Agreement of accurate costs is dependent on the transparent sharing of available information. For example, a Client should not withhold information as to possible risks that a Principal Contractor may encounter on site, and a Principal Contractor should not withhold information regarding its calculation of contingencies in respect of possible risks on site.
Hidden discounts and rebates agreed by a Principal Contractor with its subcontractors and suppliers are another obstacle to accurate costing. Any discount or rebate should only be permissible if agreed by the Client in advance, so as to ensure a transparent understanding of all supply chain costs.
The integrity of the chosen cost model depends on clear identification of project risks and a robust regime of quality control and risk management to ensure that risk owners are properly managing those risks.
Team members can build up agreed costs through tier 1 tender processes (Section 5) and through tier 2 tender processes under ESI and Supply Chain Collaboration activities (Section 6), using collaborative cost analysis that enables them to agree:
■ Fees, profit and overheads
■ Fixed prices or target prices
■ Rates for units of work
■ Categories of actual cost reimbursable to team members
■ Provisional sums for later costing.
Collaborative team members can commit to prices wholly or partly before or after commencement of construction, subject to agreed adjustments that take account of cost inflation, provisional sum items, changes and unforeseeable events. Collaborative construction procurement can use any cost model (fixed, target, rates, cost reimbursement) according to the features and circumstances of the project or programme of work.
Some teams use ESI to build up and agree a fixed price or target price or rates based on agreed supply chain costs, while others use open book accounting as the basis for reimbursement of actual costs during construction. The Construction Playbook recognises that 'Where the scope of a project is certain, fixed pricing may be appropriate and, where there is increased uncertainty in scope, a variable approach may be more suitable to achieve best value for money.'
The flexibility to build up agreed costs with a common understanding of the factors affecting those costs, and then to establish a point in time when those costs are translated into a fixed price or target price, offers a major step forward in making collaborative procurement more accessible to housing sector clients and their teams.
It is not only the chosen means of expressing agreed costs that affects how collaborative procurement supports safety and quality, but also the agreed means of establishing those costs. However a team uses the build-up of agreed costs, it will need to decide:
■ The extent to which elements of a project can or should be sufficiently designed to be costed as part of contractor evaluation, and/ or so as to enable the provisional selection of other preferred supply chain members
■ The extent, if any, to which certain work, service and supply packages can or should be suitable for a contractor to develop a business case for self-delivery
■ The breakdown of fees, profit and overheads so as to provide evidence of the value attributable to those fees, profit and overheads, and so as to enable agreed adjustment of overheads to reflect new information emerging from design development and from the selection of subcontracted supply chain members
■ The basis for sub-dividing work, service and supply packages and the extent to which it is valuable to agree the fees, profit and overheads payable to subcontracted supply chain members
■ The extent to which subcontracted supply chain members can provisionally be approved in line with contractor recommendations, and the activities required to create a business case that finalises accurate and competitive costs for their work, service and supply packages during the pre-construction phase
■ The timing for obtaining prices for all other work, service and supply packages from prospective supply chain members, and the basis for establishing accurate and competitive costs
■ The extent, if any, to which the cost of certain work, service and supply packages should be treated as provisional sums and should be finalised by a contractor obtaining prices from prospective supply chain members after commencement of the construction phase.
Successful collaborative procurement depends significantly on identifying separately the fees, profit, and overheads payable to a Principal Contractor, so as to establish a transparent basis for the review and agreement of underlying costs. It may also be possible to extend this approach to subcontracted supply chain members where they in turn engage sub-sub-contractors for parts of their work. Only if and to the extent that costs are distinguished from fees, profit and overheads can collaborative procurement ensure that savings do not erode the agreed margins and other income of team members. This transparency also enables the Client to ensure that contractors do not impose unauthorised supplier rebates and prompt payment discounts on amounts that are contractually due to their subcontractors and suppliers.
The competitive costing of collaborative procurement should not tempt bidders to undercut each other on fees, profit and overheads or to prioritise cost savings above other measures of value. Instead, the evaluation criteria used for team members should invite them to demonstrate how their proposed fees, profit and overheads will be deployed in way that will generate improved value and reduced risks.
To build up and agree the prices for each element of a project creates a detailed common understanding of costs that is distinct from the uninformed gambling inherent in lowest price arm's length bids. A 2005 National Audit Office report commented that, if established through the collaborative development of cost information and supported by suitable incentives, the agreement of 'a guaranteed maximum price, working to agreed margins with full open-book accounting procedures in place' is a model that 'builds trust, helps to overcome the adversarial approach to construction and leads to rapid conflict resolution' and can also create 'a high incentive to complete the job as efficiently as possible with high productivity.'
The Construction Playbook requires that 'Projects and programmes should undertake benchmarking of key project deliverables including cost, schedule, GHG emissions and agreed outcomes at each stage of business case development', and that public sector clients create a 'Should Cost Model' that provides 'a forecast of what a project or programme 'should' cost over its whole life, including the build phase and the expected design life'. Working by reference to an agreed Should Cost Model as a project budget is essential to maintain discipline among team members when costing designs and examining safety issues.
In order to create and maintain effective cost controls throughout a collaborative project, the Client and other team members need regular reconciliation of designs and other proposals with the agreed budget. The budget should be developed to create a more detailed cost plan that establishes agreed costs and prices, allowing the opportunity for redesigns and other improvements while avoiding cost overruns on works, services and supply packages.
Traditionally, some Clients may be advised not to declare a budget in the hope that by not sharing this information they will have the benefit of lower bid prices. It is of course tempting to think a bid that is lower than an undeclared budget will be a bonus for the Client. However, a bid that is lower than the Client's budget may not be accurately costed by the bidder and its supply chain, and this may lead them to seek later shortcuts on safety and quality in order to deliver the project within their bid.