The challenges facing New Zealand’s construction industry are having an impact on project costing and procurement approaches. John Oscilowski – Principal Cost Advisory discusses the challenges and how investing in a Schedule of Quantities may be the key to not only improving tender and bid success rates for principals and contractors, but also enabling smoother project delivery by mitigating risks, reducing cost uncertainty, and improving team collaboration and productivity.
New Zealand’s construction industry continues to face challenges around price increases, materials supply and labour shortages in today’s post-COVID world. For contractors and principals, this volatility creates challenges around forecasting cost risk on projects.
Furthermore, contractors currently have the power to be more selective with the projects they work on. This has caused some principals and design consultants to reconsider the way they engage with the market to better attract contractors and get their projects off the ground.
Over the last few years, we’ve seen a shift from a transactional to a more collaborative procurement approach. And there’s a view across the industry that sharing the risk between principals and contractors may be a more balanced way to address the challenges.
Traditional Fixed Price Lump Sum contracts are becoming increasingly unpopular as a fair and equitable commercial model, and contractors are often reluctant to enter into these contracts. Mechanisms favoured to re-allocate associated risk include the inclusion of measure-and-value contracts, formal cost escalation provisions during construction, as well as the increased use of Schedules of Quantities.
The return of the Schedule of Quantities
In the 80s and 90s, the Schedule of Quantities (SoQ) was an industry norm for construction contracts. It contains descriptions and/or measurements of all the items of work required to carry out a given construction project, and has two primary uses:
- Pre contract – assisting contractors in establishing their tender price.
- Post contract – assisting Quantity Surveyors’ value progress payments and assess variations.
From the 2000s, a move towards the design and build procurement method shifted the risk dial towards the contractor, and the need for the SoQ slowly diminished, along with the skillset across the industry to produce and use it as a financial tool.
Given the challenges in today’s market my observation is that it’s time to resurrect the use of SoQs. However, the full potential of the SoQ is not widely understood within the industry. Below I explore the benefits and perceived disadvantages to help build an understanding of how SoQs can add value.
Benefits for principals and contractors
There are clear benefits in using SoQs, especially for measure-and-value contracts:
- Balances risk resulting in reduction of risk pricing / allowances within tenders. Depending on project type, complexity and/or risk profile, this reduced risk pricing can be significant.
- Ease of tender assessment in ensuring like-for-like comparison in terms of scope.
- Fair and equitable to both parties. The principal gets exactly what it pays for, and the contractor is paid for the work it does. Neither party benefits at the expense of the other, as may be the case in a Fixed Price Lump Sum situation.
- Follows a consistent, industry-standard format, reducing extraordinary disparity in trade section variances between tenderers.
- Reduced effort and cost in tendering, thereby improving tenderers’ likelihood to bid, and certainly reduced replication of effort.
- Improved productivity across the industry by increasing collaboration.
- Early identification of design issues prior to tender, act as a quality control check for tender documents before they are released to the market, thereby reducing incidence of Notice to Tenderer.
- Assistance to critical path planning.
- Improved variation assessment, based on schedule rates.
- Improved assessment of payment claims and compilation of payment schedules; and assistance in establishing rates databases.
- Offers time to identify suppliers and negotiate early, providing an opportunity for discounts.
The Schedule of Quantities can enable smoother project delivery – offering principals and design consultants the opportunity to better attract contractors, mitigate risks and improve the pre-contract tender process and post-contract financial administration of their projects.
The perceived disadvantages
Lack of cost certainty with measure-and-value contracts. The perception is that the possibility of re-measure jeopardises cost certainty. A suitable budget for a re-measurement contingency should for most projects give adequate cost certainty. Any risk around cost certainty needs to be weighed against the risks of:
- paying over the odds for a lump sum contract by way of significant risk allowances; and/or
- an adversarial post-contract environment centred around recovering losses from insufficient tender allowances; and/or
- notwithstanding contractors will have priced in lump sum risk at tender time, unsatisfactory design information will likely still have additional time and/or cost claims during construction
- agencies using public funds have a responsibility under Government Procurement Rules to deliver Public Value, precluding unnecessary allocation and consequential pricing or risk.
The above risks are costly and undesirable which are likely to have significant impact on projects given the current challenges in the industry. It should be noted that these risks can be exacerbated in a competitive tender situation vs. negotiation (or any other approach), where these risks can be thoroughly understood by the parties and sufficiently allowed for and given the necessary time to be worked through.
Ability in the industry to produce and administer. Reduced training programmes over recent decades has resulted in a shallower professional talent pool. With SoQs on the rise, SoQ training is something we’ve invested in at Beca, with our experienced quantity surveyors providing coaching and learning opportunities.
Re-measure risk. This will not magically disappear just because a lump sum contract is executed. Much re-measure risk is associated with unforeseen work that could not have been identified by the consulting QS and therefore would not have been identified by a tenderer. Usually, a variation due to design development will result regardless.
Time to produce the SoQ. This is less of an issue in the current age of BIM (Building Information Modelling) and digital measuring tools, and if known in advance, the time for preparation of the SoQ will be adequately allowed for in the procurement programme.
Additional fees to produce the SoQ. The time, effort and cost to produce the SoQs will in most cases be offset by reduced “risk price allowances” and a more collaborative working environment on projects, as well as improved efficiency and productivity in the industry if the SoQ sees more widespread use.
In most cases, the benefits of the SoQ out-weigh the above considerations.
Quality of design
It’s important to note that to achieve the full benefit of the SoQ, that fully complete and accurate design information is a pre-requisite when considering its introduction.
The challenges around the quality and completeness of design deliverables are ever present, however, whether or not the SoQ is used, the risks around unsatisfactory design information should not be totally shifted to the contractor.
The SoQ hibernation period is over
My view is that along with all the benefits noted above, as well as considering short tender periods, busy industry tender activity, and the fact that the contractor is not undertaking or in control of the design – investing in SoQs provides value for traditional design-bid-build projects.
For Beca’s Cost Advisory team, we’re pleased to be leveraging SoQs in a number of our projects. We have an award-winning team of over 60 quantity surveyors in most offices across the New Zealand, with about half of those working collaboratively and virtually together in project teams to produce SoQs.
If you’d like to discuss whether your project could benefit from the use of an SoQ, please get in touch.