As recent high-profile projects have shown, it’s absolutely crucial to set the right budget – and stick to it. Here are Procure21’s ways and means
As with any project, one of the most important steps in controlling costs on a ProCure21 contract is setting a realistic budget in the first place. Central to this is the use of Departmental Cost Allowance Guides (DCAGs), published by NHS Estates in Healthcare Capital Investment. Although these have their detractors, they can give accurate capital costs at an early stage if applied properly.
Peter Cole, a partner with cost consultant Gleeds, explains: “The key to applying them is understanding what they include and what has to be added, particularly the 'on costs'.”
Another essential part in the process is the early appointment of the principal supply chain partner (PSCP), preferably prior to submitting the outline business case (OBC). Cole says the early involvement of a PSCP ensures buy-in to the capital budget. "There is nothing worse for cost control than getting OBC approval and then appointing a PSCP that does not believe that the project can be delivered within that affordability envelope. For example, assumptions made by the trust in its on-cost assessment may be incorrect, but the PSCP's early involvement allows time to carry out surveys and technical appraisals of the assumptions made and make the figures robust."
The programme and where the project is located inevitably affect capital costs. Location adjustments and inflation indices are published by NHS Estates in its quarterly briefing. The location factors come with a caveat that they "are for guidance only and cover a large geographical region". Previous guidance has been more explicit in this respect, advising that particular areas within a region can vary from the factor by up to 5%. Inflation indices are based on data compiled from building tender prices for public sector contracts.
Cole says it is important not to apply these factors blindly. Further advice is available from the Building Cost Information Service, which publishes location factors that give data for far smaller, more specific, areas.
He stresses: "These must be considered in the light of local knowledge, particularly any future projects that may have similar timescales to the ProCure21 scheme and where demand outstrips supply for certain trades."
If the DCAGs on costs, and location and inflation adjustments are carefully considered, it will help avoid package prices received from the supply chain exceeding those in the budget.
The early involvement of PSCPs has other benefits. Grenville Riley, ProCure21’s lead implementation manager for London and the South, explains: "Before ProCure21, a trust would not get a market view of capital costs until after the business case was prepared and tender documentation had been issued to potential bidders. Given that a trust can't vary capital costs by more than 10% from outline business case to full business case, getting a market view and, more crucially the PSCP's ownership of the business case budget at an early stage, are major benefits."
Additionally, appointing the PSCP early on has the economic benefit of contractors being able to input into the design to improve buildability, however, it is equally important that a trust fully involves the PSCP and its supply chain. This means sharing budget information with the PSCP.
Cole remarks: "This goes against the grain of those of us brought up on conventional approaches, but ProCure21 is open book and promotes the spirit of collaborative working."
Using ProCure21 debunks the notion that delivering best value means accepting the lowest capital costs. Cole cites an example where a PSCP suggested a design change that added £50,000 to the initial capital costs, but provided a "pay back" period of less than two and a half years. The change will deliver cost in-use savings of over £20,000 a year throughout the anticipated 80-year life of the building.
This was only possible because the PSCP was aware of all the details of the trust's construction budget and could work within it to achieve best value.
From the client's point of view, the most important stage in controlling costs is that leading up to the agreement of the guaranteed maximum price (GMP). It is important to have a process that ensures regular cost reporting, which also highlights issues as they become apparent so that they can be managed appropriately. Gleeds partner Paul Mills explains: "There is no point in getting to GMP and presenting a figure that is outside the trust's affordability envelope; this merely causes unnecessary redesign and hence abortive fee costs. The aim should be an evolution of the GMP so that there are no surprises to anyone when it is finally presented to the trust."
All of this must be considered in the light of local market knowledge
Peter cole, partner, gleeds
Mills says controlling costs up to GMP should cover all aspects including work packages, preliminary costs, design fees and any potential changes to the programme. He adds: "It is also necessary to have a clear and robust change control mechanism in place."
However, by far the greatest risk to capital cost and programme escalation is a fluid brief. The early involvement of the supply chain helps develop a robust brief, thereby negating the risk of design changes and cost escalation.
Risk management is something that most professionals carry out, but seldom in a methodical, structured fashion and very rarely at the beginning of the project. To combat this, ProCure21 has introduced a method of reviewing all aspects of risk right from the start when the multidisciplinary team is assembled. DART (Design and Risk Tool) combines the established design toolkit, AEDET, with a structured risk evaluation. Risks are identified and prioritised by all parties and allocated to those best able to manage them. These risks are costed and used to formulate the GMP as well as the client's own risk bucket. Projects using this process should achieve true value for money.
No matter how good the design or the effectiveness of construction, costs are critical to delivering a value-for-money project. ProCure21 has two processes to help the client:
A full audit: This process extends down the supply chain to evaluate the accounting methods used. Eight teams carry out a systems audit of the 12 PSCPs, which is reviewed annually. After this, quarterly reviews are undertaken looking at several cost categories. The results are published on the ProCure21 web site. Both PSCPs and clients benefit from this process;
AT service: Traditionally, VAT has been a problem for clients. All too often, the complications of calculating the returns and any anticipated recovery reduced the client to seeking external advice. Typically, only 12%-14% of VAT payments were recovered. ProCure21 has established a method of processing VAT returns with the full agreement of Customs and Excise. Providing the client engages NHS Estates' ProCure21 VAT team, the return will be cleared by Customs within one month and result in the maximum-return being recovered. This is a free service in ProCure21.
Principal supply chain members
PSCMs are vital to the success of ProCure21, but there's concern that they are not truly partnering up and down the supply chain. NHS Estates feels it is important that the lower levels of the supply chains can voice their concerns about the value of supply chain management and make constructive recommendations. ProCure21 has set up a review panel comprising the National Federation of Builders and Specialist Engineering Contractors Group.
The panel considers issues raised by PSCMs and any identified by PSCPs and NHS Estates. This system enables ProCure21 guidance to be disseminated throughout the supply chain and also deals with any matters not in the gift of PSCPs.
OK, but how much does all this save you? Here are some examples of savings on Procure21 projects
£500,000 saved on a £12.5m project by value-engineering
Redesigned M&E services trimmed £300,000 off original estimate plus resulted in lower running costs and reduced maintenance
Changing design of concrete frame contributed towards slashing building costs £150,000
More savings …
Out-turn costs cut 7% on £12.4m project, and finishes enhanced
Maintenance time cut 50% by simplifying access to services
Cost savings of £170,000 achieved on one scheme
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