Without a clear system for developing detailed project costs during the pre-construction phase, the ESI period of early engagement may not be used productively to reconcile Client and Principal Contractor cost expectations. If subcontract prices are established by a process that involves only the Principal Contractor, without a system for the collaborative involvement of the Client and other team members, this undermines the openness required for successful collaborative procurement because the Client and other team members will have no way of knowing how supply chain costs have been arrived at.
The omission of subcontracted supply chain members from collaborative procurement and from detailed cost analysis leaves a Principal Contractor free to put safety and quality at risk by using non-collaborative practices in its relationships with those supply chain members, for example by demanding subcontractor cost reductions in order to increase its own profit. For example, a target cost and pain/gain share incentive (considered in Sections 9.2 and 9.3) agreed between the Client and the Principal Contractor is compromised if it is not matched by equivalent incentives agreed between the Principal Contractor and the members of its supply chain.
Cost managers using ESI are no longer confined to developing a single set of bills of quantities or schedules of rates for contractor bidders to price. They can work with other team members to develop and manage:
■ An appropriate budget based on cost benchmarks for similar projects
■ The systems for bidding and agreeing team members' fees, profit and overheads
■ The systems for bidding and agreeing work packages and supply chain appointments
■ The systems for finalising transparent, accurate cost information at each stage in the selection of consultants, contractors and supply chain members
■ The mechanisms to search for cost savings and to assess the impact of those cost savings on other costs.
The ESI cost model can protect contractor profit and overheads by requiring that they are stated separately by bidders and by ringfencing them from other project costs. The remaining project costs can then be subject to closer analysis and adjustment, with joint motivation to seek efficiency savings, while they are being are built up into fixed or target prices. Concerns may be expressed that ringfencing the profit and overheads of a pre-selected Principal Contractor may lead it to be less commercially rigorous in its subcontractor and supply chain tender procedures, and that inflated supply chain prices could lead to the total price exceeding the Client's budget. These concerns can be addressed by:
■ Close monitoring by the Client and consultants of the Principal Contractor's subcontract tendering processes so as to ensure that these do not impose excessive demands that could inflate supply chain prices
■ A timetable that allows time for review of supply chain costs, so as to agree total prices within the project budget as a precondition for the construction phase to proceed
■ Transparency at each stage whereby the project manager receives all documentation prepared and issued by the Principal Contractor, all tender returns and proposals submitted by prospective supply chain members and all related correspondence, and whereby the project manager is also invited to attend all meetings with prospective sub-contractors, suppliers and manufacturers.