By: Vignesh Mohan -- Senior Research Analyst, Engineering and Construction
16 March, 2016
This paper showcases how leading global companies contract construction management services. A majority of the project owners are aware of how Construction Management (CM) services are procured within their respective organizations. However, most of them lack clarity on how their peer groups procure the same services. The objective of this whitepaper is to provide an overview of the CM practices of peer groups and to provide an update of where the market is heading in the near future.
Construction management generally is a subset of project management, which in turn forms the management wing of the construction industry. On a global scale,the construction industry is expected to grow from $7.5 trillion in 2014 to $12 trillion by 2017. It is estimated that 55 percent of the construction demand will be from emerging regions.
By 2011, a number of buyers were running projects with smaller teams having downsized their in-house project management teams – now that the market has rebounded, many project owners lack the resources to manage large scale construction projects. Hence the growing interest in procuring construction management services.
Problem Statement / Introduction
Many of the large scale projects are contractually widespread and few project owners are successful in managing projects with such levels of technical complexities. Hence, construction management expertise currently is in high demand for project owners.
To obtain a wholesome view of construction management practices, one needs to understand the following:
The decision to procure CM services is based on multiple factors such as the experience and strength of the internal team, the level of project spend, or if the design requirements are complex requiring multiple specialist firms to execute the construction. It is also important to ascertain the geography of construction and whether the team has executed projects in that region, the type of contractors operating in that region, and the contracting nature in those locations. It also depends on the type of construction – office spaces, industrial facilities or research and development (R&D) structures.
All these factors are given due consideration before the decision to outsource CM services is taken. Very few companies possess the experience and execution capabilities to handle contractually complex projects in-house.
The next logical line of thought would be to determine the most adopted forms of delivery methods for construction management. To understand that, projects in the past three years from the industries of the most dominant industrial end users can be analyzed – namely projects from the consumer products or FMCG, pharmaceutical, food and beverage, mining, and chemicals.
On studying the construction projects from these sectors, 4 prominent methods of CM delivery were identified:
CM or CM/GC (early contractor involvement) face risk during the design phase. At an average of 60 percent to 90 percent design completion, the owner and the construction manager negotiate a contract and the construction manager becomes the general contractor.
The CM may be hired at an agency, in which case the CM manages the contracts on behalf of the buyers; the risk being borne by the buyer. These CM delivery options are for Office R&D and plant facilities which constitute the largest majority of construction services for the studied industries. Now under the execution models, there is a clear tendency among buyers to include CM under pure management contracts as against execution and management.
What are the circumstances under which these contracting methods are adopted?
Contractor CM or design + CM: This is the case when CM is combined with other services such as engineering, architecture and design. Most adopted: When project spend is within $50 million to $250 million and when design is complex requiring design function to be separate. Also, when the contractor maturity/capability is high in both disciplines, prior working experience with the firm is essential. Since the general contractor does not develop the design but only executes it, the designing firm is made responsible for managing the construction. This is mostly adopted when there is only one firm handling the entire design and engineering function. This method is adopted predominantly in developed markets. Time scale – generally completed within 1-2 years.
Criteria for adoption of contracting method:
CM as part of PM: This method is preferred when design and engineering is required to be contracted by multiple parties -- a separate architect, structural and civil works team, and MEP (mechanical, electrical, piping) team. Also, when buyer has low in-house expertise, no prior experience in the region or in working with the contractor, this method is preferred. This is widely adopted in the developing regions. In case of difference in construction practices, regulation and construction codes – for instance in Russia or Japan, the design must necessarily factor in the impact of earthquake. In terms of capital, these are generally within $300 million. As for end users, these delivery methods are frequently employed in or preferred by consumer products, and food and beverage sector.
Exclusive CM: Undertaken when project spend is large (above $100 million for a single project), or when multiple similar projects under execution (portfolio) have a higher combined project spend, or for multiple locations within the same region. For example, Pfizer contracted Fluor under an exclusive CM-only contract for the development of its global research facility -- the project spend was $270 million. The project was completed within an operating record of 500,000 safe work hours. Also, there was no lost-time Occupational Safety and Health Administration (OSHA) recordable incident.
EPCM – Adopted when the project is complex, or involves multiple parties, or multiple smaller projects for fast track project execution. When an in-house team cannot handle a project because of the scale of the project (or) when the project scale with respect to the company (or industry of operation) exceeds the capability of the internal team, then EPCM is invariably adopted. For instance, Anglo American, a mining company, manages most of its projects under EPCM. Its coal projects in Australia with a project spend of $1.6 billion is managed under EPCM by Hatch.
Relatively smaller projects are also taken up for EPCM, reinstating the notion that this method of contracting is dependent on the capability of the in-house team. A mouthwash manufacturing facility for Colgate Palmolive (project valued at $33.5 million) in Poland was completed between 2013 and 2015. The project was contracted under an EPCM by PM group. One of its frequent variation is EPCMV which is employed in the pharmaceutical/petro industries.
EPCM is preferred by mining, oil and gas, and pharmaceutical buyers because the construction standards for these industries are highly regulated and they fall in the high-spend category.
When we analyzed project executions -- recent projects within the last three years -- a definite preference was for developed regions.
US and Western Europe - contractor CM is higher
Why?: Contractors are more experienced in these regions, design specifications and standards and they also have prior experience with buyers. The in-house teams have better experience in these regions; hence do not require an exclusive construction management contract. Besides other factors such as engineering and design specifications which are more standardized, LEED is followed and employed in Europe and the U.S.
The Euro codes are also followed in most countries across Europe. The CEN (European Committee for Standardization) developed these codes which are a set of structural design standards. These codes cover the design of various types of structures in aluminum, concrete, masonry, steel, and timber.
In developing regions:
Most companies maintain an overall agreement with an international PMC for CM in a consulting and supervision role from start to completion. The design and build team generally includes international engineering consultants and local general contractors.
Why? – Companies mistrust contractors in these regions and project management is crucial as the possibility of overruns and disruptions is higher. For example, in the Middle East, employing a PMC is almost mandatory after 37 percent of all scheduled mega infrastructure projects overran by 17 months and almost $2 billion in terms of cost in 2012.
Hiring a consultant helps to navigate construction permits in the region and address issues related to regulatory clearances, land acquisition and environment. Another cited reason in developing regions is lack of project managers/site managers/planning engineers/quantity supervisors on the construction site, and lack of awareness regarding modern equipment and technology. There is also a dearth of well-qualified project managers and safety managers. Therefore, companies prefer that CM be managed by an international PM consultant.
An overall agreement with an international PMC for CM in a consulting and supervision role – In developing regions
Solution: So what should companies ideally be looking to do?
The partnership approach may be feasible for companies provided:
The decision on CM contracting design can be made based on the availability of in-house expertise, relevant contractor pool and assets.
Based on in-house expertise:
An average-sized project of medium design and engineering complexity requires a team of at least 10 members on site. After evaluating the in-house expertise, the delivery method should be chosen. Since the contracting scenario is changing, both project management firms and contractors are offering their services across geographies. Companies can leverage on their expertise based on their requirements.
Evaluate your contractor pool: Most companies fail to leverage on the contractors they had worked with. Check companies’ portfolio for any addition of services. For example – Tebodin was acquired by Bilfinger to supplement their engineering and project management wing – approach either Bilfinger / Tebodin if your company has any working relation with them.
By asset Type: By clubbing similar assets, project owners can find synergies for construction management that are specific to the asset type. For example, P&G renewed its contracts with JLL. This helped it to combine asset management, facilities management and property development with construction, and manage its portfolio effectively.
Although construction management is not a core area for many companies, it is pivotal for the success of project completion. In recent years, companies have gradually extended the geographic scope of CM, although no alliances have been formed.
Trends indicate that buyers have engaged with a preferred set of PM/CM suppliers across multiple regions for separate projects: most companies are likely to start looking to bundle their project portfolio under construction management firms.
Given that the market has rebound, it is the right time to leverage on construction management services in the market for project managers with a pipeline of projects for the next three years.
As rightly stated by these leading authorities in the CM market:
“Some owners lost in-house staff during the recession and need to know what is required to manage their projects now that the market is rebounding"
-CMAA (CM Association of America)
"Owners recognize they are not fully prepared to define their requirements and turn over control to the design-builder at the early” – Hill international