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Measured Once, Priced Right

Unmeasured Risks


I have a 1951 copy of the NZSS.670 NZ Standard Specification – Methods of measurement of building works. It is not a first edition so, 70 + years on from our first NZSMM, I have to ask the question…


Why bother having a standard method of measurement, if we do not use a common measure to price works from?


We all use the same drawings and spec’s, why not use the same measure?


A single measure to a common standard, prepared for all to use in procurement, is always better value for money across the project lifecycle than multiple measures to unique standards, used only once by each individual design document interpreter at tender time.


Why are we not using one qualified specialist to review and measure the design documents, where the responsibility of the measure lies with the originator of all scope documents and the measure is fully coordinated with the designers to ensure accuracy of the design and the measure?


Why, why, why ? ? ?



The problem we face today


First, let us recognise that the problem with asking for a market response, based on multiple unqualified interpretations of the design documents, based on multiple measurement standards, is shifting a HUGE risk unnecessarily to the multitudes of contractors involved in tendering, where the principal is effectively asking the market to;

- Inefficiently identify scope; and

- Encourage error-based bidding to;

- deliver lower trade prices;

- deprive truly competitive innovation from reaching the market;

- encourage dark innovation by contractors held to an error-based bid so they may survive;



The first step towards a more sustainable industry


The first step towards. It is the principal’s ethical responsibility to ensure the procurement documents specify the Principal’s requirements as clearly and precisely as possible.


“a commonly used measure of scope = a common interpretation of scope requirements”


Infrastructure projects tend to have provisional schedules and the award is focused on the rates tendered. The client takes the risk on the quantity. The contractor takes the risk on how to build efficiently. This allows marginal innovations in building techniques to get market tested and confirmed and adopted or modified and represented in future bids.


Industries that allow true innovation to be the procurement price delta are efficient industries that are always improving. We all watch our competition to see if and how they are making money on that job they beat us on, so we learn to get better, (like them), or avoid their mistakes the next time we compete for great new building ideas. But if a mistake wins a project, the next best bid, full of innovative ideas, does not get market tested. All bid efforts wasted, as we race to the bottom of mistake alley, because the only way to win, is to lose.


Weeding out the chaff


The second step towards a more sustainable industry procurement model is to accurately identify for elimination, unsustainable bids.


Within my career span there was once a time, (early 1980’s and prior), when consultants would consistently advised clients to discard overly high or low prices from consideration, owing to them most likely to be inefficient for their purposes. They acknowledged that a low offer brings problems to a project that costs in consultants fees, creative scope claims or worse a liquidation and project delays, lost revenues, etc for the planned enterprise.


Recent Case Study (without identifying parties): A recently liquidated builder were a late change of contractor selection on a large commercial project, a year or so before they went bust. The developer changed out a respectable contractor (still in business today) with a reasonable price because a low price offer proved irresistible. Fast forward, liquidated builder goes bust, a new respectable contractor takes over the works. Significant remedial costs are identified, the developer must pay a busy market fair price and take ongoing market pricing and scope risks. The developer would have saved months and millions if they declined the low price offer. Q1. What advice did the developers consultants and funders give when the irresistible offer was presented? Q2. Given the same scenario today, are attitudes, advice and decisions going to change?


By weeding out the chaff, those contractors who had reasonably priced the works were considered on their merits with the lowest price being preferred if all other matters are equal. A competitive sustainable price represented the following;

- inherent commercial advantages particular to the successful proposer;

- new innovation for client and industry benefit;

- lower overheads and margin pricing because fair terms and quality documents from quality clients and consultants gives the contractor confidence the risks of errors and inefficiency will be low;


Today a wide variety of prices are considered, there seems to be little concern about what appears to be an under-price or poor design output. So long as you can minimise the risk to the client, by locking in the low price with terms designed to protect consultant’s performance errors. Ride the contractor to the finish line. If he survives, watch out for him on the next project. All this rewards mistakes that burns contractor shareholder funds and promotes bad behaviour from desperate actors.


Client’s, their consultants and main contractors all play a part in what is substantially a subcontractor selection problem. Allowing a desperate actor to knowingly leap onto their sword, may be legal, but it is not necessarily fair to their future creditors. There is an ethical time to pull the pin on a failing business, so enabling the gambler on more roll of the dice?


A wise man recently recalled of a past client’s sustainable market approach to procurement

“you are on the tender list and my criteria for tender selection is to select the price in the middle”.


Which effectively says, don’t allow low ball pricing to slip into your bid, cover all costs efficiently and add a modest margin, knowing your costs are fairly covered. Be as accurate as possible!

If we dispense with the obviously erroneous proposals, you will end up supporting the most innovative and efficient players in the market. If you continue to reward the most innovative but fair price, you signal to the market, there is a fair job for you here, if you will keep innovating to secure it. If the contractor only risks his margin on an innovation, they live to prosper. That is how an industry becomes more efficient and remain sustainable.



Summary


It is Ok for our clients to expect the best we can offer. But there is a line in pricing assessment where innovation ends, and destruction of assets begins. We know how to define the line. The question is, will we unite to operate above the line or stay divided and conquered?

Two easy steps to achieve a more sustainable industry procurement model are to change our procurement methods to eliminate;

scope interpretation errors at time of pricing by requiring the client to be fully responsible for clarity of scope by establishing a measure of scope commonly used by all bidders;

financially unsustainable bids from consideration by exercising assessment due diligence of prices received for a commonly agreed scope.


If it is Measured Once, it can be Priced Right. Who is going to deliver the measures needed?



By Matthew Ensoll Editor, The New Zealand Building Economist (NZBE).


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