Want to save millions of dollars on something really easy? Over my 20+ year career in engineering and construction, this habit of the 7 Habits of Highly Effective Projects has proven to be so elegant and simple; I find that it is often overlooked because most don’t believe it is possible. Yet, best-in-class owners like Inova Healthcare in northern Virginia have leveraged this habit to save tens of millions and reduce risk exposure on their projects.
We can all agree that a major source of cost overrun on capital projects is change orders. In fact, speak to any Vice President of Capital Projects, Vice President of Design & Construction or Director of Facilities and they will tell you that change orders are one of the leading sources of scope creep and cost overrun. They readily admit that regardless of the contracting strategy, be it Guaranteed Maximum Price (GMP), Design-Build (DB) or Integrated Project Delivery (IPD), owner directed change orders (COs) and contractor substantiated change order requests (CORs) can quickly turn small decisions into massive scope and schedule impacts.
How do you get control over this? Let’s admit it. We are not going to drive all changes out of the design and construction process. It is just not practical. However, what we can do is apply a pragmatic risk management to the process. Now I am not talking about doing some rigorous Monte Carlo risk analysis on your project. What I am talking about is funding your contingency budget with money that is already allocated on your project. How in the world do you do that? Well, that is the secret that leading owners know that you don’t. But today, I’m going to bring you in on it.
Habit 4 of the 7 Habits of Highly Effective Projects series on our blog is called “Win-Win & Pay Fast”. It combines 2 simple strategies when deployed together create an opportunity to save over 4% of your capital project budget. Here is how:
• When starting a capital project, take a leadership position as the owner and get visibility to the estimating and cost management process on your projects.
• As you award the contract (either CM at Risk, GMP, Lump Sum, Design-Build or IPD), include a provision on the contract that allocates buy-out saving on materials and subcontractors to be allocated to contingency funds.
• Contractually require that you have visibility to the estimating process and the buyout process. One of the simplest ways to gain this visibility is to have all of your contractors on an owner provided project management information system.
• Now sit back as contractors fund your contingency funds with direct, hard dollar savings gained through value engineering and material purchases. You may even consider creating an incentive for contractors by offering that a percentage of remaining contingency be distributed to them once the project is complete.
You as the owner have already set an initial budget for the contract. If the contractor can do things to buy out the job for less, it makes sense for the savings to first hit your contingency fund. Then both you and the contractor will be motivated to keep change orders to a minimum so that you both share in the savings!
Next is delivering a win for the contractors. As you all know, contractors have to pay financing fees for carrying the cost of procured materials until they are reimbursed by the owner through progress payments. The longer you take to get them paid, the more costs they incur and pass back to you in overhead. According to statistics released by the Construction Financial Management Association (CFMA), the average time it takes for contractors to get paid is over 52 days – a far cry from Net 30. This is costing you and your contractors’ real money.
Best-in-class owners like Northeastern University (Boston, MA) and Memorial Hermann (Houston, TX) have figured out that once you gain cost visibility on your capital programs and have all of your contractors and design firms on an owner-driven program management software solution, becoming a fast payer is only 1 click away. Most owners can’t achieve Net 30 or even consider becoming a Net 10 payer because the process is manual. However with the adoption of cloud-based construction program management software like e-Builder, you can allow contractors to submit an application for payment, automatically route approvals through a workflow engine and send instructions directly to your accounting solution like Lawson, Oracle or SAP and have it direct deposited in a matter of days.
Best-in-class owners have driven time and overhead out of their process for getting contractors paid and are delivering funds in mere days. Once the owner has built a reputation for being a fast pay owner they can attract more contractors to their projects, receive more competitive bids and get the best talent for their money.
So this entire blog can be boiled down to this. Gain cost visibility through an owner-driven project management system. Apply buy-down savings to contingency funds. Pay your contractors fast as a result. Save tens of millions of dollars and drive overhead out of your capital programs. Simple, elegant and very, very real.