Building materials price increases are a factor in rising inflation, but inflation is evidence of a past escalation. In the case of ongoing projects, any increases in costs will have to be borne by those involved in the manner stipulated in the construction contract.
For future construction projects, the inflation figures confirm that escalation is a real risk. Estimators, on both the client and the contractor side, are, however, likely to be more interested in the expected further price changes. This article looks at this risk at both macro and micro levels and the tools in place that are available to prevent or manage the risk.
How can school principals manage the risk of escalation?
For clients, speed on the market is crucial. Time is a major cost driver. Delays in the planning, construction and procurement phases lead to escalation risks.
The delays inherent in the planning system are largely outside the hands of the builders. Streamlining and shortening the overall duration of the planning process would bring significant benefits to the projects. Achieving this efficiency is one of the goals of the ongoing reform process of the resource management system, although it is difficult at this stage to assess how effective the reforms will be.
Options for generating time efficiency and tradeoffs
School principals should consider other available means to save time as they determine the scope of the project and develop a management plan. Options to consider include:
advisor – Take into account the capacity, as well as the ability of the designers to carry out the work. Once the contract is in place, what are the incentives and barriers to ensure that the consultant delivers the design documents in a timely manner at the required level of development and coordination?
Terms of contract – In an escalating environment, pricing at the header contract and subtrade level can only be sustained for so long. Orders have to be placed and that is only done after confirmation. Significant changes to standard forms can delay the signing of the contract. Intelligent Contracting takes into account whether a change is necessary, what impact the change will have on time and costs, and whether this change is in line with the market. Changes to the standard form are often required, but the contracting authorities should consider what is important to them and try to limit the project-specific aspects and special conditions to these matters.
Packaging work – The packing of early works enables a faster start on site while the procurement of the general contractor is in progress. The selected main contractor can then get started right away. In a vertical construction, separating the foundations and foundation from the structure creates a perceived risk by sharing responsibility, but that risk can be managed. Clients have to take a closer look at the perceived risk and weigh the risk in dividing responsibility against the risk of cost escalation.
procurement – The traditional design, offer and build approach has proven its worth but results in successive phases with limited overlap between these phases. A flat rate is also preferred by clients because it offers the greatest cost security and is the easiest to manage. In this environment, however, the traditional approach delays procurement and a lump sum may include a risk premium that is not worth the risk transfer or is simply not possible due to the risk appetite and predictive ability of the contractors. Alternative procurement approaches such as involving contractors early on or procurement based on an immature design could be considered. An important early-to-market tradeoff is the market’s ability to get an accurate price. An immature design will result in the risk being priced in. In order to avoid that the client pays this premium, cost-plus systems are usually used. Cost controls can be implemented by ensuring that cover prices are achieved. Incentives and risk-sharing arrangements could also be considered to ensure that the contractor is incentivized to manage the risk and deliver within budget. Contractors should be wary of cost systems that aim to disrupt or control their supply chain. If greater cost certainty is sought, clients need to go into detail and understand which packages may be subject to a fixed price or fixed prices and which packages are too risky for contractors to set a price and focus on those packages. For example, which packages are material? And is there an alternative to surcharges, e.g. increases in connection with an agreed index? The required degree of cost security is determined by the most important project participants and their requirements, in particular the financiers and the typical fixed price requirement.
Article with a long lead time – Similar to packaging work, clients should be able to identify items with a long lead time that can be obtained prior to procurement by the main contractor. Typically, the purpose of the main procurement materials is to maintain the overall project duration. Another benefit in an escalating environment is that the order is placed earlier, which avoids escalation. The NZS contracts do not properly handle the risk of free delivery items and a special condition would be required.
Advance payments for external materials – The same principle applies here as for articles with a long lead. Typically, contractors order later rather than sooner to avoid a negative cash flow position, but ordering early avoids escalation. If the client has adequate protective measures in place, earlier payment than usual can reduce the risk of cost escalation.
storage – Are there any logistical problems, e.g. B. a cramped construction site that prevents early material ordering and storage? School principals should consider both the practical and commercial opportunities to take advantage of early ordering. Insurance floors would also have to be taken into account.
Longer term considerations for clients
In the longer term, efficiency increases in planning and construction can reduce the overall project duration and time-related costs.
Repetition and process improvement create efficiency, but construction in New Zealand is largely bespoke. As a school principal, you need to ask yourself a few questions:
Can we standardize the design?
If we have an attractive work program, how do our contract and procurement structures incentivize our contractors to invest in people and resources?
What relationships should I invest in to mitigate the time and cost risks otherwise associated with the supply chain, and how?
Considerations for contractors
For contractors, it can create longer-term problems if they help get the project off the ground. Make sure any alternative materials or systems you offer are subject to the same designation responsibility assignment provided in the construction contract, or consciously take the design risk and consider how this will be handled and limited.