Warren Buffett, arguably the most successful investor in the world, once said: “Only when the tide goes out, do you discover who’s been swimming naked.”
Applying this quotation to our industry today might suggest the security provided by the rising tide of sales values is shifting.
Instead of enjoying the outlook of ever-increasing waves of rising value, clients may find instead that the tide goes out, leaving everything a little exposed.
The development appraisal may have looked good on entry, but a heady cocktail of high land prices, escalating construction costs and increasing pressure on sales values is challenging viability.
No choice but two
With high land prices paid and sales values losing their footing in the shifting sands of the economy, the viability of some projects now rests with the construction cost, where some clients may not be able to accommodate any increase in cost limit and struggle to trade with the supply chain.
Recently clients have had little option but to adapt to a two-stage procurement strategy in their race to secure market capacity. However, both clients’ and main contractors’ appetite is beginning to diminish, with the second stage becoming protracted.
“There have been reports of main contractors walking away from projects due to a failed second stage”
The impact of a second stage can be uncertainty of outcome both in terms of programme and cost, together with protracted negotiations on risk and contract terms, which result in viability challenges.
This uncertainty, compounded by pressure on sales values, has put the cost management of these projects under scrutiny.
In late 2015 we witnessed projects being put on hold due to escalating construction costs. And recently, there have been reports of main contractors walking away from projects due to a failed second stage.
This may prompt a return to single-stage procurement as they seek to tempt clients into contracts with a low entry price, but possibly a very different exit price.
“Single-stage procurement all too often produces a fragmented design team”
This approach can have unintended consequences for some projects and may result in main contractors selecting subcontractors based on price rather than capability.
Pros and cons
Under single-stage procurement, clients and main contractors are given certainty of start date and guaranteed pipeline, while mitigating the risk of a failed second stage.
But I would suggest that single-stage procurement all too often produces a fragmented design team. It can mean that the main contractor is appointed too late to influence the logistics and design and is not best suited to large complex projects where this early engagement is vital.
It relies on obtaining a price for a final design from the supply chain while offering little or no opportunity to assess what assumptions have been made.
Therefore, in reality two-stage procurement should still enable a reduced programme, with the risk profile managed more effectively.
Selective tendering to a list of main contractors based on their capacity and capability for projects of a similar nature, size and level of complexity remains fundamental to best practice in all forms of procurement.
Paul Allen is a cost manager at TowerEight