Why Lowest Price Purchasing Decisions Can Carry a Heavy Cost
Blog | 11.01.21 | 0 comments
In a competitive world, lots of purchasing decisions come down to cost. Everyone loves a bargain, but there is a fine line between good value and too cheap for comfort. Decisions taken purely on cost can sometimes come at a high price as hidden expenses begin to add up and delays exacerbate the problem.
The best value approach pioneered by the public sector was developed to address this problem by encouraging decision makers to fully-understand the value of their purchasing options, rather than comparing figures without interrogating what the price offers on a like-for-like basis. It has not always been applied rigorously in the public sector but it’s an approach from which the private sector can learn some useful lessons in order to select supply chain partners that offer real value at a competitive cost, rather than low pricing and added risk.
The Devil is in the Detail
The key to realistic and detailed pricing begins with the brief. If there is insufficient information, the contractor can be obliged to price for the unknown, which either involves anticipating every possibility and potentially over-pricing or keeping the figure low to win the project and worrying about the consequences later. Neither of these options is best for the developer, because the first could mean overlooking a contractor that would be an excellent choice for the job, and the alternative may mean substantial additional costs at final account and a potential project overrun.
For this reason, it’s essential that the brief is as detailed as possible so that contractors bidding for work can put forward an accurately costed bid that reflects the complexity of the project and the required quality of the specification. Where there is scope to value engineer the project and develop buildability solutions to reduce complexity, there is potential to make cost savings. Ideally, the project requirements should be developed and delivered with a collaborative approach, allowing risk management and mitigation by right delivery partner, rather than being passed down the delivery chain. Ways in which the contractor can add value and reduce risk through effective collaboration should be factored into a comparison of the prices submitted.
It also pays to understand ways in which a contractor can add value to the project process in other ways. By including pre-construction within the main contractor’s responsibilities, potential issues such as disputes with surrounding properties, utilities connections and planning obligations can all be taken care of, avoiding potential delays and reducing the number of consultants required on the project.
Time is Money
It’s also important to remember that, on a construction site, time is money. The length of the programme and how efficiently the project is managed have a significant impact on the costs at final account, so the price submitted should be assessed in context with the contractor’s track record for project management and handover on time and on budget.
Delays due to unforeseen issues that should have been resolved during pre-construction, poor health and safety practice, buildability challenges that have been overlooked or supply chain problems can all be avoided. Any of these could result in delays and additional costs if the successful bid has been priced to win and assessed primarily on cost, rather than priced realistically and assessed with a best value approach.
The role of the estimator when preparing pricing for a bid is not to calculate the cheapest costs possible, but to select materials that will deliver the required quality, performance and service life at the best price. Collating all that information takes time so it’s the developers that allow a reasonable amount of time to prepare a submission that receive the most accurate bid. Factoring in lead times and supply chain certainty are also important because any delays incurred to wait for materials can have costly knock-on effects on the whole programme.
Quite apart from the issue of whole life value and maintenance costs, a meticulous approach to pricing the right materials at bid is important in avoiding snagging or the potential for material substitutions that may result in additional costs.
Indeed, many developers that have been caught out by hidden costs following attractive pricing at bid are now well aware that cost certainty is of much more value than a few hundred pounds saved here and there. Small incremental added costs quickly add up to large amounts over the length of a project and delays can drive up costs even further, particularly if penalties are incurred because occupier move-in dates cannot be met.
At Edgeley Construction, we live in the real world. We know that price matters, which is why we strive to be as competitive as possible, but we will never compromise on quality or detail simply to win a job. Construction is a service, not a transaction, and a service-led approach is founded on the fact that all delivery partners are all trying to achieve the same thing: a successful project.
We’re very proud of our track record of completing projects on time and on budget and we know we can add value for our clients by working collaboratively with them during pre-commencement phase to iron out potential risk factors before the project starts on site. Where it is not possible to eliminate challenges completely, we are able to flag them and manage them effectively, delivering certainty for the project.
Our approach is to understand the project requirements as clearly as possible and include as much detail as possible in the bid, with suggestions for how to achieve the required outcome more cost-effectively where appropriate. Ultimately, we want to deliver projects that we can be proud of, which make good commercial sense for our clients and delight their occupiers. Our goal is to achieve this with no hidden costs, no surprises at final account and no costly delays. For our clients, that commitment is priceless.