be able to justify offering higher energy efficiency outcomes.

Benefits that are not able to be captured by individuals or firms (or costs borne by others, with pollution being the classic example) are referred to by economists as ‘externalities.’ Such externalities have not generally featured much in discussions around property projects or in business cases. Could the case be made for favouring development approvals for projects that commit to shorter on-site construction periods which reduce the degree and duration of disruption to neighbouring properties and businesses?

Adopting more robust cost-benefit analysis would improve both the business case methodology and project outcomes.

Different players can capture different elements of the rewards. Owners of property portfolios enjoy both the greater potential for internalising the savings that flow from more efficient buildings and are better able to justify the cost (spread across a larger portfolio value) of investing in the knowledge and monitoring systems to realise the potential savings. Intuitively, it would seem that the larger the building, the larger the potential benefits and the smaller the incremental cost of an expanded cost-benefit methodology.

Government has the additional advantage in relation to the projects it commissions of being able to directly influence energy consumption, carbon emissions and the resultant demand for infrastructure investment. And as the client, government can determine its own project assessment and procurement methodology.

Shouldn’t that make a more robust business case approach compelling to government at all levels?

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  1. David Chandler

    Warren, you and Prefab Aus struggle with saying the key words that will drive change. They are the need for construction to be "Smarter, Better, Faster, Safer and Cheaper", at least 20 percent cheaper. Unless Australian construction customers can get a measurably better deal then whats the point? There is no optionality in selecting from this basket of actions needed to drive industry change and lift its woeful productivity. Using independently measured and benchmarked data is the only credible way of lifting the the industry's effectiveness trajectory. Every week I see another promoter of the next big thing in construction. The reality is when asked, "what problem are you solving and how will the customer get a better deal?" the response is bemused indifference. Most of these promoters of new ideas have spent years toiling away at what they think is a "great idea". Most are, but these promoters are normally so far down the food chain that there is little prospect of systemic change. Risk adversity underpins most of this. Many promoters of off-site manufactures like to drop their component off at the job site and have no real interest in how the sum of the parts will come together to deliver a better deal. Most have such thin capitalisations that they are unable to offer any meaningful contribution to the whole of the project underwrite proposition. Modular construction is a good example and a recent field day at Bilgola, Sydney highlighted this problem perfectly. There are many others. Before government is asked to change, I would put it that the industry needs to come to terms with its value proposition. You know this. Until then these products will be just commodities with no point of difference.