Who Takes The Financial Risk?

Why It Matters​

 

The building industry has a reputation for “extras”, however if a project is properly managed, there is no reason they cannot be avoided. Our systems control costs on site and ensure that clients only take the financial risk they need to.

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In the last 20 years the extent of construction drawing and specification done routinely by many architects has reduced for two main reasons:

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• Contractors and specialist subcontractors have taken on the detailed design and specification after planning stage by offering design-build services. This passes the financial risk to the contractor, but the client loses control over the design and specification because the contractor makes choices based on cost to stay within their quoted sum. The end result is usually a serviceable building, but with reduced design quality

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• Some Architects have responded to increased competition by cutting their fees to maintain turnover. That means they have less time to spend on the detailed design and specification leaving some of the work unscheduled. That leads to the classic situation where the contractor can claim lots of extras in site. The inexperienced client does not realise that they are being exposed to this much higher financial risk when they decide to spend less money on design fees

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The service we offer is based on thoroughness of design and detailed construction documents. We believe that high quality construction drawings and specification are essential as they pass the cost risk from the client to the contractor. The result is a more predictable final project cost with fewer changes needed on site and less chance for the contractor to charge a premium cost for extras.

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At tender stage we analyse the bids to identify where the financial risk has been accepted by the contractor and where it has been left with the client. Once that is clear, we can report to the client on the proportion of risk they are taking, usually as a percentage, and that helps them make a decision about how to proceed. If the proportion of risk is high, we can then agree how that is managed.

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Once on site, we use a tried and tested system to record every change using a cloud based system accessible to the client and the contractor, so that the cost of changes are transparent and up to date. This really does work and usually there is no final account discussion needed, because the change list is the final account.​

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Avoiding Cowboy Builders​

 

Because we prepare very thorough drawings and specifications, cowboy builders generally do not want to price our work. We don't leave any room for rough estimates where the costs can be manipulated once they are on site and we also don't pay money in advance. So using us means you should avoid the cowboys. You might be interested in this article about finding a good builder.

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We also either have worked with the builders before or we have thoroughly checked them before we ask them to quote.

 

Who Is Taking The Risk - You or the Builder?​

 

This is the fundamental question you should ask. Let’s look at some examples:

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• Building a brick wall: The size, materials and quality of workmanship can all be specified so that what is required is clear. In this case the builder can take the financial risk for the cost of materials and labour and can therefore give you a fixed price. The same argument holds true for most of the construction items in any project

• Fitting out a bathroom: Most clients will not have made final decisions about what bathroom fittings they want at the beginning of the project and so the builder cannot give a fixed cost. In this case we can allow provisional sums to cover the cost of bathroom fittings that are used as a budget guide for the client. So the client takes on the financial risk and chooses to suit their requirements

• Foundations: The type of soil likely to be encountered can be predicted using trial pits and boreholes, but the actual conditions are only known when the foundations are dug. There is always the risk of unexpected problems and the cost risk for this lies with the client. We allow a contingency sum to cover this

• Repairs: Many repairs to existing buildings can be foreseen and therefore fixed priced because they are visible. However there are always hidden problems in existing buildings and in that case the risk again lies with the client. Again the contingency sum is there to cover this​

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What Level Of Risk Should The Client Take?

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We aim for the contractor to take on 85% of the risk leaving 15% for the client for final decisions on finishes, etc.

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Client Changes and The Virtual Building

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Despite our best efforts the greatest risk to the budget in our experience relates to client changes on site. As well as the cost of the change these also mean undoing work already complete and cause delays to get the new work done. A 3D virtual building helps clients understand the details and gives opportunities to question and clarify the design before work starts on site. 

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What Is A Contingency Sum?

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This is a pre-agreed sum of money within the budget for unplanned costs.

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Builders Pricing - Traditional Tendering:

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This gives you high quality at the most competitive price. Each contractor prices a set of drawings and specification and price the schedule of work in competition with each other. Their quoted costs are fixed. This process takes time because we need to draw and specify the work and then the contractors need about 6 weeks for pricing. If you want good quality at the best price, this is the preferred option, but it takes longer.

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Negotiated Price

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If you want good quality and speed, you can negotiate a price with one contractor. This option is worthwhile if you are prepared to pay more to meet a deadline.

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Building Contract

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We always prepare a written contract and ask the client and contractor to sign. That way what the agreed costs and scope of work are and what the variable costs and scope of work are, is all clearly set out.

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Risk Management System

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We translate clients ideas into a clear design and scope of work using a very detailed 3D virtual model that has the specification embedded into it. Because everyone understands the project better, site changes are reduced or even avoided altogether. Because our drawings and specification are so thorough the builder can fix a proportion of the costs as possible. We aim to pass the financial risk to the builder for all normal construction items.

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We also operate a very rigorous site cost control system. Every change is flagged and approved before any extra is incurred using an on-line system available to view 24/7.

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Building and Contract Insurance

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This is a complex area that we help clients with by helping to ensure that they arrange the insurance cover needed for their own building. We also always ask to see contractors insurance during major building works. Their insurances need to cover employers’ liability, public/products liability and contractors all risks.