Tackling viability. How does the industry do better?

In a strong market, when it’s easy, we tend to just carry on as long as the number in the bottom-right of the spreadsheet looks OK. But viability for projects has been tough for a while, exacerbated further by the current Middle East conflict, so what can be done to help? 

There are many strands to a final build cost, which has travelled through a briefing, design, procurement and construction process, but let’s highlight some of the key areas of this evolution to spark some thought around “how to do better” in striving to enhance the project’s commercial success.

Starting with the brief, has this been prepared in a scrutinised fashion with debate and challenge, or are previous versions being wheeled out because they seemed to work last time? Perhaps there are items which could be “over-the-top” because that is an easier path than finding the energy or time to debate whether they are necessary. Of course, the product must be right and satisfy the occupier, which is a different point to satisfying the letting agent.

It really is worth challenging convention with a mindset of “function” over “fussy”. Irrational exuberance does not help viability

For most businesses, property is an overhead, so scrutinising the product and looking at the alternative specifications built in the different parts of London, and indeed across the country, and how they respond and perform in relation to occupier requirements is a critical part of the process. It really is worth challenging convention with a mindset of “function” over “fussy”. Irrational exuberance does not help viability.

What post-occupancy work from previous schemes has been done to highlight components or systems which have never been used by the occupier, or don’t really represent value for money? What level of resilience is built into the scheme and is it all really necessary? What is the cost to the project for the contractor to comply with all the employer governance and compliance and is it adding any value? Questions such as these are good to ask and may shake-out unnecessary cost.

Key guiding principles are those of simplicity and repetition, as these concepts score favourably when it comes to cost, time and risk

Moving on to design, this should be relatively straight-forward if the team are on their game, with everything visible, understood, costed and programmed. On most jobs the design is well understood, certainly at headline level.

However, it is also common for unnecessary cost to be hidden away in the detail, whether this be in the drawn or model form or detailed specifications. This is often not deliberate but comes about through a lack of understanding over the commercial consequences of such items.

Key guiding principles are those of simplicity and repetition, as these concepts score favourably when it comes to cost, time and risk. This is where contractor input and influence, particularly at a specialist level, can really help the process and one should not underestimate the cumulative benefit of marginal gains.

Perhaps one of the most obvious and significant points in the area of design is its general quality and coordination between disciplines, and clarity around who is designing what, and which trade is most appropriately placed to build the various elements of work. Are all these issues “on point”?

In terms of procurement, the contractual arrangement and packaging strategy is a significant influencer in achieving the optimum commercial result. It starts with a well-thought through strategy which responds to the key client drivers, project specific environment including site constraints and the market dynamics at the time. But once the strategy is set, the execution of it is of equal importance. But this is often compromised in some way thereby attracting unnecessary and often invisible cost. Getting the procurement wrong can mean +/-10% on construction cost, so it is vital to get this right.

The supply chain has consolidated over recent years … we need a deeper gene pool and more innovative ideas from the supply chain to help clients

The supply chain has consolidated over recent years (largely due to the high number of insolvencies and reduced capacity of those remaining) giving clients much less choice, which in turn has not helped tender price inflation. Materials and labour input costs have also been a factor, and the MEP market continues to experience significant price pressure. In short, we need a deeper gene pool and more innovative ideas from the supply chain to help clients.  

Another important aspect here which is generally hidden is the cost being passed on for contract terms, where the risk versus reward conundrum is invisibly debated by the contractor back at the ranch and then priced accordingly in response to the risks he is being asked to take on. One example would be level of damages for late completion, as any requirement being above market expectation is likely to be met with the pricing in of damages within the offer, but there will be no line-item for that in the pricing schedule.

This leaves the construction period, and how best to construct buildings and contract with the supply chain. There needs to be real emphasis on proper planning of site activity, rather than flooding the job with too many trades tripping over one another to a point of costly inefficiency.

The extension of this concept is moving more towards modern methods of construction with less site assembly of components, which some schemes are now embracing. However, the cost challenge remains that this needs to be occurring on a much larger scale before financial benefits are more evident. 

The final bit of the jigsaw which straddles all the above stages is the project environment and effectiveness of the scheme’s management regime, including key attributes such as leadership, behaviours, efficiency of processes and decision making, all of which shape the project culture. It is quite difficult to put a monetary value on all these things apart from, say, late decisions or changes, but the extent to which the project is run well will have a significant influence on cost.

Clearly, viability of schemes in the current market is not easy, but working together and challenging one another has to be a healthy thing to do in striving towards the starting line.

Iain Parker is a director and head of London cost management at Turner & Townsend Alinea