- The 3.5 bn. Cost of Securing Work
- Costs Breakdowns
- Total Costs to Get One Job
- Who foots the bill?
- What’s the Addition?
- Other Costs to be Covered
- Clever Bidding
- 20+% May go on bid costs
- When Bigger means Smaller
- Enthusiasm beats Value –v- Price
- Delivering Better Value for Money
- Where the Money Goes
- Egan’s ‘Better Way’
- Partnering Fundamentals
- Creating the Right Environment
- How this is done
- How to do it
- Developing Values
- The Results
Prompted by the Carillion catastrophe and Chris Blythe’s article in Construction Manager, this paper revisits the authors writings on this subject over the last two decades. Highlighting the incredible waste and other problems created by ‘lowest cost’ tendering, it echoes other calls for a more rational, partnering approach to construction projects. Perhaps more importantly, it offers such a framework for achieving greater harmony, ,
The 3.5 bn. Cost of Securing Work
Back in 2003 the staggering cumulative annual spend on bidding and winning construction work across the UK was £3.5 billion! , While it was reckoned that this could have been cut in half to save nearly £2bn, today it may well be double this.
More recent research survey by MarketingWorks and Professor Will Hughes of the University of Reading, show that in 2014 the average cost of a winning tender to a contractor was £60,208; for consultants it was £23,821. They found that firms winning one in every five projects could be spending as much as 22 per cent of operational turnover on winning work. This is an average across all respondents and contract sizes ranging from up to £2m to mega projects worth more than £250m.
For smaller projects (less than £5m), the proportion of bid cost to project value is highest, meaning the win ratio is crucial for companies looking to avoid problem jobs and determining whether to bid schemes in the first place.
On average, it cost’s consultancies (architects, QS’s, engineers, etc) 7% to 8% of their income each to win work. Contractors spend 3% to 4% of their turnover. On average, a construction consultancy typically spent 40 hours on each bid, running up costs at that time of £4,000. For contractors, this amounted to 100 hours and £10,000 for a standard bid, while Design and Build submissions racked up over £25,000 each.
Total Costs to Get One Job
Using the same figures, ignoring inflation, covering the costs of failed bids, and assuming typical success ratios of between 1:5 and 1:10, this means it could cost a consultant between £20k and £40k to get a job. For a contractor this could be £50k to £100k, while Design and Build figures escalate to between £125k and £250k – just to get one job!
One interesting trend from the Reading research is that winning contractors spend more time than losing contractors on factors such as their decision to bid (double the time) and selecting/briefing members of the team, including bid managers.
Who foots the bill?
In this crazy, contracting world, firms nominally pay out these sums as an almost incidental cost of remaining in business. And this applies to a plethora of professionals and multiple sub-contractors as well as the several main contractors vying for the work. And the fact is that all of these costs have to be passed on to the end customer - the owners and occupiers of the buildings commissioned – via higher overhead and other allocations for all of those competing firms in the supply chain.
What's the Addition?
Architects 8%, say
Structural engineer 8% on, say £100k
Quantity Surveyor 8% on, say £300k
Ground works 4% on, say £50,000
Struture/Frame 4% on, say £100,000
Roofing 4% on, say £10,000
Plastering 4% on, say £10,000
M & E 4% on, say £15,000
4% on balance, say £220k
Total 'Wasteful' Costs
ADD if Design & Build extra 1% on value less consultants of, say £424k
Funds that could be available for project improvement/profits
Other Costs to be Covered
To these each firm must add costs of project risk, marketing, advertising and generally promoting their businesses. Between 3% and 5% of turnover is possibly a conservative estimate of these.
And this takes no account of the employer’s direct costs engaging project managers, producing tender documents, securing bids, assessing the suitability of contractors, and entering into legally binding contracts. Nor does it consider potential dispute, litigation, and resolution costs.
This is notwithstanding that prudent contractors will have had the Bills of Quantity and documents examined in micro-detail in advance of tendering to establish where the real money is to be made via claims, design discrepancies, and the like.
Wall St Journal
20+% May go on bid costs
So, from the simple example given above, before a contract is placed, the employer can expect to be paying out a huge extra sum for the privilege of following the conventional tendering processes prevalent in the construction industry. 20% or more is probably a fair estimate. This is supported by the Reaading research.
When Bigger means Smaller
Only when contract value moves into the tens of millions can this be said to be in any way manageable. For the bulk of building contracts this is just money down the drain.
Enthusiasm beats Value -v- Price
And, strange to relate, as Collard’s research showed and as most sales people recognise, “Clients don’t make decisions on lowest price, but rather on value. … It is only when the client has said ‘we want you’, that it turns to the issue of price.”
In fact a survey carried out by the University of Leeds concluded that ‘enthusiasm’ is the most important issue for picking a contractor.
Leadership Freak blog
Delivering Better Value for Money
No wonder then that, rather than tendering for work in the hope of winning, say, 1 in 7 projects, progressive firms prefer to deliver better value for their clients. By continuously improving quality, by value engineering projects at the design stage, and by delivering high-end professional services they can save them money.
This is easier to understand when one recognises that to win, say, 1-in-7 tenders would take more space, more equipment, more facilities, and more people to compile the ‘bids’. Almost worse is the demoralising effect such ‘bidding’ can have on staff who find that in 6 out of 7 cases their efforts are a total waste of everyone’s time, effort and money.
Instead, by positively re-applying these resources to working closely with clients and other supply team members, such firms can establish the ‘right price’ for each job. To do this they work collaboratively, achieving results more quickly, more definitively, with greater certainty, and with less risk for everyone involved, while establishing sound business relationships between all parties.
Where the Money Goes
It is not unusual to find that, as a result, such firms are able to research & develop better designs and systems, implement continuous improvement programmes, and invest in training their people. This enables them to promote a co-operative working environment for, and with, supply chain and other professionals engaged on the project. All paid for by transferring the abortive cost of speculative tendering.
Indeed such ‘Partnering’ is a natural consequence of this approach, as set out below.
Egan's 'Better Way'
As illustrated above, every year the UK construction industry spends around £3.5bn tendering for work, of which almost £2bn could be saved (see above). One way to do this is to invoke project Partnering.
Project ‘Partnering’ is an all-encompassing term derived from Sir John Egan’s work on Rethinking Construction . The UK Government, the Construction Industries Training Board (CITB), Constructing Excellence, and Construction Best Practice Clubs throughout the UK, are now actively promoting this concept.
While it does not involve the legal relationships and cross liabilities incurred by a formal Partnership, or Joint Venture type arrangement, it does invoke a spirit of mutual co-operation to deliver best value for the building owner and end user client.
As ‘Construct Wales’ recognises, where clients adapt best practice manufacturing principles to construction, devise a collaborative approach to project delivery, and are active members of the team, best value for money ensues.
When design and build contracts are let to teams dedicated to achieving the client’s objectives, rather than competing with one another in a supply chain that has no common goal except to make individual profits by some means or other, better buildings are produced.
The fundamentals of ‘Partnering’ are:-
- Formalised mutual objectives
- Agreed problem resolution methods
- Active search for continuous measurable improvements
- A supply chain made up of preferred suppliers chosen as business partners for the long term and for overall mutual benefit, rather than for projects ‘one-at-a-time’
Companies who embrace ‘Partnering’ take a structured management approach to facilitate working together with clients, consultants, contractors, sub-contractors and suppliers as a team. This helps us to lock-in those benefits that flow from working together as a team over a long period, for their clients.
Generally this means they are also concerned to ensure that, as well as aiming for high standards and values, all stakeholders receive the benefits they anticipate in all the projects to which, jointly, they apply their efforts. This includes fearlessly, but impartially, addressing all of the financial implications involved in the drive to achieve these objectives.
Creating the Right Environment
A key element in any approach to ‘Partnering’, is the ability to create the right environment for collaboration between all members of the ‘partnering’ team.
The emphasis is on collaborating with industry colleagues to achieve mutual goals, as well as developing relationships that can withstand divergent views – and even disagreements!
Increasingly, as ‘partner’ teams learn how to do this, it improves the joint ability to deliver the highest quality and standards of products and services.
This is in stark contrast to the ‘old’, confrontational way of working, in which separate factions fight to protect their own narrow interests, often losing sight of the real aim of satisfying the building needs of joint end user clients.
How this is done
Conventionally, most of the people in the diverse ‘supply chain’ of professionals, contractors, sub-contractors, material suppliers, etc. needed to complete a construction project, have little, if any, interest in the needs and difficulties experienced by ‘opposing’ firms.
But, bringing as many of them as possible together in pre-project meetings enables them all to understand that a “Not my problem” attitude is, in fact, very much everyone’s problem.
Addressing the ‘blame’ culture that has regrettably grown up throughout the construction industry I an essential part of the process. In its place an alternative ‘trust’ culture is promoted in which, little by little, all of the partners in a project learn how to share responsibility for group performance.
This leads on to encourage the recognition and understanding that true co-operation, really working together, requires increasing transparency.
Taking on board the axiom that “To be human is to be vulnerable”, members are shown how to tackle the barriers to effective and meaningful communication that exist in the world and how to improve the relationships between them.
Finally, this results in an understanding of the way in which sharing information on the issues and difficulties that affect the performance of any one member firm, impacts on all other members of the project team..
How to do it
‘Training for Partnering’ draws on the experience of all participants to explore and consider ways of resolving project an related issues. Usually it engages ‘pre-project’ meetings as part of the process. By bringing together lead representatives from the employer/client, design team, main contractors, essential sub-trades, and key component and service providers, everyone is given the opportunity to both learn from the particular job and to draw out issues that may both help and hinder the contract.
By applying the lessons learned to upcoming projects, you can begin unpacking the issues that are likely to arise as your project progresses, even before it has begun.
'Independent' - FTI Consulting
In fact, this facilitation exercise not only helps you learn-by-doing, it also lets you begin to experience the benefits of seeing the project through the eyes of your other prospective (chosen) team members and gaining the essential elements of team building.
The process encourages and develops a number of important values for individuals and their firms, e.g.:
Integrity: being honest, ethical and fair. Personal integrity and professional ethics guide all decisions.
Excellence: strive to exceed client expectations - accept only highest level of quality & performance.
Teamwork: generate exceptional, value-added solutions by working together across functional
Accountability: take ownership of own responsibilities, keep commitments to team members, clients,
and wider community stakeholders.
Innovation: adopt technological innovation to benefit customers and create opportunities for them.
Initiative: recognize and reward personal initiative by pursuing creative solutions for customers
Community Service: accommodating all stakeholder interests is of greatest service to the community.
Every human being and every organisation has the latent capacity to improve their own abilities and performance. The results derived from adopting a partnering approach are progressive and ongoing.
While real benefits will derive during the ‘teams’ first project, the greatest benefits will come as team members increasingly work together on future schemes, and as they learn to share their experiences with others on ‘outside’ projects.
Once project partners have an understanding of the fundaments outlined above, each project becomes a practical, ‘learning by doing’ exercise. By honing their skills and sharing their experiences within this project team, all project partners gain an understanding that Together Each Achieves More (TEAM). This is the real payoff.
It also has an impact on other areas of the members individual businesses, from strategic shifts and managing procurement; through improving the effectiveness of supply chains and project management, to clients - who rapidly learn the benefits that partnering can bring to the efficiency and profitability of their organisations.
In developing these skills they learn to understand what works and what does not, how to harness and apply appropriate tools in their own organisations, how to drive forward positive change in making partnering arrangements more effective and profitable, and how to make their own businesses smarter, more reliable and more valuable to their customers.
Perhaps most important for everyone is that, if they also embrace the additional concepts of lean construction and Six Sigma, they have started on a journey of continuous improvement. By helping people to grow and develop their ‘talents’ – whatever shape, or form, these take - they gain greater satisfaction from their work, produce finer buildings, generate more satisfied customers, and leave a real inheritance for future generations.