With the mining industry facing significant productivity challenges, companies are under pressure to deliver their projects more and more efficiently and meet budget objectives.
Owners have often used guaranteed maximum price contracts to “protect” their investment, notably in major mining projects. But is this the best way to control costs?
This method of delivering projects has proven successful, but mainly in the context where projects are simple and predictable.
For Owners, the guaranteed maximum cost project has two main advantages:
- the transfer of risk to the business partner (including the risk of cost overruns);
- the assurance of an acceptable return on investment according to industry standards.
For complex major projects (where there are few “comparables”), the guaranteed maximum cost project sometimes rather seems to be the problem rather than the solution.
As SNC-Lavalin has recently announced, major engineering firms are gradually withdrawing from this type of contract.
How to ensure a return on investment?
Transferring risks seems to be an interesting option for Owners. In reality, this avenue also has its share of disadvantages:
- overestimation of negotiated costs to take into account the risks
- too much dependence on the business partner’s ability to manage costs and risks
- administrative burden in managing changes to the contract,
- potential for claims and drawn-out litigation process.
In our experience, the biggest risk that clients want to transfer is cost overruns.
Thus, rather than looking for a way to transfer all the risks, a costly avenue, why not put in place an effective Cost Management system?
As early as the feasibility study, these mechanisms can be deployed to reduce and control costs at each stage of the project life cycle. The owner will then have full control of costs at all times.
Cost Reduction and Control Mechanisms
Three cost reduction and control mechanisms to consider are
Integration of an independent cost estimator into the project team
A construction cost estimator should be integrated into the engineering team at the pre-design stage. His or her intervention at the beginning of the project is crucial to establish the fair cost of the project, including risk allowances.
This must be done from the beginning since it is difficult, if not impossible, to make up for a project that has been underestimated later.
Conducting an estimate by a cost specialist with in-depth industry knowledge
Only an accurate estimate, made with the proper references of the field and the market, allows the client to make informed decisions throughout the project’s delivery life cycle.
With knowledge of the industry’s particularities, the cost specialist can establish the “right” monetary value of a project as early as the feasibility study.
Among other things, he can verify that the costs are representative of the market and that the proposed technical solutions are economically viable based on various parameters, such as :
- the project schedule,
- labour productivity,
- project location.
Continuous cost monitoring during design and construction
During the design phase, a cost specialist can obtain real-time information regarding amounts spent to date, cost performance index and cost to complete. It is possible to make precise cost forecasts early on, raise “red flags,” and suggest ways to reduce certain expenses.
Our Cost Management expertise allows us to take into account the costs of tangible elements of the project (equipment, labour, materials, etc.) as well as intangible elements that are more difficult to identify (market price fluctuations, etc.).
During this phase, the costs of projects can be optimized by exploring certain project delivery strategies (e.g., splitting or regrouping certain Work Packages).
During the various project delivery phases, the role of the cost management expert is that of a “goalkeeper” of all the economic aspects of the project. At any given time, he can provide a clear picture of the project costs to allow the owner, if necessary, to reduce the risks of cost overruns for the project owner.
A 2019 study by KPMG found that from 2016 to 2019, approximately 69% of construction projects were over budget.
These cost overruns are often essential in projects failing to deliver the desired return on investment.
It is hence crucial for Owners to implement an efficient Cost Management system to plan and control effectively throughout the project delivering life cycle.
Integrated teams – including engineers and independent experts with expertise in estimating, construction management and cost control – provide owners with the resources they need to better monitor their projects’ performance, particularly concerning schedule and cost.
Unbiased advice from Cost Management advisors allows Owners to better control their projects.