You get what you pay for - Oh Really?
The construction industry comprises many disciplines which contribute to the success or otherwise of various types of projects.
Design and cost consultants comprise an important one of these disciplines.
Most in the construction industry consider the success or otherwise of a project only in the context of the design and construction phase. That is understandable, because that is usually the period of their involvement.
However, whilst the design and construction phase of a project can range from twelve months to five years for mega projects, the operational life of the constructed asset or facility may be up to 100 years.
Two very important points to consider with respect to value for money (VFM) outcomes are:
- It is usually the operational and maintenance costs of an asset or facility that really determines the true VFM outcome.
- Most of the operational and maintenance costs are usually determined or locked in by the design and cost consultants during the design and construction phase.
Currently, the most common practice for many clients is to seek competitive design fees through competitive bidding. The successful bidder is selected based upon the lowest design fees offered.
WHAT IS VALUE FOR MONEY?
The definition or concept of Value For Money (VFM) for clients is quite broad as indicated by the definition recently published by PWC:
“Value for money has been defined as a utility derived from every purchase or every sum of money spent. Value for money is based not only on the minimum purchase price (economy) but also on the 4 E’s (economy, efficiency, effectiveness, and equity) of the purchase.
Value for money is used interchangeably with:
- Optimal (Optimization)
- Return on Investment (ROI)
- Things sold at a good price
- Where quality meets the price
- Quality to price ratio
- Win – win “
VALUE FOR MONEY FOR A CONSTRUCTED ASSET OR INFRASTRUCTURE
This article focuses on the economic aspects of a constructed asset or infrastructure project, because this is where most of the author’s experience and expertise has been gained. However it is acknowledged there are other aspects such as social benefit which are also important for clients such as government.
Value for money (VFM) is relevant at all stages of a project which include:
- Design Phase (up to two years duration)
- Procurement Phase (up to six months)
- Construction Phase (up to five years duration)
- Operation and maintenance Phase (up to 100 years duration)
From a VFM perspective, most of the current tender practices for design services are merely one dimensional. This is because they only consider the initial cost of the design service and fail to account for the likely output of the design and its impact upon operational and maintenance costs over the asset’s useful life.
The best opportunities for achieving optimal whole of life VFM outcomes occur during the design Phase (DP). It is rather ironic that consequences of many design decisions made in the first two years of a project later manifest themselves in the significantly longer (up to 100 years) operational and maintenance phase.
Presently, with most clients, there appears to be an entrenched belief the lowest design fees equate to achieving VFM with respect to just preparing the design rather than a whole of project life VFM perspective.
The current belief could not be furthest from the truth, as the quality of design and documentation significantly impacts the cost of both the Construction Phase (CP) and the Operation and Maintenance Phase.
The banning of minimum scales of professional fees in the late 1970’s and early 1980’s by the Trade Practices Commission (TPC) – later superseded by the Australian Competition and Consumer Commission (ACCC) – has been a major driver of a race to the bottom for professional fees. This has been eagerly accepted by clients for decades under the guise of obtaining VFM. Such a view of VFM is narrow and simplistic and ascribes too much weight to the short-term benefit which is derived from achieving the lowest possible fee in a competitive tendering process.
Sadly, this practice has worked against the prospects of achieving the best possible whole-of -life VFM outcomes for client’s projects.
These specific legislative changes and resulting client tendering practices of accepting the lowest design fees, have created many unintended but nonetheless significant consequences. including detrimental VFM outcomes.
Clients with large asset and infrastructure portfolios such as governments and institutions really need to start monitoring design performance of designers on a long term VFM basis over the whole life of the asset. Such a database could be used as part of a non-price assessment in the procurement process for design fees.
As a theoretical example, it is not implausible for the difference in design fees (lowest to third lowest price) on a large project to be $300,000, whilst there is a saving in whole of life costs between the third lowest price consultant’s output design and the Lowest price consultant’s design of many millions of dollars in present value terms.
In that example, selecting the third lowest price bid for design fees would provide a significantly better VFM outcome for the client.
Procuring design services based on whole of project costs versus the lowest design service price at the time of procurement of the design service
Whole of Life VFM must be fully considered at the procurement phase for professional design fees. Cost consultants have a role to play in these types of assessments and appropriate weightings should be given to several non-price VFM outcome criteria possibly including:
- A cost to client assessment (including operation and maintenance costs for the whole of project) of which the design fee is a relatively minor component.
- Assessment of demonstrable efficient VFM whole of project life outcomes achieved by designers on previous projects (i.e. a demonstrable record of efficient whole of life design on similar types of project).
- Other non-price criteria which can be validated and given a calculable value to the client.
- Consider setting up a national register of designers which tracks and records the VFM achievements of designers so that all designers are given a comparative rating. In the interests of fairness, all designers (and later entrants to the register) would commence on the same base rating. It would also be possible to track and record other design performance criteria such as environmental and safety which would be judged against a different set of values.
Unfortunately, there is no one silver bullet solution and the author certainly does not have all the answers. However, industry should be open to implementing any viable solution with the potential to deliver positive improvements in whole of project life VFM outcomes.
Industry must work collaboratively to implement solutions and make legislative changes which would positively improve the whole of project life VFM outcomes delivered by the Australian Construction Industry for both government and the public.
One of those solutions can certainly be to focus on improving Value for Money outcomes by implementing “Whole of Life cost benefit analysis” into the procurement assessment for all design and construction services at the commencement to the project.
Bob Wildermuth OAM FAIQS CQS FAIB is an Adjunct Associate Professor at the University of Southern Queensland and a certified professional quantity surveyor with over 45 years experience in the construction of buildings and infrastructure for Clients and Contractors both in Australia and internationally. Bob is a director at Wildermuth Consulting with a specialisation in the commercial stream of construction encompassing both pre-contract (tendering and forms of contract) and post-contract (project management, contract administration, claims & risk management, and dispute resolution).