Why Forecast Beyond the End? 4

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Monday, September 28th, 2015
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Having been a career estimator in the commercial construction industry for nigh on 40 years, there is one question I still ask myself over and over again. Why do we only want the ‘start’ figure that is known to be variable and not do enough to ‘forecast beyond the end’?

Many industry practitioners talk privately about a cultural change to reduce both the tendering risks and subsequent contracting risks inherited from the unreasonable and furthermore unrealistic terms and conditions pertaining to construction bidding.

A whole-of-industry approach toward poor and inadequate documentation, price maintenance, trade contract discounting, sham contracting, under-reporting of wages and phoenixing across the important phase of tendering is the panacea to bring about this cultural change in conjunction with a ‘two-stage tender process.’

The kudos offered to the construction estimator when examined in the light of the current antiquated out of date aggressive and conflictual processes is nothing short of extraordinary and needs a new approach if we are genuinely seeking to a sustainable industry into the next decade. There is a staggering issue shielded in the ignorant belief that a construction company, including their suppliers and trade contractors somehow know what the exchange rates are tomorrow, what interest rates are doing in six months’ time, the status of the industrial relations in the closing phases of the project, and finally but not least the impact of the supply and demand cycles governing both materials and labour costs.

The demand for a firm/fixed priced contract too often sought by a non-commercially trained project manager has resulted in a practice known as ‘price maintenance,’ resulting in higher start costs than should otherwise be anticipated.

The simple solution to this practice is the acceptance and introduction of a two-stage tender process (in some cases referred to as early contractor involvement or ECI), whereby the initial round of bidding takes place immediately after the ‘design freeze has been established’ and the contractor’s team is assembled with the prime purpose of eliminating or at least identifying the majority of risks that the principal will ultimately be exposed to.

This is the first stage of the bid phase, and comes about with reduced bidding costs and the non-burden of risks required under current bidding practices. There are significant benefits from this process, with the first and most notable being the ability to ‘select horses for courses.’ This enables the tendering authority to cast their net wider than currently practiced, typically inviting expressions of interest, based not on a sales brochure but project specific elements which will underpin stage two of the bid phase and ultimately form a key component of the final contract. The primary elements of stage one will be as follows:

  • Team
  • Experience, resources and availability
  • Program
  • Preliminaries
  • Methodology (this would be non-binding, and formalised in Stage 2 of the bid)
  • Nomination of ‘preferred’ contract
  • Mark-ups on trade costs, NSC, PC and provisional sums

The evaluation of the tender would consequently be based on the actual deliverables which come under the direct control and influence of principal contractor, and not some ‘wild’ guess 12 to 18 months into the future. Where commercial information is required (typically for funding and feasibility purposes), a Stage B cost plan preferably prepared by the client’s quantity surveyor, however may form part of the stage one bid process to be supplied by the principal contractor, (albeit non-binding) until stage two.

The bids received at this stage would no longer be educated guesses (often referred to as guesstimates) but a usable platform from which the developer or tendering authority can build a bona fide relationship with the principal contractor, eliminating future conflict and costly litigation often incurred due to the ‘lack of ownership’ of the key elements of the overall bid.

A traditional negotiation process is still open to the developer or tendering authority before the appointment of ‘preferred contractor status’ is entered into. A representative of the principal contractor (usually comprising the project manager, supported by the nominated estimator and programmer) would then be incorporated into the project team and commissioned with the task of ensuring the original design team meets all of their predetermined KPIs in terms of compliance, co-ordination and economic performance.

The two-stage tender process is proposed to provide a performance outcome and should not be deemed to be in any way prescriptive, so as to garner the maximum amount of innovation, capturing the best commercial outcomes all without compromising the original design concept and previously acknowledged market objectives. Often a ‘get-out’ fee maybe required by the principal contractor should his preferred contractor status not be consummated into the final contract agreement. This to some people has been deemed to be wrong if not illegal, however I am of the opinion that the principal contractor is entitled to be reimbursed for his/her professional intelligence should the project be cancelled or not proceed for any bona fide reason.

The primary purpose and most singular benefit gained from the two-stage tender process is the elimination of price maintenance, along with the comfort of the relationship established between all members of the project team. This helps to deliver a harmonious, non-confrontational project in a shorter time, with fewer risks for all parties, devoid of trade contract discounting (commonly known as ‘screwing’ and defended by price maintenance.) It also removes the need for ‘sham’ contracting (due to the transparency delivered during the design/development phase), under-reporting of wages (often alleged when the trade contractors have been ‘forced’ to match another bidders price, usually based on a lesser scope or an error in the original bid) and finally phoenixing (a result of current tender practices applied by the principal contractor having ‘all of his eggs in the one basket’)

So back to the question “why forecast beyond the end?” I think given the appropriate consideration, we have been kidding ourselves for far too many years that the principal contractor has the wherewithal to accept the unprecedented risks without carrying a contingency of some degree, and/or compromising the overall project by fighting for variations, arguing scope of works changes and blaming the documents which all has the effect of working against the very people we claim we are working with.

The final benefit that has not been raised is that the overall reduction in the builder’s overhead will see a significant reduction in the on-costs as these risks are identified and dealt with in real time, not some mythical highly contentious gaze into the future by unskilled risk-takers because it’s our culture not to change!

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Discussions
4
  1. Glenn Hedges

    Thanks for the article Stephen. Adopting less litigious and adversarial approaches to tendering and contracting would very much help reduce the well reported extremely high costs of new projects in Australia, but who will take the first step? Clients, contractors or financial providers?

    • Stephen Dean

      Well Glenn, thay say never interfere and try to fix something that AIN'T BROKEN, well here we are in UNANIMOUS AGREEMENT that the Tender Process is in fact BROKEN, and very much in need of REPAIR!
      I recognise and acknowledge your 'scepticism' in asking WHO will take the first step, to which I must answer ALL of US (especially those that use the system, anyone that wishes to deliver VALUE and above all every fair minded person that wants to OPERATE in an OPEN, CO-OPERATIVE AND TRANSPARENT Procurement Process devoid of any graft & corruption.
      Disappointingly current (and former) Industry Leaders have demonstrated their ineptitude at fixing a BROKEN SYSTEM, therefore call this the first step, and talk to your peers and everyone that has a vested interest in introducing / adopting as you say a "…less litigious and adversarial approach to Tendering…"
      I am available for continued dialogue and discussion should you be responsive and interested in proving that this is not about change for changes sake, but the development and implementation of a FAIRER & GENUINELY more competitive PROCUREMENT SYSTEM, with the ultimate goal of REDUCING the excessively high CONSTRUCTION COSTS.

  2. Andrew Doherty

    Hi Stephen,

    ECI procurement is currently being implemented by several public clients in NSW. It will be exciting to see how the journey runs!

    Hopefully there are not too many unskilled risk takers signing off tenders on building company boards.

  3. Nathan Vogelsang

    It is my understanding that an ECI contract only adds value to large, complex or long term projects, the current standard model of bidding and forecasting does still have a place in small / medium scope and short / medium term projects. It becomes important to select an appropriate bidding process for the specific project scope, timespan and contractor. What constitutes as large, complex or long term is entirely contractor dependant as labour and material resource allocation differs between large and small contractors.