THE PRICING OF CONTRACT PRELIMINARIES: QUANTITY SURVEYORS AND CONTRACTORS COMPARED The pricing of preliminaries

Transcription

1 THE PRICING OF CONTRACT PRELIMINARIES: QUANTITY SURVEYORS AND CONTRACTORS COMPARED The pricing of preliminaries P.A. BOWEN?? Department of Building and Surveying, Glasgow Caledonian University, Glasgow, Scotland K.A. HALL Department of Construction Economics and Management, University of Cape Town, Cape Town, South Africa P.J. EDWARDS Department of Building and Construction Economics, Royal Melbourne Institute of Technology, Melbourne, Australia Abstract This paper documents the results of an empirical study into the methods adopted by quantity surveyors and contractors for estimating the preliminaries component of project tenders. The pricing procedures of twenty-seven quantity surveying firms and twenty-five contracting organisations were studied through an opinion survey, using a structured questionnaire supplemented by formal interviews. Differences found between the two groups are discussed. Keywords: Contractors, preliminaries, pricing, quantity surveyors. Sommaire Ce document décrit les résultats d'une étude empirique des méthods adoptées par les métreurs et les entrepreneurs pour estimer les éléments préliminaires des états de quantité. Les méthodes d'estimation de 27 entreprises de métrage et de 25 entreprises de construction ont été analysées à l'aide d'un sondage, par l'utilisation d'un questionnaire et par des entretiens formels. Des différences d'évaluation des coûts ont été identifiés entre les 2 groupes observés. 1 Introduction The preliminaries costs of construction projects can be defined as those items that are not directly related to the individual items of measured work. Where tender bills of quantities 1 Professor Paul Bowen is currently on sabbatical leave from the Department of Construction Economics and Management, University of Cape Town, and is Visiting Professor to the Department of Building and Surveying, Glasgow Caledonian University, Glasgow, Scotland.

2 are prepared, these items are usually grouped together in a `preliminaries' section. Examples of preliminaries costs include plant, accommodation, temporary services, scaffolding, and insurances. The preliminaries can be grouped into items that relate to the contractor's general overheads, and items relating to the client's requirements. Examples of the latter include insurances, penalties for non-completion and general site restrictions. The preliminaries items can be seen as falling into two categories, namely, time-related costs and fixed costs. Fixed costs can be further divided into costs that are value-related (e.g., insurances), method-related (e.g., temporary works and plant), and quantity-related (e.g., hoardings and scaffolding). Time-related costs relate to those items of the preliminaries directly affected by the time they are required on site e.g., the cost of supervision and site accommodation. Most preliminaries items possess both a fixed- and a time-related component in their overall cost build-up. This can be illustrated if one considers the cost components of an equipment item, such as a tower crane. The tower crane has fixed costs for the transportation of the crane to and from the site and for the erection and dismantling of the crane. In addition, time-related costs apply to the duration for which the crane is present on site - either in the form of hire charges or in the form of opportunity and depreciation costs if the crane is owned by the contracting organisation. Moreover, the method of construction and the quantity and type of materials to be placed per week may impact on the positioning of the crane and the number of cranes required. Studies conducted by Gray [1] [2] on the pricing of preliminaries by contractors concluded that 90% of the value of the preliminaries can be found in only six items, namely, the costs of site staff, plant, scaffolding, site accommodation, electricity and cleaning. He also found that contractors generally only price sixteen items in the preliminaries section of a tender bills of quantities. Bennett et al. [3] reached similar conclusions. The `Preliminaries' document published by the A.S.A.Q.S. [4] for use with the Joint Building Contracts Committee (J.B.C.C.) `Principal Building Agreement' [5] makes provision for items contained in the preliminaries section to be priced by the contractor as either `fixed', `variable with value' or `variable with time', or a combination of these. This breakdown is then used as the basis for the payment and any subsequent adjustment of the preliminaries. The purpose of this paper, then, is to document the results of an empirical study into the methods adopted by quantity surveyors and contractors in estimating and pricing the preliminaries component of project tenders. 2 Theoretical discussion of the pricing function The functional separation of design and construction has been reflected in the development of price forecasting/cost estimating techniques. For quantity surveyors, the object is to inform clients and architects about the price implications of design decisions. For contractors, the need is to be informed of the anticipated cash flow implications should the contract be acquired. Although the nature of the competitive tendering process is such that quantity surveyors and contractors are essentially concerned with the same function (forecasting the market price of the project), the potential for contractors to access production cost information is a determining factor in the type of technique used [6]. The

3 generic form of quantity surveyors' traditional price models are given below. These equations were developed by Bowen [7] from the work of Skitmore and Patchell [6]. P = [(p 1 + p p n ) + G].I (1) n = [ (q i r i ) + G ].I i (i = 1,..., n) (2) i=1 n k = [ (q i r i ).I i + (q j r j ).I j ] (i = 1,..., n; j = 1,..., k) (3) i=1 j=1 where: P = total price of the work p = the individual product price of each item or work package q i = measure (quantity) associated with the i th item or work package r i = price per unit measure of the i th item or work package q j = the measure associated with the j th preliminaries item or work package r j = price per unit measure of the j th preliminaries item or work package n = the number of items or work packages k = the number of preliminaries items or work packages G = the price of the preliminaries I = a general price index for time adjustment I i = a price index for the time adjustment of the i th item or work package I j = a price index for the time adjustment of the j th preliminaries item or work package Consider the method adopted by most quantity surveyors in the pricing of preliminaries. The basic form in which preliminaries items are represented in bills of quantities is that of ` (q j r j )' (Eq. 3). Throughout the early design stages when approximate price forecasting techniques are used, and often when pricing bills of quantities as the final pre-tender price forecast, quantity surveyors adopt the procedure of adding on a percentage allowance to the priced builders' work. This percentage allowance is usually obtained from an analysis of priced bills of quantities of a `similar' nature, with an intuitive adjustment allowing for the differences between projects. This presupposes that there is knowledge of the composition of the preliminaries and the relevant items which should be adjusted because of the varying circumstances of the project. The pricing of the preliminaries must be seen as a potential source of considerable forecasting error given that this section can account for some 15-20% of the tender value [1] [2]. Contractors recognise the dangers inherent in this approach, preferring to adopt an individual assessment of each project to calculate the work content and cost of each preliminaries item ` (q j r' j )' (Eq. 6 below) [3] [8]. Research in the United Kingdom [9] [1] showed that preliminaries costs, when expressed as a percentage of contract value, display wide variability. This variability is not significantly affected by the size of the project, its type of construction or complexity. There is also no significant correlation between the preliminaries percentage and the value of the project. The relationship between the preliminaries and the overall duration of the project reflects a higher correlation, which improves further in projects of a more complex nature. However, the standard data sources and methods of price forecasting used by quantity surveyors do not consider this relationship at all. The percentage addition

4 approach, determined in relation to the value of the project, is highly subjective and unrelated to the process of construction. Little published data exist in South Africa regarding the percentage contribution made by preliminaries to tender price for various types of projects. The pricing function employed by contractors in tender bidding may be represented by: B = Cm (4) where: = [( c 1 + c c n ) + G'].m (5) n k = [ (q i r' i ) + (q j r' j )].m (i = 1,..., n; j = 1,..., k) (6) i=1 j=1 B = the value of the market price bid made by the contractor C = the estimated costs of production m = a `mark-up' value to be determined by the bidder c = the product cost of each item or work package G' = the cost of the preliminaries q i = measure (quantity) associated with the i th item or work package r i ' = cost per unit measure of the i th item or work package q j = the measure associated with the j th preliminaries item or work package r j ' = cost per unit measure of the j th preliminaries item or work package n = the number of items or work packages k = the number of preliminaries items or work packages The emphasis in tender bidding is the determination of a suitable value for `m' which will provide the best trade off between the probability of winning the contract and the anticipated profit should the bid be successful. Component `C' of the model is essentially similar to the basic price forecast model for `P' (Eq. 2). Costs are usually current with little use being made of price indices. If the same items are used (a basic assumption inherent in Eq. 6) in providing both design and construction price forecasts (e.g., pricing the bills of quantities as the basis for the bid), Eq. 6 may be simplified to n n B = (q i r' i ).m = (q i r i ) = P (i = 1,..., n) (7) i=1 i=1 as `B' and `P' are essentially forecasts of the same value, namely, the market price of the contract [6]. Given this underlying theoretical framework to the pricing of the preliminaries component of project tenders, how do quantity surveyors and contractors differ in their practical approaches to this task?

5 3 Opinion survey 3.1 Survey design and administration An opinion survey, using interviews and incorporating a structured questionnaire, was conducted in the Western Cape region of South Africa, to establish the methods used by quantity surveyors and contractors for the pricing of preliminaries items. Telephone contact was made with twenty-seven quantity surveying practices and twenty-five contracting organisations and their participation sought. The quantity surveyors were selected using the directory of registered (regional) practices of the Association of South African Quantity Surveyors. Contracting organisations were drawn from the membership directory of the local Master Builders' Association. In all instances interviews were arranged with a quantity surveying partner or chief estimator/contracts manager. The survey interviews addressed a number of issues relating to quantity surveying and construction management processes. The questionnaire for quantity surveyors amounted to fifteen A4 pages; while that for contractors contained forty-seven pages. The interviews were thus quite lengthy. However, participants were sent a copy of the relevant questionnaire beforehand, thus enabling them to offer more informed and more considered opinions. The interviewer does not think that any of the question responses was affected by survey fatigue. The section of the questionnaire dealing with the pricing of contract preliminaries was similar in content and format for both sets of participants. After a number of questions relating to company demographics and workload statistics, the questionnaires dealt specifically with the relative proportion of various preliminaries cost items to the total preliminaries value; participants' methods of calculating the cost of the preliminaries; the use of standard formats and checklists; detailed pricing of preliminaries items; factors influencing the cost of preliminaries items; and factors influencing the accuracy of preliminaries estimates. 3.2 Survey results The survey results are discussed question by question and compare the participating quantity surveyors' and contractors' opinions about each issue. Question 1: On average, what proportion of the total contract value does the preliminaries section represent? Various authors have pointed to the cost significance of the contract preliminaries expressed as a percentage of total contract value [9] [1] [10]. None have compared the assessments of quantity surveyors and contractors, and the question sought to explore this gap. Table 1 summarises the opinions of the survey participants about this question. Most respondents believe that contract preliminaries, expressed as a proportion of total contract value, lie in the range 4% - 10%. Some contractors; however, believe that preliminaries may, on average, amount to more than 20% of contract value; suggesting that, in some instances at least, the proportion may be much greater than 20%. While quantity surveyors and contractors participating in the survey hold broadly similar opinions about this question, there is an underlying difference between them. So, although the modal response in each case was that preliminaries account for 7% - 8% of total contract value, most quantity surveyor respondents believed that preliminaries account for between 7% and 10% of contract value; whereas the large majority of contractors opted for

6 a wider range: 4% - 10%. Clearly contractors expect a greater variability in preliminaries costs. Table 1 Contribution of the preliminaries to total contract value Percentage contribution Assessment of quantity surveyors and contractors Quantity surveyors [n = 27] Contractors [n = 25] % % 0-1% % % % % % % % 0 0 Exceeding 20% 0 5

7 Question 2 (to quantity surveyors): 2(a) In undertaking (the preparation of) an approximate cost estimate, which of the following methods do you use to determine the (total) value of the preliminaries? And 2(b): In pricing bills of quantities, which of the following methods do you use to determine the (total) value of preliminaries? Question 3 (to contractors): Please indicate which of the following methods you use to determine the (total) value of the preliminaries for tender purposes. These questions were intended to explore how quantity surveyors and contractors might differ in their overall approach to determining the total value of the contract preliminaries for a project. Participants were given a choice of three alternative methods, plus `other'; and a choice of five frequencies ranging from `always' to `never'. Quantity surveyors were asked two questions to reflect situations where more project information is available to them when producing a final estimate by pricing the tender bills of quantities. By far the most common method chosen by quantity surveyors, when preparing approximate cost estimates, was that of making a percentage addition to the estimated net project cost (96% of respondents reckoned that they `always' or `frequently' use this method; with a third of these indicating that they `always' use it). Making a lump sum addition to the net estimated cost was a less popular method. Only a quarter of the quantity surveyors `frequently' use this approach; while three-quarters use it `occasionally', `seldom' or `never'. Less than ten per-cent of quantity surveyors `frequently' calculate the cost of each preliminaries item when preparing approximate cost estimates. Similarly, 93% of quantity surveyors `always' or `frequently' use the percentage addition method to value preliminaries when pricing bills of quantities. Even with the greater level of information now available, more than 80% of quantity surveyors only `occasionally', `seldom' or `never' price each individual bill item of preliminaries. Indeed, a somewhat surprising 40% of them `frequently' or `occasionally' resort to making a lump sum addition for preliminaries when pricing the bills of quantities. Clearly, the percentage addition method is the approach most favoured by quantity surveyors at any stage in the estimating process, notwithstanding the proven lack of significant correlation between preliminaries percentage and project price [9] [1] [10]. The adoption of this technique also ignores the influence of project duration on preliminaries costs [7]. In contrast to the quantity surveyors, most of the contractors interviewed do not favour making tender allowances for the cost of the preliminaries by applying a percentage addition based on the net contract value. Three-quarters of them `seldom' or `never' use this method. A similar number do not favour a lump sum addition approach to pricing preliminaries. More than half of the contractors interviewed `always' calculate the cost of each individual preliminaries item. Question 4: Where the cost of each preliminaries item is calculated, is a standard format (i.e., method of calculation) used? Fewer than fifteen per-cent of quantity surveyors answered `yes' to this question. Where standard formats are used, they may incorporate assessments relating to the fixed cost, time, or value-related components of preliminaries items.

8 Just over half of the contractors interviewed do use standard formats for assessing the cost of preliminaries items. They also include fixed cost, time- and value-related methods of assessment. Question 5: Is a formal checklist used to minimise errors/omissions in the pricing of preliminaries? Just over a third of the quantity surveyors reckoned to use a standard checklist of items when pricing preliminaries, compared with two-thirds of the contractors. At the bill-pricing stage, of course, the preliminaries bill itself forms the checklist for quantity surveyors. Some contractors still use their own standard checklist at this point to ensure that sufficient detail has been incorporated in the preliminaries section of the tender bills of quantities. Question 6: Please indicate the extent to which each of the following factors influences the total value of the preliminaries. The purpose of this question was to see to what extent quantity surveyors and contractors were in agreement about causal influences on preliminaries costs. Survey participants were offered a list of eleven different factors, plus `other'. Against each factor, five possible response choices ranged from `no influence' to `strong influence'. The survey results are shown in Table 2. No additional factors were specified by either group of respondents. Table 2 Influence of project factors on pricing of preliminaries Degree of influence of factors Factor None Little Moderate Significant Strong Q.S. Cont. Q.S. Cont. Q.S. Cont. Q.S. Cont. Q.S. Cont. (%) (%) (%) (%) (%) (%) (%) (%) (%) (%) Project type Project value

9 Project size Contract duration Location Expected number of bidders State of market Quality of tender information Project timing Project complexity Client organisation Project type was considered to be a `significant' to `strong' influencing factor on the total value of preliminaries by most quantity surveyors (78%) and most contractors (75%). Project value attracted less support, particularly among the contractors. Over half of them (58%) thought that project value had `little' to `moderate' influence on preliminaries costs, and nearly ten per-cent thought it had `no' influence. No quantity surveyors thought that project value had `little' or `no' influence, but one third thought it had only `moderate' influence. Two thirds of the quantity surveyors; however, still thought of project value as having a `significant' to `strong' influence on preliminaries costs (compared with only 44% of contractors). Opinions on the influence of project size varied more sharply. Nearly ninety per-cent of the quantity surveyors thought it had a `significant' to `strong' influence on preliminaries costs, compared with less than 60% of contractors. No quantity surveyors thought that

10 project size exerted anything less than a `moderate' influence; whereas nearly 25% of the contractors thought the influence of project size would be `little' or even non-existent. Contract duration was considered to be a `significant' to `strong' influence on preliminaries costs by both quantity surveyors (89%) and contractors (79%). Project location was seen as less influential, with just over half of quantity surveyors, and half of the contractors, believing it to be a `significant' to `strong' influence. Competitiveness (the expected number of bidders) seems to be even less influential. Half of the quantity surveyors, and a little over half of the contractors, thought this factor had `little' or `no' influence on preliminaries costs. There was some intra-group disagreement; however, as over ten per-cent of quantity surveyors thought it might be a `significant' to `strong' factor; as did 21% of contractors. The state of the market was less favoured by contractors than by quantity surveyors. Three-quarters of the contractors considered it to have `moderate', `little' or `no' influence on the total cost of preliminaries; compared with 38% of quantity surveyors who thought its influence was `moderate' or `little'. Less than a quarter of the contractors suggested that its influence was `significant' or `strong'; while just over half the quantity surveyors believed this was the case. Rather surprisingly, the quality of tender information did not rate highly with either group as an influential factor in the total cost of preliminaries. Only about a third of each group considered it to be a `significant' to `strong' influence. Project timing attracted a little more favour. Nearly half of the quantity surveyors, and almost 40% of the contractors, thought this was a `significant' to `strong' influence on the total cost of preliminaries. Project complexity was generally thought to exert a `significant' to `strong' influence on the total cost of preliminaries; with 69% of quantity surveyors and 67% of contractors opting for this view. No quantity surveyors rated the client organisation above a `moderate' influence on the total cost of preliminaries. However, more than 40% of the contractors thought it would have a `significant' to `strong' influence. Question 7: Please indicate the extent to which the following cost centres contribute to the total cost of the preliminaries of an "average" project undertaken over the past three years (express cost centre value as a percentage of total preliminaries value). This question was intended to find out to what extent quantity surveyors and contractors were in agreement about the cost significance of individual preliminaries items. Interestingly, many of the quantity surveyor respondent group (44%) declined to answer this question, claiming that they `did not know'. The results are shown in Table 3 with those for quantity surveyors reflecting the views of the reduced group size. The displayed statistics represent the means of the values expressed by participants. It might be argued that the modal values would be a better indicator of group opinions in this instance, and future extended analysis will explore this. Compared with the contractors, the quantity surveyors appear to over-value the costs of site personnel and providing temporary site accommodation, mechanical plant, and site security. On the other hand quantity surveyors may tend to under-value preliminaries costs for scaffolding, hoardings and name boards, and site transport, when compared to contractor assessments of these items.

11 Table 3 Contractors' and quantity surveyors' opinions regarding the significance of individual preliminaries cost centres Preliminaries cost centres Mean group values for percentage contribution of preliminaries cost centres Contractors [n = 25] Quantity surveyors [n = 15] (mean response values %) (mean response values %) Head office personnel Site personnel Temporary accommodation Telephones Temporary power and lighting Plant (mechanical) Plant (non-mechanical) Protective clothing Setting out

12 Scaffolding Water supply Hoardings and name boards Security Temporary roads Temporary works (e.g., storage facilities) Drying out Rates, notices and fees Insurances Contract conditions Cleaning Transport Abnormal overtime

13 Attendance on nominated sub-contractors

14 Question 8: How important do you consider the following factors to be in the calculation of an "accurate" preliminaries value for a project? Quantity surveyors and contractors need to have confidence in the accuracy of their pricing, but this can be affected by a number of factors. For example, the heavy reliance by quantity surveyors on the percentage addition technique (as a means of determining a total preliminaries value) implies that the forecaster's judgement, project details and feedback from previous projects are all important in the selection of an appropriate percentage. The question sought to ascertain how participants viewed the importance of such factors. Survey participants were offered a choice of seven factors, with three levels of importance for each. The results are shown in Table 4. Table 4 Quantity surveyors' and contractors' opinions regarding the importance of factors influencing the accuracy of the preliminaries estimate Importance attached to factor Factor Unimportant Important Very important Quantity Surveyors Contractors Quantity Surveyors Contractors Quantity Surveyors Contractors (%) (%) (%) (%) (%) (%) Detailed knowledge of project Experience in estimating Extensive knowledge of construction techniques Feedback from previous projects

15 Extensive data base Time spent in estimating Quality of tender information Detailed knowledge of the project is considered to be an `important' or `very important' factor by virtually all respondents, with contractors tending to ascribe slightly more importance to this than quantity surveyors. However, it was not clear from the survey whether the type of detailed knowledge so highly valued by contractors is different to that enjoyed by quantity surveyors. Respondents were almost unanimously agreed that estimating experience is `important' to `very important' for accurate pricing of preliminaries. Contractors tended to rate the importance of extensive knowledge of construction techniques more highly for the accurate pricing of preliminaries than did quantity surveyors. This suggests that contractors may have a better understanding than quantity surveyors of the resource implications of these technologies. It might have been anticipated that both groups would overwhelmingly have rated factors such as feedback from previous projects, the availability of an extensive database, the time spent in estimating, and the quality of tender information, as `very important' in influencing the accuracy of preliminaries pricing. In fact, these were generally regarded more as `important' rather than `very important'. The availability of an extensive database was actually thought to be an unimportant influence on the accuracy of preliminaries pricing by a quarter of the quantity surveyors and by over one third of the contractors; which suggests that they thought such a resource to be an unnecessary luxury. More surprisingly, over two-fifths of each group believed that spending more time in estimating would not be an important factor in influencing the accuracy of preliminaries pricing. Question 9: As a standard procedure, do you use feedback from previous projects to check on the accuracy of your preliminaries pricing? More than 80% of quantity surveyors confirmed that they do use historical feedback as a standard procedure for checking the accuracy of their preliminaries pricing. Only 60% of contractors reckoned to do this, however. This suggests that contractors may be more prepared to take a `fresh' view of each new project. Conclusions Several important findings arise from the survey. Firstly, quantity surveyors may take an overly narrow view of the proportional contribution of preliminaries costs to total project tender value. Secondly, despite its recognised shortcomings, quantity surveyors rely

16 strongly on the percentage addition method of calculating an overall value for contract preliminaries. Thirdly, quantity surveyors may over-rate the influence of project value and project size on preliminaries costs. Fourthly, quantity surveyors may under-rate the influence that the nature of the client organisation exerts on the minds of tendering contractors. Fifthly, when estimating, quantity surveyors may under-rate the impact of scaffolding, site hoardings and site inspection items on preliminaries costs. In conclusion, it is evident that quantity surveyors are unlikely to improve their methods of pricing preliminaries without becoming more involved in, and aware of, the implications of the construction programme and its relationship with building design. References 1. Gray, C. (1981) Analysis of the Preliminary Element of Building Production Costs. Unpublished M.Phil. Dissertation, Department of Construction Management, University of Reading, Reading. 2. Gray, C. (1983) Estimating preliminaries. Building Technology and Management, Parts 1-7, Chartered Institute of Building, Englemere, Ascot. 3. Bennett, J., Morrison, N.A.D. and Stevens, S.D. (1980) Construction Cost Data Bases. Second Annual Report prepared by the Department of Construction Management, University of Reading, for the Property Services Agency, Department of the Environment. 4. Association of South African Quantity Surveyors (A.S.A.Q.S.) (1991) Preliminaries. June 1991 Edition, A.S.A.Q.S. 5. Joint Building Contracts Committee (J.B.C.C.) (1991) Principal Building Agreement Edition, J.B.C.C. 6. Skitmore, R.M. and Patchell, B. (1990) Developments in contract price forecasting and bidding techniques, in Quantity Surveying Techniques: New Directions (Ed. P.S. Brandon), Blackwell Scientific Publications, Oxford, pp Bowen, P.A. (1993) A Communication-based Examination of Price Modelling and Price Forecasting in the Design Phase of the Traditional Building Procurement Process in South Africa. Unpublished Ph.D. Thesis, University of Port Elizabeth. 8. Chartered Institute of Building (C.I.O.B.) (1983) Code of Estimating Practice. Fifth Edition, C.I.O.B, October. 9. Flanagan, R. (1980) Tender Price and Time Prediction for Construction Work. Unpublished Ph.D. Thesis, University of Aston in Birmingham, Birmingham. 10. Pearl, R.G. (1992) Factors Affecting the Accuracy of Quantity Surveyors' Pre-Tender Price Forecasts in South Africa. Unpublished M.Sc. Dissertation, University of Cape Town.