Managing cost overruns and related time delays on construction projects is a common point of contention for most developers and one of the most widespread contributing factors to a development not reaching its profit potential.
One key strategy to maintain project feasibility is for the developer to engage its building contractor as early into the design process as possible. This approach highlights and helps manage potential design problems as well as to integrate, engage and empower the development team at an early stage.
Commonly referred to an ECI arrangement (Early Contractor Involvement), the Building Contractor is asked to contribute its time, expertise and guidance to ensure the construction cost budget (and overall project profit target) are all maintained prior to any works commencing on site and even before any building approval obtained.
The broad purpose of this strategy is to help control what you can and influence what you can’t control. Typically, this process may take the path of a formal Design & Construct (D&C) arrangement where, ideally, the Contractor is asked to sit at the ‘design table’ in the capacity of an advisor rather than ‘the contractor’. The initial step is for the Developer (and its consultant team) to establish the broad design direction of the project, nominate a realistically achievable construction cost budget, then enter in a formal ECI arrangement with a preferred contractor.
The ECI agreement broadly states the expectations and requirements of the contractor as well as its involvement with the consultant team with the mandate to help achieve the project’s design and construction budget goals. As well as establish these objectives, the ECI predetermines the proposed building contract terms to be entered into between the developer and contractor. Where design and cost outcomes are met by the contractor - a D&C building contract is formally executed.
A well drafted ECI agreement encourages and incentivizes the contractor to commit its resources - typically on a speculative basis. This method of procurement requires preparation of PPR (Principal Project Requirements) which enables the developer and project architect to document and/or clarify the overall design intention of the development. The documents that form the PPR typically include the combination of schematic drawings, graphical imagery, photos, finishes schedules, specifications, and/or the like. The PPR ensures the building contractor is bound by certain pre-agreed, quality and quantity expectations. Once the construction cost budget is agreed to and a formal building contract agreement in place (between developer and building contractor), the detailed design documentation can begin by the contractor.
Typically, at this stage, the design documentation would be completed to around 70% of the full /total documents needed to construction the works. This procurement approach is in direct contrast with the more traditional and typically utilized tendered ‘fixed lump sum’ style of contract procurement. Whilst this is the most common and popular approach, its short comings can be detrimental as cost over-runs are still commonplace. Poorly prepared contract documents almost always lead to cost variations and project delays, not to mention the high probability that tenders may exceed initial construction budget requirements.
A critical review of most standard-form building contracts entitles a building contractor to claim cost variations as a result of discrepancies within the design documents; unlike a D&C contract which in most instances redirects the design and cost risk away from the developer towards the contractor.
Once you overlay both the ECI and D&C approaches, the contractor gains a truly insightful understanding of the project; its design objectives and construction issues, enabling the mitigation of both cost overruns and time delays.
The key takeaway here is to involve your building contractor as early as possible and practical in the design process.
About Author: Sebastian has 36 years in the property industry & an extensive range of experience in Property Development & Building Construction having being in involved in all aspects of the procurement & delivery process for both small & large commercial retail, residential, office & industrial projects across Australia.
Co-Founder of DevOp3