For procurement, sourcing construction projects can represent a significant challenge. Given that there are a variety of delivery methods that can be deployed, variability in benchmark cost data, and that owners are more likely to purchase a concept than a commodity, buyers have to navigate a complicated ecosystem in order to bring tangible value. Aside from the acquisition process itself, a multitude of options are available when it comes to contracting and a Total Cost of Ownership (TCO) approach. We will explore each of these below as we embark on the happiest days of our lives…developing and executing a sourcing strategy.
The first major decision in this process is how to best deliver a project that aligns with the ultimate business objectives of the owner. Four essential construction delivery methods exist and with each one, separate contracting methods apply:
- Design-Bid-Build (DBB) – This is the most common and traditional method, which gives an owner the ultimate control over design. It is also the longest from a schedule standpoint and puts the owner on the hook for any change orders once the design is “frozen.”
- Design-Build (DB) – A DB contract places all of the risk upon the general contractor selected where a guaranteed max (GMAX) number is set at the beginning and carried throughout the project.
- Construction Manager “Fee At Risk” – With this format, a construction manager will place his fee (profit) at risk to meet specific project objectives such as cost, schedule, safety, etc. This method and the DB method take less time to construct than a DBB project.
- Integrated Project Delivery (IPD) – The new kid on the block, this approach brings the owner, construction manager, architect and trades into a multi-party agreement where risk is shared. Common objectives are established in a truly collaborative environment but writing an agreement such as this is rather complex. It is also the quickest type of project to complete.
When it comes to the actual sourcing activity, buyers have a myriad of options to consider as well. Most properly assembled construction RFPs will include an RFI component to it because again, in most cases, owners are buying a solution rather than the sum of individual commodities. This is especially true when design/engineering is part of the scope. Each of the following approaches should be used strategically and thoroughly vetted with your stakeholder(s) prior to execution:
- Competitive Bidding – This is the most common method of procuring, with a fully developed and mature supply base competing for the work specified. This can be done at a tiered level (with a general contractor or construction manager overseeing the project) or on an individual trade level. A “target price” component can also be incorporated for an added cost reduction dimension.
- Time and Material/Open Book – Depending on the complexity, available suppliers to bid and needed time to market, an open book or Time and Material (T&M) approach may be the best option. A high level of trust between the owner and contractor is essential here.
- Bundling – Looking across the enterprise for similar projects that involve the same targeted supply base can yield a good savings return. The biggest challenge with this approach, however, is timing. Getting multiple projects ready for market takes a lot of internal coordination, with the level of effort sometimes not worth the return. Bundling becomes ideal when you have numerous projects but few available sources to quote.
Within or apart from the RFP, procurement has additional options available to improve the profitability of a given program. Throughout the lifecycle of a structure, approximately 20% makes up the initial investment (CAPEX). This means that the other 80% relate to costs such as operating expenses and ongoing maintenance. Amongst several available options, procurement can use an RFI to identify options that will improve the total lifecycle cost of a given capital asset. Below are a few notable strategies available:
- Energy Conservation – Thicker insulation, LED lighting and natural light improvements are realistic ways to lower the long-term expenses associated with building operation. Highly efficient HVAC equipment can also play a significant role.
- Longer Life Materials – A 40-year roof will be more expensive during the initial purchase but will result in thousands of dollars saved in patching, maintenance and replacement costs.
- Cost Segregation – Accounting and tax rules can make depreciation estimates difficult. Spending time understanding what needs to be capitalized and what can be expensed can have a significant impact on the overall investment.
- Government Rebate Programs – Many jurisdictions (federal, state and local) provide rebates for green factory-based materials and products.
- Public Funding – Available state job incentive programs and capital lease/port authority funding options may also be available to owners looking to minimize capital costs.
For owners, an unstable construction market can lead to disastrous results when constructing a new warehouse, office space or manufacturing location. A recent survey found that only 5.4% of construction projects are meeting first quartile cost and schedule targets. By any measure, these are disastrous results with more uncertainly in a schizophrenic US economy making cost management as difficult as trying to button a shirt with socks on your hands. By knowing which means and methods are available to them, sourcing professionals can greatly impact the profitability and ROI of a given construction project, while preventing the number one cause of termination in their profession…failed capital projects.
Click here to read part one of Mathew Daniel's article.