Give me the numbers!

Can developers make big savings on construction management?

In previous articles, we talked at length about what Construction Management is, how it differs from the traditional ‘main contractor’ procurement route, and what the benefits are of this fresh approach.

In this article, let’s delve into the numbers and explain the exact financial implications. Construction costs are complex, often filled with jargon, and complicated by the multitude of trades there are, as well as systems and material specifications within each trade.

It sure is complicated and trust me; I feel your pain. When I started as a Quantity Surveyor it took me time to understand the glossary of terms. I believe this jargon is just one of many turn-offs that prevents a developer in really wanting to, or being able to, understand the detail of construction costs. However, the reality is that you’re spending millions of pounds on construction every year; it impacts your bottom line, and you need to know why.

On that note, what does traditional ‘main contractor’ procurement look like? It looks like this:

Developer employs a main contractor to manage the construction, the main contractor employs several subcontractors to conduct the works required to build the development.

With this in mind and before getting into the financials, we think it’s important you understand the function and business model of a main contractor. Wikipedia provides the following definition:

“A main contractor is responsible for the day-to-day oversight of a construction site, management of trades, and the communication of information to all involved parties throughout the course of a building project.”

The Project Definition (theprojectdefinition.com) describe them in similar terms:

“A main contractor is a total responsible contractor for the completion of the project under the contract terms and conditions. The Main Contractor can utilise and manage subcontractors or hire people for specific parts of the work to complete the work.”

The main contractor is effectively the coordinator of construction projects. You’ll note that I’ve boldened certain keywords: “management”, “communication”, “manage”, “hire”. This is because it highlights that a main contracting company is a people-oriented, service business. The service they offer is management and human expertise.

This statement is important to consider…

When you are paying for their service it represents the expense of hiring construction professionals. Project Managers, Quantity Surveyors, Site Managers, etc. Main contractors are in the business of hiring professionals who are good at the hiring of, management of and communication with subcontractors.

A good main contractor has good people: intelligent resource with great knowledge and management skills but little else.

There’s more to it then that of course. When you employ a main contractor you’re getting infrastructure – a business with a supply chain and cashflow – but mostly you are paying for the quality of their people and you’ll see that play out on your project. We’ve all been involved in good and bad projects – the good projects had a great professional team.

With this in mind, you can better understand the costs when you see them expressed as numbers. Now, let’s walk through the breakdown on a development with a build cost of £3 million.

The Numbers

When you employ a main contractor, what are you actually paying for?

Main Contract Cost Breakdown

[table id=17 /]

Preliminaries

A typical tender includes circa 10% for preliminaries, 10% overheads and profit and 80% for measured works. Preliminaries are defined as the “cost of administering a project and providing general plant, site staff, facilities, and site-based services and other items not included in the rates…”

Overheads and Profit

Main contractors are businesses. They therefore include overheads and profit into their price. For smaller developments (say less than 50 units) this figure frequently accounts for at least 10% of their price.

Measured Works

Measured works is a sum made up almost exclusively of the appointment of subcontractors. The subcontractors include a 10% prelim themselves, so the breakdown looks more like this:

[table id=18 /]

On a £3 million build, with the traditional ‘main contractor’ route, there is £840,000 (28%) of ‘management fees’ and profit included.

How Construction Management is different

With Construction Management, you cut away the middle layer. Instead of employing a main contractor you deliver the project in-house, creating a main contracting capability in-house:

With traditional ‘main contractor’ procurement this is different, as shown below:

The In-House Team

When you remove the extra layer of management you need to replace it. There are many ways to do this, the easiest is to find a site-based Project Manager. You may also add a Quantity Surveyor to your team, or your Project Manager may manage the commercial side of the project using some of the latest software available. This depends on the size of your business and how many projects you run concurrently throughout the year, but for this example, let’s say you employ a high-quality, well-paid, Project Manager.

The Numbers

[table id=19 /]

£3 million main contract price vs. £2.5 million with Construction Management

The Numbers are flawed

The sharp-eyed reader will notice a flaw in the numbers. The typical salary for a Senior Project Manager in London is £78,000. A full years’ salary might be an inaccurate way to measure the cost of the Project Manager against a single development. The actual numbers may be better than those above if the cost of a Project Manager is spread across all developments she manages throughout the year.

Nevertheless, we thought we’d show the less ambitious case to give this balance.

The Old versus the New

On our development with a construction cost of £3 million, the numbers look like this:

[table id=20 /]

As you can see, you save more than £500,000 when working with a Construction Management model versus the traditional.

What holds a lot of developers back is a lack of understanding of just how much money can be saved. Just understanding that you can save half a million pounds for every £3 million you spend (17%) will be enough to whet the appetite of many developers.

However, change often comes at a cost.

In any industry, switching from one system to another has a cost of switching. Whether that’s changing from an Apple iPhone to an Android or from main contractor to Construction Management, it’s only right that we account for the cost of switching in this discussion.

Let’s talk cost vs price

Paslode are the market leader for nail guns in the UK.

We’re in a fictional world where we set-up as their competition and create a new type of gun that works from solar energy. You don’t need to worry about finding a source of electricity to use the gun. You don’t have to change the battery, so you never have the problem of running out of charge.

The product solves a problem that my target customer has and it’s ready to hit the market. How much will we charge for the new gun?

A brand new Paslode gun sells for around £500, so we can decide to go above the Paslode or below, depending on brand positioning. But that only deals with price, not ‘cost’, and there’s a difference.

When the customer considers our new product, they’re not just weighing up the pros and cons of both products, they’re weighing up the ‘cost’ of switching too.

They’ve been using a Paslode for years. They know how it works and feels and so does the rest of their gang. They’ve invested in the Paslode. They trust the gun and brand, they own batteries, chargers and other Paslode accessories. The new gun works differently. Yes they don’t have to charge it with electricity, but they do need to develop a habit of leaving it in sunlight when they’re not working with the gun so it builds up charge through solar energy. It’s inevitable they’ll forget to do that regularly when first using the tool. That dead time will cost them money, so they need to factor it in to the cost of switching gun.

Customers also consider the non-commercial risks. Their team likes and trust the Paslode. If the decision-maker switches brand to a new solar energy gun and the results aren’t as good as hoped, it looks bad on that person and their judgment. Nobody likes making bad decisions, especially when they’re out in the open for everyone to see. It’s much safer sticking with what you know.

In the long term, the new product is a better option, but the short-term cost of switching is higher, and the cost of the switch doesn’t purely equate to the purchase price of the tool.

The cost of switching procurement routes

When you consider switching procurement routes, the ‘cost of switching’ is not dissimilar. I have focused your attention on the price, but what really matters is the cost to your business.

If you are considering the change from traditional to Construction Management, you won’t simply be taking into account the 17% saving on construction expenses, but also the overall risk your business will take on and whether you can manage that.

Construction Management is an unknown quantity, and it’s up against a tried and tested method. Even if you’ve had problems with main contractors in the past, Construction Management has additional ‘costs’ beyond the ‘price’ of the construction.

You don’t know the process; you don’t know the paperwork and you don’t know the people. You don’t know how you manage obstacles and challenges during the construction. When you weigh up all these factors, it’s clear that the cost of switching requires more thought that simply the price.

So, when it comes to cost what should we be thinking about?

Many of the primary concerns for developers taking this leap into the unknown will revolve around a desire to avoid the need to manage construction. Construction Management is hard – how you do you manage a poorly performing subcontractor for instance? How do you manage a technical problem or challenge on site?

These are big challenges so let’s default back to the main contractor and consider how they do it?

People.

That’s right, they manage these issues with people, good people. You can do exactly the same by employing the high-quality Project Manager. In doing this, we can provide answers to the questions above…

How you do you manage a poorly performing subcontractor?

There is the risk that a contractor underperforms on any project. In fact, it probably happened on your last project. Have you ever wondered why progress on site has slowed dramatically with a certain trade?

A main contractor will manage an underperforming subcontractor in several ways. The task of doing this will fall on their Project Manager who, initially will try people management to motivate the subcontractor to start performing and latterly, if this approach fails they will start to consider alternative contractors and manage the poorly performing subcontractor with notices of delay and potentially termination.

So, again – this issue, that you have on every project, is managed by a Project Manager – why is that Project Manager not in your business – you are paying for them.

What about technical problems on site – how would I manage this?

Construction has a vast supply chain, and the reality is that nobody can claim to be an expert in every specialist trade. The subcontractors are the experts – when there is a technical problem on site the main contractor will seek the advice of the subcontractors and manage out the risk or problem.

With Construction Management you will have a Project Manager who is your designated construction expert. This Project Manager will do exactly what they would do at a main contractor and work through the technical challenge with the subcontractor – there is no difference.

With every issue on a project, the main contractor manages it with their Project Manager. You pay for that Project Manager (and more) on every project – so why do you not have the benefit of them (and more)?

The cost of switching comes from the unknown but now that the unknown is clear, do you see how you might be missing out?

Other business benefits of Construction Management

The Construction Management model is proven to encourage early involvement from all parties. Early involvement leads to better collaboration, increased efficiency, minimised waste, and a unified objective.

When you have one Project Manager collaborating and bringing design and subcontracting parties together, you avoid the waste, increased cost and time, and also the adversarial relationships that frequently rear their head with the traditional model.

When the developer brings management in-house, they give themselves the opportunity to align all their interests. Now that they have the construction expertise in-house, they can deploy that added knowledge within the teams to all phases of the development. The developer can bring its Project Manager into the conversation to advise on how early decisions during planning may affect the construction phase. They can then collaborate with the sales team to share ideas on how construction methods and design can be modified to improve the marketing and sales aspects of your development.

Okay, but who else is really doing this?

There are plenty of working examples of projects where developers are taking the Construction Management approach. We shall discuss case studies in future articles but one easy example is Thornsett Group.

Thornsett Group is a developer that builds around 200 units per year. Thornsett currently split the management of their projects, using a main contractor on major developments and their in-house construction team on all other schemes.

Thornsett used the Construction Management route on their Kingsland Road scheme in East London and recorded savings of up to 12% on construction costs. The original construction budget was in excess of £25 million so doing the maths to understand how significant a 12% saving was, is not difficult.

Final Takeaway thoughts…

The switch from traditional ‘main contractor’ procurement to Construction Management is not a simple one. However, many developers are starting to take the leap, Thornsett being a fantastic example. The market is becoming more challenging and developers need to maintain a competitive edge.

For me, the employment of a high quality, in-house Project Manager, is your most important task. In employing a Project Manager, you clear almost all the hurdles of the cost of switching and in doing so open the door to Construction Management.

I don’t believe there is a developer on the planet who does not want to save £500,000 for every £3 million they spend on construction. That’s a massive saving added to your margin through intelligent management – you’ll be hard pushed to find a better way to add that to your bottom line.

Feature image photo by Carlos Irineu da Costa on Unsplash

About Paul Heming

Paul was a Quantity Surveyor who gained 10 years experience of managing £200 million worth of flagship UK projects, including 20 Fenchurch Street and Battersea Power Station. In 2015, Paul founded C-Link with the intention of sharing his expertise of managing major projects with the SME market.