Effective Project Control: The New (Old) Methods

Alexia Nalewaik, MRICS, and Simon Taylor, FRICS, argue for increased transparency in the construction supply chain.


© Pukhov Konstantin

While the construction industry worldwide struggles to dig itself out from the current downturn (literally and figuratively) and projects stall because confidence has waned, it is worth reflecting on happier times two to three years ago, when financing was freely available and forecast margins would likely cover any increase in cost. Sadly, in the push for profit and growth, basic good practice principles were forgotten. Take some example sectors: Infrastructure and rebuilding after the hurricanes Katrina and Rita; the pharmaceutical sector, where seemingly every product was a blockbuster product or could be adapted for various applications; school development in California, New York and New Jersey; commercial real estate and healthcare in Everycity USA. All were good project candidates but they struggled to establish firm cost baselines and left the door open to abuse by the supply chain.

A key component missing from the procurement of services and contracts was then, and is now, transparency. Construction projects temporarily bind together parties with competing objectives, resulting in a situation characterized by high potential for conflict. Cost visibility is vital in bridging the value gap between contractors and owners, adds confidence and certainty, and enables a continuous focus on performance and absorption of change, rather than opening the door at the end of the project to disputes over the perceived impact of change.

The Quantity Surveying profession grew from a specialist expertise in measuring construction components and understanding means & methods, which remains the gold standard in many parts of the world, used by owners to bid work and by contractors in developing their pricing. The element of transparency comes from the use of a common methodology for quantification of scope, developed using industry-standardized rules of measurement. The advent of Building Information Modeling (which requires standard component coding structures), and the increasing demand for open-book reporting, collaboration and risk-sharing between project parties, should drive a renewed industry-wide focus on seeking a bidding and cost management methodology that is relevant to today’s construction sector, thereby enabling owners to re-enter the market with confidence.

A Fractured Industry

The classic project team remains largely characterized by a separation between legal entities, both in forms of remuneration and level of risk and liability for the performance of the product. Each entity is expected to work closely with other team members but is bound to the owner directly under separate contracts. The traditional construction contract clearly defines each party’s responsibilities and the consequences of failure to focus on the product. Avoidance of accountability and protection of selfinterest results in the erosion of focus on collective success.

A typical scenario consists of:

• The Owner and their technical representative (which may be a separate Program Management company, auditor or a lawyer)
• A project office team comprised of an architect or designer, engineering disciplines (contracted through the architect or directly by the Owner), an estimator/quantity surveyor (contracted through the architect, project manager, or Owner), construction manager (CM) and other specialty consultants, and
• A construction field team comprised of a general contractor (or construction manager at risk), and several levels of subcontractors.

The number of potential variations in this team structure is dizzying and varies to account for available expertise, address any legal or regulatory constraints and hopefully best capture the objectives of the Owner.

This separation of design and execution functions is unlike the organizational structure found in almost any other industry and often leads to conflicting obligations for individual project parties. This is particularly true for the Contractor and subcontractors, who bear the cumulative brunt of project cost obligations, via the expectation that the end product will be provided at the agreed upon amount (often a fixed price lump sum), regardless of the quality or completeness of design documents and assumptions made by the project planning team.

Issues With the Current System

These traditional preconstruction processes and team arrangements lend themselves more to managing individual liability and detract from effective execution planning. Constructability input from the construction experts (the Contractor and subcontractors) is rarely sought before bidding commences and, until the bidding process is complete, confidence in the forecast of final cost remains low.

A great deal of detailed knowledge and information is provided by the estimating function; in its purest form, it equates to an independent review of the project’s scope and theoretically enables a focus on problem areas and constructability issues. Unfortunately, the estimating function is not often utilized to its full effect. The team could, by adopting a consistent approach to identifying errors and omissions, improve design accuracy before bidding takes place, so that late, expensive changes can be avoided or reduced. Scope quantities could also be provided to contractors for use in developing accurate bids, reducing low bidder risks and future change orders. Unfortunately, these opportunities are hindered by inconsistency in scope breakdown and schedule of values (SOV) detail, because the material takeoff methodology varies from estimator to estimator and firm to firm, such that any reconciliation process becomes difficult and missing items are less visible or easily can be assumed to have been included “elsewhere” in the SOV.

Consider, also, that professional standard of care does not guarantee defect-free buildings. On the contrary, liability laws provide that professionals (such as architects) are expected to exercise learned judgment, based on experience and education. These professionals are held accountable for the process, not the results. Design documents do not specify every element of construction in excruciating detail — certain items are left to the skill and discretion of the builder but the contractor is not held responsible for the consequences of defects in the design documents.

Imagine, therefore, the challenges experienced by trade contractors when assembling a bid price from drawings and specifications. Whereas the estimators had the benefit of several months and access to the design team, thus enabling a deeper understanding of the intended scope, the contractor typically has less than a month to produce a price and develop execution and logistics plans, often revising their bid price in-situ at the time and place specified for bid delivery. The basis of the scope analysis, a quantified measurement of the building, is not provided to the potential bidders, so it can be assumed that each bid will be based on different measurements, means & methods and degree of understanding. The Contractor has a high risk of accidentally omitting or misinterpreting scope items; contingencies are added to the price and schedule. In a low-bid environment, the bidder who submits the lowest price for the scope (or makes the biggest mistake) wins the contract and during construction any changes from the price, scope and design assumptions are pursued vigorously.

The fractious environment of design, engineering and construction seems to have been crafted to create conflict and additional cost. Is there another way?

The Path Forward

Clearly, the industry can gain by engendering a stronger, more cohesive design and construction team. Scope definition and comprehension is the common thread between all parties and communicating this transparently and consistently for use by all will boost effectiveness and lead to improvements and innovation. This is where a consistent measurement and quantification basis can provide an industry standard “symbolic” interpretation of the drawings and specifications that is understood by all, without loss of competition or negotiation leverage. The measurement rules used by quantity surveyors provide two key levels of consistency, by:

1. Establishing which items shall be measured, how each shall be described, what components are included and how each item shall be coded for consistency across all projects
2. Dictating how each item shall be measured, what is to be included in the quantity and what is to be excluded

By requiring such consistency across the industry, a number of benefits quickly emerge for Owners, quantity surveyors, cost managers, project managers, construction managers and Contractors:

• Reconciliation of estimates will be greatly simplified, as detailed items will be coded and described similarly; an apples-to apples comparison will be possible, without much guesswork
• The systematic approach to developing the estimate will aid the design review process and help to identify errors, omissions and constructability issues
• The Owner will have an improved understanding of risks and contingency requirements and will be able to incorporate appropriate cost control mechanisms into the bid documents
• The chance of error will be greatly reduced and (with practice and familiarity with the methodology) measurement will ultimately become more automated.

There is some opportunity for pricing improvement as well; by providing a consistent basis for bidding, the spread of bids received can be expected to narrow because each bidder will have incorporated the same scope of work without omissions and with reduced error. By enabling a bid process with fewer errors and risk, there will be potential for lower prices because Contractor price and schedule contingencies will become more realistic.

This bidding methodology has been used in many other countries for generations, including the United Kingdom, South Africa and Australia, and continues to be used by Owners and construction managers. The process is particularly effective in Private Finance initiative/Public-Private Partnership (PPP) projects where long term service agreements depend heavily on accurate pricing at the offer stage.

Recent pilot projects in New York have helped to amplify the potential in the Americas. In mid-2005, The City of New York, through its Department of Design and Construction (DDC) and efforts led by Commissioner David Burney, sought ways to combat declining interest from contractors and high levels of change during construction, and achieve a more consistent bid basis, increased collaboration with consultants and contractors and greater confidence in achieving project objectives. The DDC has strict public procurement rules requiring award to the lowest responsive bidder, which on occasion meant awarding work to contractors who did not have the necessary expertise, but had submitted the lowest priced bid. Change order approval was extremely slow due to audit requirements, and overall price levels reflected the cost risks borne by the contractors. With a booming market and plenty of private development opportunities, public sector work began to fail to attract competitive bidders.

The solutions proposed resulted in the Defined Quantity Contracting strategy, which included the following key features:

• Standardized expectations of the format and detail to be provided in the final estimate, through use of a published standard measurement methodology. This represented a ‘road map’ of the design documents, with clear references to specifications and drawings.
• Bid documents that included the (unpriced) quantity take off and descriptions, requiring bidders to use the quantified measurements as the basis for their bid
• Provisions that enabled the Contractor to be made whole for any errors in quantities as shown in the bid documents
• Consistency and continuity in the methods for processing change orders and payments, with no change to those procedures.

This restructuring of the procurement process resulted in: an equitable sharing of risk; additional assurance that scope was complete and described correctly; added focus on the accuracy of the final estimate; transfer of detailed knowledge from preconstruction to the Contractor; use of the described scope and quantification by bidders which lessened their fears about miscalculating or misinterpreting the scope; more transparency for both Owner and Contractor in quantifying the basis for change orders, and the ability to exert more focus on performance. Although the projects are still ongoing, the process benefited from extensive outreach to the trade contractor community and resulted (at the peak 2007 construction market) in bid awards at or near budgeted amounts. This was a substantial achievement, as the study initially anticipated higher prices from use of the process, with pricing expected to reduce over time as familiarity with the process increases.

Now, in 2010, a similar effort is being undertaken by a large public sector Owner in California. Using Defined Quantity Contracting on a small and simple project, the Owner is pioneering the effort to create a more equitable and transparent bidding environment within the limits allowable by low-bid public procurement laws. The current economic situation is the primary motivation for this pilot; extremely low bids, thirty to fifty percent below the estimated cost, are being received on projects statewide and projects under construction are experiencing an unprecedented increase in change orders. The Owner seeks a method by which bids can be compared for responsiveness and responsibility, on an apples-to-apples basis. To date, surprisingly few revisions to the bid package have been necessary, although instructions to bidders required some expansion and clarification and it is expected that the pre-bid meeting will be dynamic, with much Q&A. No changes have been made to the contract, payment application process or change order process. The expectation is that lessons learned can be captured after this first iteration and the methodology refined on future, larger projects.

A similar benefit can be extended to the use of Building Information Models and Integrated Project Delivery teams. The ability to derive schedules and estimates of cost from the design model provides a good opportunity to improve early decisions to optimize the final product, by capturing real time information integrated with the design solution. The BuildingSmart Alliance (of which RICS is a signatory) is standardizing the way design objects in the various systems are coded, so estimates and schedules can be (almost) fully automated directly from the model. One component of this is the use of standardized quantification principles, to make the model measurement more consistent industry wide. As with the Defined Quantity Contracting effort, the overall aim is to improve the timing and accuracy of estimating, provide a consistent, transparent basis for decision-making, enable highly effective collaboration between team members, and create opportunities for more effective partnering with contractors and suppliers.

Through the use of these innovative design and procurement methods, the vision of a more integrated, less adversarial industry with a clear road map for increased efficiency can be realized. The quantity surveying professions have a perfect occasion to instill these principles in current processes before significant economic recovery gains traction and while conditions for embracing innovation remain opportune. •