September 27, 2021

Why lowest price purchasing decisions can carry a heavy cost

Detailed and realistic pricing is important to avoiding hidden costs and unforeseen delays on site, as James Brett, Managing Director of construction contractor, Edgeley Construction, outlines here.

Whatever their project, every client wants the same thing: the best possible quality at the lowest possible cost. And most construction companies aim to deliver just that. Unfortunately, in a competitive market where winning the project is often about offering the most attractive price, the quality end of the equation gets lost in a race to deliver the cheapest bid.

Everyone loves a bargain, but lowest cost is often incompatible with best value. Lowest cost may mean details overlooked and corners cut. As a consequence, hidden and unexpected expenses can begin to add up, resulting in both escalating costs, or compromises to stay within budget. These curved balls once the project is on site often cause delays too, exacerbating the problem.

The best value approach pioneered by the public sector was developed to address these issues by encouraging decision makers to fully-understand the value of their purchasing options, rather than comparing figures without interrogating what the price offers on a like-for-like basis. It has not always been applied rigorously in the public sector but it’s an approach from which the private sector can learn some useful lessons in order to select supply chain partners that offer real value at a competitive cost, rather than low pricing and added risk.  

The devil is in the detail

The key to realistic and detailed pricing begins with the brief. If there is insufficient information, the contractor can be obliged to price for the unknown, which either involves anticipating every possibility and potentially over-pricing or keeping the figure low to win the project and worrying about the consequences later. Neither of these options is best for the client, because the first could mean overlooking a contractor that would be an excellent choice for the job, and the alternative may mean substantial additional costs at final account and a potential project overrun.

For this reason, it’s essential that the brief is as detailed as possible so that contractors bidding for work can put forward an accurately costed bid that reflects the complexity of the project and the required quality of the specification. Where there is scope to value engineer the project and develop buildability solutions to reduce complexity, there is potential to make cost savings. Ideally, the project requirements should be developed and delivered with a collaborative approach, allowing risk management and mitigation by the right delivery partner, rather than allowing responsibility to be passed down the delivery chain. Ways in which the contractor can add value and reduce risk through effective collaboration should be factored into a comparison of the prices submitted.

It also pays to understand ways in which a contractor can add value to the project process in other ways. By including pre-construction within the main contractor’s responsibilities, potential issues such as disputes with surrounding properties, utilities connections and planning obligations can all be taken care of, avoiding potential delays and reducing the number of consultants required on the project.

Time is money

It’s also important to remember that, on a construction site, time is money. The length of the programme and how efficiently the project is managed have a significant impact on the costs at final account, so the price submitted should be assessed in context with the contractor’s track record for project management and handover on time and on budget.

Delays due to unforeseen issues that should have been resolved during pre-construction, poor health and safety practice, buildability challenges that have been overlooked or supply chain problems can all be avoided. Any of these could result in delays and additional costs if the successful bid has been priced to win and assessed primarily on cost, rather than priced realistically and assessed with a best value approach.

Quality counts

The role of the estimator when preparing pricing for a bid is not to calculate the cheapest costs possible, but to select materials that will deliver the required quality, performance and service life at the best price. Collating all that information takes time, so it’s the clients that allow a reasonable amount of time to prepare a submission that receive the most accurate bid. Factoring in lead times and supply chain certainty are also important because any delays incurred to wait for materials can have costly knock-on effects on the whole programme.

Quite apart from the issue of whole life value and maintenance costs, a meticulous approach to pricing the right materials at bid is important in avoiding snagging or the potential for material substitutions that may result in additional costs.

Indeed, many clients that have been caught out by hidden costs following attractive pricing at bid are now well aware that cost certainty is of much more value than a few hundred pounds saved here and there. Small incremental added costs quickly add up to large amounts over the length of a project and delays can drive up costs even further, particularly if penalties are incurred because occupier move-in dates cannot be met.

Experience matters

In the real world, price always matters, but attractive pricing should never compromise on quality or detail simply.

By understanding the project requirements as clearly as possible and including as much detail as possible in the bid, contractors should be able to submit a cost that’s reasonable and transparent with suggestions for how to achieve the required outcome more cost-effectively where appropriate. Ultimately, Construction is a service, not a transaction, and a service-led approach is founded on the fact that all delivery partners are all trying to achieve the same thing: a successful project.

James Brett, Managing Director of Edgeley Construction