Our latest Blog looks at the impact of project procurement methods on cost transparency.
Understanding the true cost of a project is essential to effective cost control. The procurement route determines how costs are established, reported and managed, and how much visibility the Customer has over the underlying supply chain.
Construction Management (CM), Design & Build (D&B) and Traditional procurement each provide different levels of cost transparency and control.
Construction Management
The open-book nature of CM is a distinct advantage over Traditional and Design & Build. CM allows the Customer to see a detailed breakdown of all project cost committed or expended.
Through the Construction Manager the Customer can audit every penny spent. This is unlike other procurement routes where a Main Contractor’s lump sum may cover various items.
CM provides true cost awareness and understanding to the Customer. With no party masking the true trade cost, the Customer has better financial control.
The Construction Manager supports throughout the design and cost planning project stages. So the Customer can influence decisions that affect the final cost with confidence. With Traditional or single stage Design & Build, costs are often fixed before the design is complete. Then when the design does change, the cost to the Customer is the Main Contractor’s price – which may be very different to the true cost.
Under CM, each work package can be competitively tendered. This means that the Customer only pays the market rate with no Main Contractor markup or masking of cost. There is a much-reduced risk of overpayment with Customers able to verify actual cost.
Customers can engage direct with the Trade Contractors for value engineering. True savings are transparent, not diluted by a Main Contractor creaming off the top.
CM also provides much improved Customer cashflow management. Certified payments are for actual progress and cost incurred, not pre-agreed lump sums. Via interim payments Main Contractors can often triple their forecast margin temporarily through overmeasure. They stretch out supply chain contract terms, preventing payments flowing downstream. With CM, Customer payments go direct to the Trade Contractors.
Cost transparency via CM leads to better stakeholder engagement and trust. All relevant parties can see the true financial aspects on the project down to trade level. Customers can better plan and forecast future projects knowing the true costs.
CM offers Customers a high level of true cost transparency. This leads to better cost control, increased savings, and collaborative project management. It benefits Customers who want close involvement in financial decisions on their projects.
Design & Build
D&B generally provides less visibility of underlying trade costs once the Main Contractor has been appointed. The Customer contracts against the agreed price, with the Main Contractor managing its supply chain and commercial arrangements.
This provides greater price certainty and reduces the Customer’s involvement in day-to-day procurement. However, when design or scope changes, the Customer is generally reliant on the Main Contractor’s valuation of the change rather than direct visibility of the underlying trade cost.
The Main Contractor’s design and procurement responsibility can also simplify cost management, with a single party coordinating the relationship between design, procurement and construction.
D&B therefore suits Customers who prioritise price certainty and simplicity over detailed visibility of supply chain costs.
Traditional
Traditional procurement provides cost visibility through the tendering process, with the Customer able to review and compare Main Contractor bids against a developed design and specification.
Once the contract is awarded, however, the Main Contractor generally manages its supply chain commercially. The Customer has less visibility of the underlying trade costs than under CM, although the contract price provides a clear basis for managing expenditure.
The more developed design at tender can also provide greater cost certainty before construction begins. Changes after contract award may be valued as variations, with the resulting cost dependent on the contractual mechanism and the Main Contractor’s pricing.
Traditional procurement therefore provides a balance between upfront cost definition and contractual price certainty, with less ongoing supply chain transparency than CM.
Choosing the Right Route for Cost Transparency
Each procurement route offers a different approach to cost control:
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- Construction Management: maximum visibility of trade costs and greater Customer involvement in procurement and value engineering. No Main Contractor cost filter, decisions based on cost not MC price, Improved cashflow at all project tiers, accurate forecasting for future projects partially due to increased confidence in data.
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- Design & Build: greater price certainty and simpler cost management, but less visibility of underlying supply chain costs.
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- Traditional: clear tendered pricing based on a developed design, with less ongoing visibility of Trade Contractor costs after award.
The decision is not simply which route offers the lowest cost, but which provides the right balance of transparency, cost certainty and Customer involvement.
CM is suited to Customers who want detailed visibility and active involvement in financial decisions. D&B suits those prioritising price certainty and single-point commercial responsibility. Traditional suits projects where a developed design and competitive tender provide the preferred basis for establishing cost before construction.
Contact Scribe to apply the cost transparency benefits of Construction Management. Please comment below, and read our other Blogs.
