The Impact Of BIM On The Distribution Of Cost & Return On Investment In UK Construction Projects by L. Cusack

Abstract. It has been widely documented that when Building Information Modelling (BIM) is used, there is a shift in effort to the design phase. Little investigation into the impact of this shift in effort has been done and how it impacts on costs. It can be difficult to justify the increased expenditure on BIM in a market that is heavily driven by costs. There are currently studies attempting to quantify the return on investment (ROI) for BIM for which these returns can be seen to balance out the shift in efforts and costs to the design phase. The studies however quantify the ROI based on the individual stakeholder’s investment without consideration for the impact that the use of BIM from their project partners may have on their own profitability. In this study, a questionnaire investigated opinions and experience of construction professionals, representing clients, consultants, designers and contractors, to determine fluctuations in costs by their magnitude and when they occur. These factors were examined more closely by interviewing senior members representing each of the stakeholder categories and comparing their experience in using BIM within environments where their project partners were also using BIM and when they were not. This determined the differences in how the use and the investment in BIM impacts on others and how costs are redistributed. This redistribution is not just through time but also between stakeholders and categories of costs. Some of these cost fluctuations and how the cost of BIM is currently financed are also highlighted in several case studies. The results show that the current distribution of costs set for traditional 2D delivery is hindering the potential success of BIM. There is also evidence that stakeholders who don’t use BIM may benefit financially from the BIM use of others and that collaborative BIM is significantly different to the use of ‘lonely’ BIM in terms of benefits and profitability.

 

1. Introduction and Research Rationale

In the effort to reduce construction costs by 15-20%, the UK Government set a mandate in 2011 for all centrally procured public construction projects to use fully collaborative Building Information Modelling (BIM) by 2016. Since then there has been a rapid uptake in the use of BIM on both government and private projects (NBS, 2015), incurring challenges which many studies are attempting to address and overshadow by demonstrating the benefits and return on investment (ROI). Currently, owners are faced with the dilemma of whether or not to utilise BIM based on these speculated benefits (Barlish & Sullivan, 2012). As of 2015, cost and client demand are still the major barriers to BIM uptake in the UK (NBS, 2015).

Building Information Modelling (BIM) can be defined as a process improvement methodology enhancing analysis/predictability of outcomes during the building lifecycle by leveraging data (Reddy, 2012). This process improvement involves usage of data rich 3D models in addition to traditional 2D deliverables to aid design, collaboration, coordination and construction activities. Such a change requires an investment of both cost and time. Cost and time are impacted by the initial financial investment in BIM. There are currently numerous studies attempting to quantify the ROI, however these studies quantify the ROI based on the individual stakeholder’s/organisation’s investment without consideration for any investment in BIM from the other stakeholders, or how it impacts on the other stakeholders. If a project stakeholder reports an increase in costs or profit on a BIM project do the other stakeholders experience a profit increase, even if they aren’t using BIM? Could other stakeholders be profiting from the investment of others?

This research investigates changes in cost and its distribution across the building lifecycle between the 2013 RIBA Plan of Work stages 2 to 5 (concept, developed and technical design and construction) which could indicate the ROI for different stakeholders. Also considered is the relationship between success of BIM and its monetary investment from each stakeholder’s viewpoint, and whether more effort is required during design when BIM is utilised. How this shift in effort affects costs distribution is also realised as well as its implications on the profitability of other stakeholders.

2. Literature Review

There is currently little published literature analysing the distribution of cost in construction with respect to stakeholders and work stages, and where BIM may have an impact on cost. Regarding factors affecting capital expenditure and cost distribution, Smith and Jagger (2007) stated that the opportunities for the cost of a project to get out of hand are increasing along with the increasing complexity of buildings. Potts and Ankrah (2013) point out that poor planning at the early stages can result in cost and time overruns among other things. It is not uncommon for the early cost estimate of a project to be significantly different to the final cost (Shane, et al., 2009). In a study of 276 construction and engineering projects in Australia, Love, et al. (2013) calculated an average cost overrun of 12.22%. Risks are associated with the unknown so for management of cost, the identification and management of risk is important (Potts & Ankrah, 2013). When consultants use BIM there is more transparency in what is being proposed meaning that contractors can reduce some of their risk margins for the unknown (Knutt, 2011).

Smith and Tardif (2009) explain that it is common for design firms to pass on the added cost of BIM to clients through fees whereas construction companies look to exploit BIM in reducing their project related expenses as well as generating more profit. However, the key to leveraging BIM to increase profits is by increasing value by reducing lifecycle time rather than raising fees. Conversely, the Royal Architects Institute of Canada (2009) acknowledges that since BIM requires more effort in the early stages of design, architectural fees for schematic design should be as high as 25% of their total fee compared to the minimum 12% for traditional 2D CAD. Saxon (2013) believes that because BIM is redefining how architects work, this will in turn redefine what they charge. With the increased effort in setting up a job and the new role of the information manager there is more work to do in RIBA stage 2 however there is less to do in RIBA stages 4 & 5. This shift in effort will come at a labour cost for the architect who may pass this on to either the client or the contractor who then may recoup that cost in a lower fee paid back to the architect during construction.

Indeed, McGraw Hill’s (2014) report showed that contractors generally receive a greater portion of the financial benefits of BIM compared to design professionals with 50% of UK contractors reporting a positive return on their investment. The survey respondents were asked for their perception of ROI which when tracked with their level of BIM engagement suggests that the higher the level of BIM engagement, the higher the ROI. In the UK, 26% of contractors surveyed reported over 25% ROI, however how this is quantified is not clear. The survey only targeted contractors and no data was available on whether part of their investment in BIM was paying higher fees to their design consultants and sub-contractors, or how the return on investment was distributed among stakeholders, which is the focus of this research.

In the 2015 NBS BIM report, 56% of respondents shared that the fourth biggest barrier to BIM implementation was cost. With 44% of non-BIM users agreeing BIM brings cost efficiencies and 31% believing it increases profitability (NBS, 2015), it is clear the desire for investment is there but not clear on how much they would be willing to invest on BIM. In a study of 35 construction projects, Bryde, et al. (2013) created a set of project success criteria based on knowledge areas from the Project Management Institute’s (PMI) Project Management Body of Knowledge (PMBOK) (PMI, 2008). The highest-ranking benefit was Cost reduction or control. Whilst Bryde et al. (2013) documented the design and construction periods for most case studies, it was not evident in which period these benefits were perceived or which party (designer, contractor or owner) was inheriting the cost saving. A significant outcome of this study, supporting a positive ROI on BIM, was that the cost benefits far outweighed the costs for implementing BIM tools and processes, and that many of the BIM benefits are the result of an upfront investment that incurs savings later on, indicating a redistribution of costs.

In their study into the perceived effect of BIM on cost/fees in the US building industry, Becerik-Gerber and Rice (2010) noted that 85% of respondents are absorbing the cost of BIM in terms of software, hardware and training and that just 10% are able to pass this cost on to the client by way of fees where the client sees the investment as reusable and retainable. Over half the respondents reported both cost and time-savings on projects but with no mention of where these savings were made, and by whom. Whilst project duration was reduced on BIM projects, the schematic and conceptual design phases took longer (Baddeley & Chang, 2015). Furthermore in their analysis of BIM implementation throughout the project lifecycle in the UK Eadie, et al (2013) concluded that financially, the client and facilities managers benefit most from BIM. They also pointed out that the size of a company has an impact on implementation due to proportion of overhead allowances in larger companies, but there was no indication of relationship to life cycle stages or stakeholders.

3. Project Description and Research Methods

The impact of BIM on costs distribution throughout the design and construction phases was investigated in this study in comparison with the costs distribution within a traditional construction workflow, in terms of ownership, magnitude and categories of costs. The effects of these changed cost distributions on the length of the lifecycle phases was also investigated. Qualitative and quantitative data was collected from existing literature, an online questionnaire, interviews and case studies related to stages 2-5 of the RIBA Plan of Work and the findings thoroughly triangulated and verified to ensure validity. Data was visualised to find a correlation of where costs are, who is incurring them and when. The research considered all building/infrastructure projects in UK however scope was limited to using case studies of building projects only. These were grouped by lifecycle stages: 2- Concept design / 3- Developed design / 4- Technical design, and 5- Construction stage. Participants in the data collection represented the following groups: Design consultants (architecture and engineering) / Contractors / Sub-contractors / Clients, owners and operators.

The process for deriving substantial evidence to whether BIM may or may not have an impact on cost distribution during design and construction in the UK was first taken from the concept that BIM is costing people more in design and costing less in construction. The use of qualitative data was important to identify reasons based on assumptions, observations and experiences that need to be tested, hence data collected might be subjective by nature (Naoum, 1998). Moreover, with this research being based on cost, quantitative data was also collected in the questionnaire, which was the quantification of qualitative data. This data was reviewed against literature to indicate similarities, novelties or contradictions. Pearson’s Correlation Coefficient (R) was calculated to highlight associations and relationships (Naoum, 1998) between cost, time and profitability. The proportion of variance between responses showing association or relationship predictable from another response was investigated by coefficient of determination (R2).

The online questionnaire contained both open and closed ended questions about the following categories: a) The cost of BIM to the organisation, b) The impact BIM has on the cost and duration of project phases, c) Who is paying and benefiting from BIM d) Percentage ROI on BIM for each work stage. The questionnaire accumulated 108 responses. The interviews identified and quantified cost elements across RIBA stages 2-5 with comparisons between 4 project scenarios and their impact on cost, time and fees: 1) all stakeholders use BIM, 2) no stakeholders use BIM, 3) BIM stakeholder hands to non-BIM stakeholder, 4) non-BIM stakeholder hands to BIM stakeholder; 7 interviews were conducted representing all disciplines in the construction industry. Candidates were chosen based on their experience and exposure to commercial and operational aspects of BIM, and were director or associate director level with responsibilities in strategic management of BIM and costs on projects. For each scenario above, the interviewee was to comment on the impact of BIM on costs, profitability, resources, time across the previously mentioned work stages. BIM’s impact on these categories was to be described as less or more than traditional projects across a Likert scale of 1-5, and asked to describe any change using a list of cost overrun factors collated from the literature review. If one stakeholder reported an increase in one stage and another found a decrease in another stage the change factors were used to find relationships to support or refute the theory that BIM has an impact on cost distribution. Such factors could include resource, scope and time management.

Data collected from the questionnaire and interviews was used to select suitable project types to examine as case studies. The most common project types where BIM was used were commercial and educational with 89 and 80 responses respectively, most using Design Build procurement methods. The next highest used procurement method was Private Financed Initiative (PFI), primarily used in healthcare, for which 73 respondents’ organisations were involved with. Hence 2 commercial / residential design and build projects, a healthcare PFI project and an education project were investigated.

4. Discussion of Results

Results from questionnaires (figures 1 and 2) demonstrate an increase in costs incurred for designers and contractors during design phases compared with traditional 2D delivery. However profitability is higher for both categories (and more so clients) during the construction phase resulting in an overall increased ROI in projects in general on BIM implementation.

 

fig 1

Figure 1. Impact of BIM Implementation on Profitability (left) and Costs (right) of a project

fig 2

Figure 2. Impact of BIM on duration (left) and staff numbers (right) resourced to projects.

As for duration of the projects there is an increase for architects during design phases due to increased BIM deliverables. Contractors however, display a marked reduction of project time duration during the construction phase, which might explain the increased overall profitability as opposed to designers. A higher rate of staff retention on BIM projects is also noted for newly BIM-adopting organisations (1-5 years) versus more “BIM mature” organisations (>5 years) which can be due to setting up new teams, roles and responsibilities within the different disciplines to manage BIM projects.

Calculating Pearson’s Correlation Coefficient (R) between staff numbers and overhead costs on a project revealed an association of 56%. Further analysis using Coefficient of Determination (R2) revealed that 27% of the variation between the responses to the project overhead costs might be explained by the variation in the number of staff on projects. Regarding impact of BIM on profitability, the largest association between the drivers for BIM adoption and the impact on profitability was reducing costs, with 39% similarity (R) and 15% variance (R2). The driver for enhancing efficiency and saving time had less association with profits at 29%. It is noteworthy that coordination and collaboration were seen capable of both saving and increasing time. Architects believed training and skills where among their top 3 factors impacting duration. The correlation R between overall project cost and duration revealed an association of 64%. Further analysis using R2 revealed that 31% of the variation between the responses to project duration could be explained by the variation in cost on a project.

When asked who should pay for BIM, the majority indicated the client in the beginning of a project and then the contractor during construction. When asked how BIM is financed for costs associated with implementation and ongoing maintenance, there was little differentiation between the 2 except that in some cases the client contributes to implementation and that costs are then absorbed by the organisation for ongoing maintenance. This result differs from the research by Becerik-Gerber & Rice (2010) who reported 85% of respondents saying their organisation pays. One result that is consistent however is that still only 10% of respondents are passing the costs on through their fees. Furthermore 62.5% of architectural practices believed they are investing the most in BIM and 33% believed contractors are investing the most in BIM. Only 15% of contactors believed architects invest the most and 72% believed that they themselves invest the most.

When asked the percentage of ROI on BIM for each work stage, 60% of respondents claimed their organisation does not formally measure BIM. Of those that did, the most common method was quantifying the reduction of clashes on site during the construction phase. This indicates that the return of BIM is not being fully tracked and that organisations may benefit from adopting a set of metrics for defining BIM success. A 43% association R between the overhead costs and profitability was calculated, which might suggest that the extra cost in training, software and hardware is having an impact on profitability. With overall profitability being reported, it was important to realise the relationship between BIM statuses of stakeholders, i.e. how one stakeholder’s use of BIM affects another. Respondents were asked to comment on their own profitability when certain stakeholders are also using BIM as well as how their use of BIM impacts the profitability of others. Results showed that the profitability of BIM has less to do with BIM usage of individuals but more to do with whether or not others are using BIM. This may be due to that when BIM is sporadically used, coordination can be more difficult especially for building services, a discipline requiring high levels of coordination. Main contractors appear to be the biggest benefactors when everyone is using BIM as many of their activities rely on successful coordination. Overall, recipients of information produced using BIM are better off than those producing information using BIM for others. BIM is impacting costs distribution in a way that those who receive BIM information are profiting from those who produce BIM information. Hence organisations are only getting higher return on their investment when they are receiving information produced using BIM in addition to producing it.

When it came to benefits, 12.5% of architectural practices believed architects are benefiting the most, 50% believe it is contractors and 33% believe clients are the biggest benefactor. 50% of contractors believe they are benefiting the most whereas 34% believe clients are benefiting the most and only 6% believe architects are benefiting. There is a shift in volume from those investing to those benefiting, namely the client is gaining the most from the least investment, which supports the conclusions above that those on the receiving end of BIM are benefiting the most. The most significant benefits reported to organisations were coordination and collaboration.

Some of these results clarify the assumptions on the effects of ‘front-loading’ the energy exerted on a project, which was the most mentioned cost impact. Results suggest that front-loading creates pressure and increased costs during initial life-cycle stages, impacting profitability as well if coupled by the challenge of lack of coordination and collaboration when BIM is not used by all but only by some disciplines on the project.

The following patterns were observed from the interviews:

 All interviewees involved in projects during the concept design stage reported few benefits in terms of time savings or profitability from BIM during that stage as most deliverables are still 2D and there isn’t a great level of detail in the information that would benefit from using BIM. When requested to use BIM at this stage, costs increased

 When using BIM for their own benefit, organisations’ BIM costs were less as a whole than when using BIM collaboratively. This coincides with the research of Love & Irani (2002) who mention that a company’s custom interfaces can be barrier to effective communication and coordination affecting costs

When organisations have to use or produce BIM deliverables for others, they spend more time as scope increases which in turn increases cost

 When requested to use BIM, setting up collaboration initially takes more time and can reduce profitability, especially in the technical design stage

 When receiving information produced using BIM from others, organisations are more profitable as the information is more accurate and can result in less rework/re-iterations when producing own deliverables

 Those at the end of the information delivery chain will benefit the most whereas those at the beginning benefit the least. This trend is confirmed by the questionnaires where a spike in costs, time and resource were experienced during the design stages and profitability improvements in construction suggesting that the investment made during design is paying returns during construction

Costs on average are lower when all parties use BIM. Also profitability is at its maximum in construction so potentially those not involved in construction are missing out on the returns for their investment in BIM. On average, profitability and time can be seen to bear a relationship where less time equals more profits. After combining the results from all interviewees, the responses correlation coefficient R between profitability and time was calculated which revealed an association of 85%. This shows that the longer the duration, the less the organisation will profit. The correlation coefficient between fees and costs have a 61% association suggesting that an increase in costs to a stakeholder could result in an increase in their fees to recoup costs.

Case studies were chosen to represent the most common project types and procurement methods mentioned by respondents to the questionnaire. With the data available, the following observations were made. In all but one project the architect, structural engineer and services engineer were required to coordinate their design using BIM. Additionally, certain BIM deliverables were required to support methods of construction (hence all disciplines using BIM). Projects 1 and 2 demonstrate the difference between adopting BIM for own benefit compared to using it because it is required. In Project 1, the designers were requested to use BIM, which was not part of their normal processes so a cost of implementation had to be passed on in the fees. In Project 2 however, the architect conducted their own pilot independent of their contractual deliverables that was tailored to their own needs. They did it in a carefully chosen environment that suited the pilot and they received financial gain without passing on their implementation costs.

Projects 3 and 4 demonstrate the risk taken in investing in BIM in the early stages for a contractor. This risk is also highlighted in the results from the client/owner/operator interview in who saw the risk in investing in BIM being outweighed by reduced risks later in construction. In projects where there is a risk allocation or contingency, there may be the opportunity not to lower this but to re-distribute the risk allocation from construction to design.

5. Conclusion

This research presented evidence to show that BIM has a substantial impact on costs distribution and which is currently more comprehensively realised and understood. Highlighting the impact of BIM, as a process improvement methodology on the distribution of costs, has been achieved by revealing the placement of costs incurred in a project and their magnitude as impacted by BIM. This has also been achieved by reporting the experiences of stakeholders who are receiving mixed returns on their investments that bear relation to their input into the design and construction process.

BIM’s impact on costs during design and construction phases is such that certain costs are redistributed which could in turn impact methods of procurement. The impact of BIM is not only moving costs within the construction life-cycle in terms of time but also between stakeholders as certain costs move from one stakeholder to another. This is discovered in the interview results where the information, produced by those who have made an investment in BIM, has a positive return on those who receive this information who have reduced costs.

When BIM is used during design and construction there is evidence from the analysed results that there is more effort required up front, and better realising its impact should help planners in calculating fee structures and preliminary costs on projects who may still be following a cost and fee structure that once supported 2D delivery. When BIM is used within this traditional cost and fee structure, its usefulness is hindered which alters cost, duration and the workload of stakeholders, with particular impact on designers. There is evidence to show that BIM is benefiting those who either use it to produce information and those who use the information produced by it. However these two benefits are absorbed differently depending on who the stakeholder is and when they are involved in the construction life-cycle.

 

KEY FINDINGS

Cost Coordination and collaboration can be expensive initially. The more the collaborative effort, the more time and cost is spent in design however there is less error and rework during construction
The cost of collaboration is more expensive for those who have used BIM for less than 5 years as they have a steeper learning curve than those who have developed their capability independently through the use of lonely BIM (non-collaborative BIM)
For stakeholders to receive a fair return on their investment on BIM there would need to  be  a redistribution  of costs. Currently,  the benefits are passed onto the contractor and the client
Fees As the costs incurred by stakeholders are increased with the use of BIM they are generally only able to pass this cost on in their fees when they are contractually required to use BIM
Profit-ability and ROI Users of information created from BIM can be more profitable than those who produced the information in the first place
Some stakeholders who don’t even use BIM can benefit financially from the BIM use of others
Those who use BIM for their own benefit can sometimes be more profitable than those who use it in a collaborative environment
Those who have been using BIM for more than 5 years tend to be more profitable in a collaborative BIM environment than those who have used it for less than 5 years
Time The use of BIM requires a significant shift in workload placing more work into the developed and technical design stages
Using BIM collaboratively takes more time to produce deliverables than when using it independently
General The current distribution of cost is hindering the potential success of BIM and hence more consideration should be made in structuring fees and allocating costs during design and construction with respect to the impact BIM has during these phases
Those who are investing in BIM should be aware of the return others are receiving from their investment to understand its true value to their own organisation

The findings in this research are based on the assumptions and experiences of experts within the industry however further investigation into specific types and sizes of organisations and projects may yield more consistency and accuracy revealing even more truths.

For the case studies, more data and more analysis and metrics produced on live projects using BIM from design to construction would increase the opportunities for analysis to reveal more results related to effects of BIM on costs. These could be carried into operation and maintenance as well which was outside the scope of this research yet plays an important part in the construction lifecycle. Evidence in the results from the client interviews suggests there are further returns on the investment in BIM during operation.

As a process improvement methodology, BIM is still relatively new and as highlighted in the research, its impact on costs distribution can vary with the experience of the organisation. There is no way to test its full potential without all parties being at the same level of maturity and capability. In this particular period during BIM’s implementation and adoption it is important to realise how it impacts those who are working together. The 2016 UK BIM mandate as mentioned in the introduction doesn’t just call for the use of BIM, but the use of collaborative BIM.

References

BADDELEY, M. & CHANG, C.-Y., 2015. Collaborative Building Information Modelling (BIM): Insights from Behavioural Economics and Incentive Theory, London: Royal Institution of Chartered Surveyors (RICS).

BARLISH, K. & SULLIVAN, K., 2012. How to measure the benefits of BIM — A case study approach. Automation in Construction, Volume 24, pp. 149-159.

BECERIK-GERBER, B. & RICE, S., 2010. The Perceived Value of BIM in the US Building Industry. Journal of Information Technology in Construction, Volume 15, pp. 185-201.

BRYDE, D., BROQUETAS, M. & VOLM, J. M., 2013. The project benefits of Building Information Modelling (BIM). International Journal of Project Management, Volume 31, pp. 971-980.

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EADIE, R. ET AL., 2013. BIM implementation throughout the UK construction project lifecycle: An analysis. Automation in Construction, Volume 36, p. 145–151.

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LOVE, P. E. & IRANI, Z., 2002. A project management quality cost information system for the construction industry. Information & Management, Volume 40, pp. 649-661.

LOVE, P., WANG, X., SING, C. & TIONG, R., 2013. Determining the probability of project cost overruns. Journal of Construction Engineering and Management, 139(3), pp. 321-330.

MCGRAW HILL,  2014.  The Business Value of BIM for Construction in Major Global Markets, Bedford, Massachusetts: McGraw Hill Construction.

NAOUM, S., 1998. Dissertation Researh and Writing for Construction Students. 1st ed. Oxford: Butterworth-Heinemann.

NBS, 2015. NBS National BIM Report 2015, London: RIBA Enterprises Ltd.

PMI, 2008. A Guide to the Project Management Body of Knowledge (PMBOK Guide). 4th ed.

Newton Square, Pennsylvania, USA: Project Management Institute.

POTTS, K. & ANKRAH, N., 2013. Construction cost management: learning from case studies. Oxon: Routledge.

REDDY, K. P., 2012. BIM for building owners and developers: making a business case for using BIM on projects. Hoboken: John Wiley and Sons Inc.

SAXON,    R.,     2013.     We    need     to     learn     to     make     bim     pay.     Available     at: http://www.bdonline.co.uk/comment/we-need-to-learn-to-make-bim-pay/5064659.article

[Accessed 25 October 2015].

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managers. Hoboken, N.J.: Wiley.

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“Let Me Be Clear…” – The need for clarity with payment applications and notices.

Jawaby Property Investment Ltd v The Interiors Group Ltd / Mr Black

President Obama’s hackneyed phrase resonates in the mind when reading the above case which was decided in the TCC in March this year.

As most will know, the revision to the HGCRA 1996 (the “Construction Act”) brought about by the LDEDC Act of 2009 introduced what many perceive to be harsh consequences to a paying party in a construction contract should they not issue timely Payment or Pay Less Notices in response to an Application for Payment from the Payee. The first case that tested whether the new Act actually meant what it purported to state was that of ISG Construction Ltd v Seevic College [2014] in which ISG was awarded the full value of its interim application for payment in the absence of a Payment/ Pay Less Notice from the Employer – irrespective of whether the value claimed was capable of being disputed by the Employer.

Since this landmark decision, the door on achieving a “payment by default” may be said to have been gradually closed by various subsequent cases which, collectively, provides a topic for another day but, first, back to the case in question.

The project concerned a £4m refurbishment of an office building in Holborn, London. Jawaby was the Employer and The Interiors Group (“TIG”) was the Contractor. The contract was the JCT 2011 Design and Build Contract with amendments. The Employer was bringing the case to effectively stop the Contractor from presenting a claim that would trigger a payment of just over £1.1m from an escrow account, set up as financial security to the Contractor in the event that the Employer failed to make a payment that was properly due.

The Employer contended that a valuation from TIG, emailed to the Employer’s Agent (EA) on 7th January 2016 was not a valid interim application under the Contract. Alternatively, if the Judge decided it was valid, the Employer averred that an email sent by its Agent on 18th January constituted a valid Pay Less Notice.

TIG was to make an application on 8th of each month; this was considered to be the “due date” for payment (alternatively, it would be when the Contractor submitted its application – if this was later). The final date for payment was 30 days after the due date and a Payment Notice was to be submitted within 5 days of the due date and a Pay Less Notice was to be issued not later than 5 days before the final date for payment.

Throughout the project TIG had issued 6 “valuations” which were then assessed by the EA, following a site meeting, and Certified for invoicing. On 5th January, the EA requested the Contractor’s valuation (ahead of a planned meeting on site on 11th January). On 7th January, the Contractor submitted what was stated to be “an initial assessment for Valuation 007 based upon progress update and onsite review carried out earlier this week”. Following the meeting on 11th, the EA sent a Certificate of Payment on 15th January, which advised the Contractor that no payment was due as its assessment was £124K less than the previous assessment. This communication was clearly too late to be a valid Payment Notice. On 18th January, the EA sent the back-up documentation relating to its assessment as well as answering some specific points about the assessment from the Contractor’s email of 15th January. The Employer subsequently contended this constituted a Pay Less Notice.

In summary, the Judge decided that the EA’s communication was not acceptable as a Pay Less Notice; it had previously submitted two formal Pay Less Notices, each labelled as such including what clause of the contract and Construction Act it was pursuant to – the email on 18th January was completely different to the formal Notices issued previously and dealt with other queries.

More significantly, however, it was decided that the Contractor’s email of 7th January was not a valid application for payment, as it did not follow the usual pattern of procedure and was materially different to that adopted previously. For example, it was an “initial assessment” (not a firm or final one), it did not contain what it considered to be due, the valuation did not value the works beyond 5th (or 7th) of January and, unlike previous valuations, did not include the value of works up to the due date (of 8th January). There were other contentions raised by the Employer including that the valuation did not apply for anything and did not contain the back-up documents required by the Contract. Accordingly, the Judge concluded that any reasonable recipient of the document would not have regarded it unambiguously as being an Interim Application, as required by the Contract, in its substance, form and intent.

Conclusion

Although the conduct of the parties, or the convention adopted, throughout the course of the contract will be taken into account in assessing whether strict contractual requirements have been waived in respect of how applications are made – and how they are responded to, the case emphasises the point, that where such significant consequences arise for the paying party (should they not comply with the requirements for notices in respect of payment applications received) it is also incumbent upon the party making the application to be absolutely clear on what it is submitting and to follow the contractual requirements for making an application.

The Employer was fortunate in this case as, although the Judge decided that what the Contractor had submitted was not a valid application for payment it was also decided (albeit this was somewhat academic) that the EA’s response to the “application” was also not acceptable as a Pay Less Notice.

Practical Tips

The need to have to rely on a convention of past dealings in circumstances such as those presented in this case, in order to prove a document is valid under the Contract (and the unpredictable outcome that may ensue), can be avoided by following some of the precautionary measures below:-

  • Follow the contract – where to send the application, when, what format (including additional information), how it is to be sent and to whom.
  • Be clear on what it is you are sending to the paying party and check it.
  • Be clear on what you consider to be the “amount due” (the author’s view is the net amount for payment rather than the gross to avoid any doubt).

 

The full judgment is available at URL: http://www.bailii.org/ew/cases/EWHC/TCC/2016/557.html

Written and contributed by Ian Stumpf 

(This article does not represent legal advice).

An Alternative Approach to Contractors’ Formulae Claims for Head Office Overheads

SurveyorToolKit.com are pleased to announce that Ian Stumpf has exclusively contributed, his Commended submission for the SCL Hudson Prize 2015.

Please follow this link to receive the full paper as a PDF

Abstract

This paper adds support to the notion that Contractors’ head office overheads are, as a general rule (particularly where lost opportunity for turnover can be demonstrated), recoverable as a head of claim in construction contract claims for prolongation, using a formula-based calculation; the decision in Walter Lilly v. Mackay has brought further clarity to Contractors’ entitlement to these claims. This paper also sets out an alternative approach to the ascertainment of head office overhead costs where, it is submitted, the traditional formulae exaggerate the costs actually incurred by a Contractor as a result of a compensable Employer Risk Event.

Please follow this link to receive the full paper as a PDF

 

The Additional Rate of Stamp Duty and it’s Effect on the Housing Market

With effect from 1st April this year, the additional rate of Stamp Duty Land Tax (SDLT) came into force for purchases of residential property.  So the existing residential SDLT rate of 2% for the £125k – £250k band will be 5% for the purchase of an additional residential property and so on for the other existing rates.

The higher rates will apply to most purchases of additional residential properties where, at the end of the day of the transaction, an individual purchaser owns two or more residential properties and is not replacing his main residence.

The logic behind this change is that while the Government believes it is right that people should be free to purchase a second home or invest in a buy-to-let property, it is aware that this can impact on other people’s ability to get on the property ladder, especially first time buyers. So the higher rate is a disincentive to the purchase of buy-to-let properties so as to free up property stock for prospective home owner occupiers.

The Chancellor has stated that he is introducing these changes to boost first time buyers’ competitiveness by increasing the price some investors will have to pay.  It has also been stated that he is concerned about individuals’ investments becoming overexposed to residential property and hence becoming vulnerable to housing market cycles.

However, on reflection, is it possible that this is just a poorly thought out and well-sold vehicle to rake in taxes?

There are so many conflicting government policies on housing that it is difficult to be confident about the net impact.  However the initial query we at Surveyor ToolKit have with Osbourne’s logic, is that New Build properties are heavily reliant on off-plan investors to trigger development finance because off-plan sales are generally a prerequisite for release of construction finance.

Some could feel that the squeeze makes buy-to-let significantly less appealing and will look to invest elsewhere.  A reduction in demand from this group could dramatically reduce the viability of many New Build schemes, which would further reduce supply.  So, perversely this may lead to new housing developments stalling and rents increasing for tenants of private rented accommodation.  At the very best Landlords will be looking to recover their stamp bill by raising charges.  Either way it will clearly reduce profitability in this sector.

JLL have already reduced their Central London Price Growth Forecasts in March 2016 stating,

‘The 3% charge for investors and second home purchasers not only undermines new build supply, but will negatively impact on affordable housing, CIL payments and employment across the entire construction supply chain.’

Surely the core problem the Government should be focusing on is one of supply, specifically that after years of stoking demand there are too few homes.  Until this is addressed house prices will continue to rise, albeit more slowly.

While some credit needs to be given for relaxing of planning regulations, will it give the kind of supply side boost that might return the housing market to a healthy equilibrium?

We shall see…

Please let us know your thoughts in the comments section below.

 

 

Building Information Modeling and its impact on the future role of the Quantity Surveyor.

The Fear

Throughout history there has been opposition to various forms of industrialisation, automation, computerisation and general new technology, where the people have had concerns they may ‘be replaced by robots’.

In the nineteenth century, English textile workers feared the end of their trade due to labour-economizing technologies such as stocking frames, spinning frames and power looms, causing the Luddite movement.

In the 1830’s, there were the Swing Riots, which saw an uprising by agricultural workers destroying threshing machines.

Although the construction industry has not yet demonstrated signs of descending into the discontent displayed in the late eighteenth and early nineteenth centuries, there is an evident luddite fallacy that Building Information Modeling (BIM) could cause technological unemployment. A recent SurveyToolKit Snap Poll on Twitter showed that a quarter of QS’s think BIM poses a threat.

Perhaps it is this continued concern about the impact BIM may have on the role of the humble QS, which has caused a delay in Quantity Surveyor’s commitment to the BIM agenda.

The Reality

Quantity Surveying’s uptake of this new approach to design and construction has been slow to-date, but there are many rewards for us further down the line.

BIM’s ability to automate measurement and speed up the traditional estimating process are its key benefits for Quantity Surveyors, according to a RICS research report titled ‘How Does Building Information Modeling (BIM) Support the New Rules of Measurement (NRM1)?’ The research reveals that the main advantage of BIM is its ability to capture, manage and deliver information.

The research, by the University of Salford, finds that the efficiency and accuracy of Quantity Surveying functions can be significantly improved by aligning the BIM based cost estimating and planning processes with NRM1, as it resolves the problems related to the quality of the BIM models and the issues created by the variations of design details. It also notes that BIM delivers a more efficient operational solution for Quantity Surveyors for cost estimating, with its ability to link the relevant quantities and cost information to the building model and update them simultaneously to design changes.

BIM models require a lot of upfront calibration between the QS and designer, for example inputting the correct coding, zoning and ensuring that the building is drawn as it should be built. Even after all that upfront work the QS still has to interrogate, interpret and extract the quantities and align it with standard methods of measurement.

Therefore surely it is the responsibility of the QS to educate the industry on what our requirements are, so as to establish clear methods of achieving the accurate, structured data we want.

Conclusion

As technology evolves, we are forced to evolve with it or run the risk of being left behind. The traditional way of utilising the services of a Quantity Surveyor has largely been at the stage of costing a design, and the production of procurement and construction documentation.

With the development of technology like BIM, the responsibilities of professionals are starting to shift. BIM includes a series of cost management functions that could change the processes of cost management of construction projects. This allows the Quantity Surveyor to delve deeper into different parts of the cost management process, than what wouldn’t have previously.

Not only will BIM influence the cost management functions and responsibilities of the Quantity Surveyor, but also the technology and types of software that are currently used in Quantity Surveying offices.  It is our responsibility and it is to our benefit, to demystify the shroud of fear surrounding BIM and ensure we are working collaboratively.

As technology evolves, we are forced to evolve with it or run the risk of being left behind.

charles-darwin-quote-it-is-not-the-strongest-of-the-species-that-survive-nor-the-most-intelligent-but-the-one-most-responsive-to-change

A blog by Ian S.Graham

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The Dangers of Selecting the Lowest Tender

Within this blog we will look at the dangers of selecting the lowest bidder, predominantly from the client’s perspective, however these points will be equally important to Main Contractors when selecting their supply chain on single stage projects.

For the purpose of this reading, when we talk about ‘selecting the lowest tender’ it is important to note that we are not talking about abnormally low bids. Abnormally low bids are generally described as those which are ≥ 25% below the average bidder and are normally discounted by all but the most unscrupulous of QS’s (Secret Surveyor). I want to look at those which are say 10-15% less than the other bidders, which on face value are alluring.

Evaluation, the assessment of tenders against a client’s requirements, is the most important part of the procurement process. All too often during bid selection it is irresistible to focus on the initial bottom line, without considering the damage on quality, time and final exit price.

There are of course a few reasons for this such as; prevailing market conditions, internal procedures requiring demonstration of value or external stakeholders requiring demonstration of the same, e.g. publicly funded projects. You could further argue that the process is a ‘necessary evil’ to ensure competition and competitiveness, however when we look at the potential pitfalls inherent in this process… well, make up your own mind in your race to the bottom.

The Facts of life

If a Contractor has tendered too low and failed to source materials and Subcontractors at rates which generate a margin, they will have difficulty securing materials and Subcontractors to carry out the works.  This will undoubtedly cause delays to their procurement and inevitably the works.

The Contractor will be on the hunt for cheaper materials to substitute where he can get away with it, likely leaving the client with an inferior product. Furthermore they will seek to pass their problems down the line to the lowest Subcontractors.  This potentially has many repercussions, such as poor workmanship and an inability to offer the levels of security warranted upstream.

If the Contractor is forced to procure the project at a higher price, issues may emerge with their Subcontractor payments, creating disputes, delays and more inherent problems such as Subcontractor failure.

Generally, as it is impossible to maintain standards and make profits, quality of work falls and Contractors become more eager to engage in legal battles to recover their ‘losses’.

Safeguards

There is an argument that if the Contractor selected is robust enough, then they should be able to shoulder the burden and can be bullied into compliance with their procurement and performance.  This is a dangerous gamble to take however, because the caliber of Contractor large enough to ‘take it on the chin’ will have an equally robust legal department and will be commercially shrewd enough to play ‘the delay game’ or similar shenanigans.

The only real safeguard is transparency and openness through the evaluation process.  This is not simply about disclosure and honesty but also the removal of discretion and subjectivity. Evaluation must be based on objective criteria that are known to bidders in advance.

It is imperative to establish that the information and criteria is fully understood and the bid compliant so that it may be valuated in a non-discriminatory manner.

Conclusion

The tender price on a construction project does not represent the final outturn price. A low tender price which does not cover a contractor’s costs will normally lead to the contractor seeking other ways, such as claims and disputes, to recover additional costs.  The quality of the works provided or services delivered cannot be guaranteed if the monies reimbursed under the contract do not cover the costs of providing them.

Selecting cheapest in the short term does not deliver cost savings but in fact is more likely to result in cost and time overruns, leading ultimately to poor value for money and greater whole life costs in the maintenance and operation of assets.

The use of lowest price tendering may seriously damage your financial health, reputation and may have undesirable side effects.

You get what you pay for so, please consider the consequences and remember…

lowest-bidder-fool-pic

A blog by Ian S.Graham

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The Oldest Excuses for Not Paying Sub-Contractors (And the Answers)

The Secret Surveyor uploaded a tongue in cheek list of reasons to avoid paying subbies (or at least we hope it was whimsical). Naturally we do-gooders at Surveyor ToolKit don’t endorse such behavior, so we’ve turned it into a problem and solution session with one of our Sub-Contractors.

Hopefully the following will be of use if you ever run into any of these all too familiar vindications for delaying remuneration.

‘The cheque is in the post’

 

This excuse is so ancient that it has in itself become a cliché for stalling payments. Although less popular in these days of BACS transfers, it does still raise its ugly head from time to time, when dealing with ‘lower tier’ Contractors.

The first thing to do is ask for the cheque number. You can normally test the validity of their excuse with this simple question alone.  If they are unable to provide a cheque number, then the chances are, this piece of paperwork is in fact mythical.  If they do provide a cheque number, this can be used to authenticate their credibility when the cheque (or any replacement) does in fact turn up.

A good round of follow up questions such as who was it posted by, when and what class post is normally enough to let the offending accounts payable representative know that you will be a thorn in their side until payment is received. If they can’t answer tell them you will phone back in half an hour when they have the answers.  Chances are they will use this time to write the cheque.

I have not received the payment application / invoice’

 

Another all too familiar defense, albeit if they can get away with using this line on you, it is your fault. When issuing a payment application or an invoice always follow up to ensure it has been received, who has it, and confirm that the due date will be met.

I can’t afford to pay you until my customers pay me.’

 

“Pay when paid” clauses were outlawed by Parliament in 1998, except where the third party employer is insolvent, however this excuse is still prominent with lower tier contractors.

There are many legal avenues to pursue if they think this is an adequate reason to withhold payment, however in the first instance ask for the name and contact details of their client. If they are ‘chancing it’ you will know immediately because they will resist giving you this information.

If you can get the information, get on the phone to the client, verify the story, find out when they are getting paid, and ask if the dispute involves your works. Contractors don’t want stories in the marketplace that they are unable to pay their debts, so this should usually get their wallets open.

Be mindful that the responsibility for paying you still resides with the party you have contracted with. If they truthfully don’t have the money to finance the work then there are greater problems at large.  Write them a letter quoting s123 and s214 Insolvency Act 1986 stating that you consider them insolvent and unable to pay their debts. Then tell them you are giving 7 days to pay before you start winding up proceedings.

We can’t process the payment because…’

 

With the advancement of modern technology the excuses have evolved also. Typical reasons for accounts being unable to process the payment include ‘your insurances are out of date on our system’ and ‘your health and safety details have expired’ or the old faithful ‘you haven’t put the correct order number on the invoice’.

In the first instance it is worth stating that, it is in your vested interest to ensure all the relevant documents are in place. The payer has no motivation to confirm these documents are spot-on and will happily let the process time out until you are squawking that they are late. So the onus is on you, as the payee, to be proactive in ensuring everything is present and correct.

That being said, accounting foibles and Sub-Contracts don’t always match. Quite often the hurdles perceived by the accounts department are not a contractual requirement, this flips the problem and makes it their issue.  Where this is the case don’t hesitate to promptly issue a ‘7 day notice to suspend works’.  This will cover you for any delays, demobilising and remobilising costs if the money isn’t with you within a week.

The person who signs the cheques (or pushes the button) is away’

There are many varieties to the ageless alibi. The higher power who signs the cheques is; on holiday, sick, at a funeral, on a site visit, in meetings all day etc. Naturally when this happens we supposed to believe that the entire business has grinded to a halt.

If they are on holiday query how they planned to make other business essential payments such as wages and utility bills. Is there a deputy safekeeping some pre-signed cheques?  Why can’t the secondary signatory on the account make an electronic transfer?

Worst case scenario, establish precise timeframes as to when the person will be back and ensure your paperwork is on the top of their pile when they are back.

‘The owner has died’

 

Ok so this particular excuse doesn’t does not come up that often but it is as old as time itself. When this arises, it can be quite a prickly predicament.  The heart of the matter is, you are out of pocket and still need to be paid, so with a touch of diplomacy you need to nevertheless push for your entitlement.  Depending on the business structure, there are various routes to take.

If the company you have been Sub-Contracting with is a sole proprietorship then effectively the business has ceased trading. In this situation you have a claim on the estate of the deceased.  This is probably the most awkward situation and fortunately it doesn’t happen regularly.  A tactful telephone call expressing sympathy, and querying if the business is to be continued before going down this road is advised.  It is possible the business may continue operating with a surviving relative “taking over the reins”.

In the case of a partnership suffering a death, then the partners have ‘joint and several liability’ to the debt and need to pay, though a respectful wait on your part may well be appropriate.

If it is a limited liability company (an ‘Ltd,’ ‘PLC,’ or ‘LLP’), then the business should continue to trade as normal.

We have ceased trading/are in liquidation/receivership’

In this situation it is paramount to get as much information as swiftly as possible.

The first thing to establish is precisely how the company has ceased trading, i.e. is it a ‘formal insolvency’; liquidation, administration, receivership, bankruptcy, IVA. Once you have established this get the details of the Insolvency Practitioners (IP) who are administrating the business.

Get in contact on the double and register yourself as a claimant. Make sure the IP is formally notified of any reservation of title, intellectual rights or security you have.

Dig out and make sure you dig out and have safe all documented evidence of your contractual relationship and the debts concerned. This will be paramount to retrieve any goods or property from the insolvency firm dealing with their affairs.

Without this, you stand little or no chance or retrieving and goods or property from the insolvency firm dealing with their affairs.

If the business has merely ceased trading, you must satisfy yourself that the business has no assets in order to make a commercial decision whether or not it would be appropriate to pursue the debt through legal channels.

 Conclusion

 There are many more excuses but all add up to the same thing – if the customer cannot pay to your terms they may be insolvent. So beware. If they are a key customer go and see them; talk together about a plan to recover the position. You may accept staged payments over time provided that new supplies are paid to terms.

If they are insolvent and readily admit they have problems with the bank and the crown then steer clear until the position is resolved.

Be terrier like, never let go until the debt is paid (even in stages) or they have gone into an insolvency mechanism. Then get full details of the liquidation, receivership, administration or company voluntary arrangement.

It should still be possible to get your money.

Happy Surveying,

The Secret Surveyor & Friends