The old mantra of “better, faster, cheaper” is familiar to anyone who’s been involved in the design and management of construction projects for more than a day as the emphasis to deliver projects at the lowest possible price and provide as much cost savings as possible motivates many decision makers. Interestingly enough, that quote is credited to Shigeo Shingo, a Japanese industrial engineer considered an expert on manufacturing processes. If anything, this should make one pause and consider it’s relevance towards construction projects, which are each to some degree unique and unrepeatable.
Public owners always have limited financing for their projects and, having a fiduciary responsibility to the tax payer, want to do as much as they can with the funds they’ve been entrusted with. They have significantly more tools at their disposal now to improve the performance of their projects with the increasing availability of alternative project delivery methods (e.g – other than Design-Bid-Build) that can reduce cost and schedule growth while allowing for the fast tracking work packages. These delivery methods have been shown to reduce overall cost and schedule growth when compared to the traditional delivery method which is enticing for savvy public owners. In the vein of minimizing overall project costs, many owners also seek to negotiate the lowest permissible fees for their design consultants and preconstruction fees for their construction managers, believing that the cost savings delivered will reduce the overall cost of the project.
Lopez del Puerto, et. al. (2016) posed a good question: is the best project outcome for owners to be focused upon be minimizing cost growth or should they rather focus upon maximizing cost certainty? In their paper, titled “Construction Cost Certainty Versus Construction Cost Savings: Which is the Correct Approach?” the authors analyzed preconstruction services design fees in comparison with the early budget estimates and the final construction costs from three turnpike authorities and one department of transportation for a total of over 1,200 projects. Increasing cost certainty directly relates to improving the accuracy of early estimates and the overall quality and completeness of construction documents. The authors came to the conclusion that inadequate investment in preconstruction phase design activities was tied to post-award changes and cost growth by putting an artificial cap on the billable hours available to the designers in order to produce defect-free construction documents and the focus on capturing cost savings during preconstruction had the opposite of effect of increasing cost growth post-award. They found that there was a direct relationship, up to a point, between increasing the funding for preconstruction design services and increased cost certainty. The most compelling evidence comes from the comparison of Washington State DOT (WSDOT) and the Oklahoma Turnpike Authority (OTA) where the cost growth from the early estimate was -5.70% and 9.65%, respectively. The OTA’s design fee percentage for their projects was 5.21% compared to WSDOT’s 18.07%. The other two turnpike authorities’ design fee percentages were over 10% and experienced between 0.29% to -1.26% cost growth from the early estimate showing a clear tread demonstrating that increasing your investment in preconstruction services increases cost certainty.
Using the percentages provided in the paper and a hypothetical $5 M project, I calculated the total cost of preconstruction fees and cost growth from early award:
|Fee %||Fee||Cost Growth||Total|
You can see that somewhere between 12.55% and 18.07% is a point of diminishing returns on preconstruction investment, but the difference in combined totals of design fees and cost growth between a 5.21% fee and an 11.87% fee is worth $136,000 on the back end. Even if owners remain focused on cost savings, this study shows that increasing the fee you pay in your up front design costs can improve your project’s overall financial performance. Just as utilizing alternative delivery methods necessitates a cultural/paradigmatic shift from the traditional methods, shifting a focus onto increasing cost certainty from reducing cost growth requires owners and designers to clearly communicate the real benefits of investing in preconstruction services.
If you’re interested in reading this paper, I’ve hyperlinked it with the title in the second paragraph. What kind of design fees do you typically see in your area? Have you experienced cost growth in your projects due to incomplete plans and specs? Let me know what you think in the comments.