Every project’s success is judged based on whether the project was delivered as planned. Contractors are developing the asset to be completed on a specific date, purchased at a specific budget and operate to specific cost levels for as long as possible. The ultimate goal for a project is Asset Performance Certainty (ACP), in other words, the perfect execution of the project plan throughout the entire project lifecycle—design/build/finance/operate/maintain.
This whole-life approach to managing a project reduces capital costs, reduces asset-related operating costs, extends asset life and improves utilization, performance and ROA (return on asset).
According to David Bowcott, senior vice-president, national director of large/strategic accounts, AON Reed Stenhouse Inc., “the lifecycle or asset management approach significantly reduces the opportunity for disputes amongst design, construction and operations (owner) and as is the case with most disputes a majority of those costs are related to legal and other professional fees contributing very little to solving the actual hard costs to repair the issue (estimated at 60 per cent).”
He explains: “The integration of all aspects of project lifecycle create a paranoia that demands up front planning of the project, this in turn leads to certainty in execution and thus significant reduction in disputes – the measure twice cut once approach pays dividends to all involved and this model strongly encourages such pre-planning practices”
In layman’s terms, imagine for a moment that the contractor is not only building a structure, but will also be responsible for its design, maintenance and operation for the lifespan of the building… Because they have this vested interest, they will make sure that it’s built cost effectively, using materials that will last a life time, it will be energy efficient, strong and esthetically appealing. A contractor does not have the same vested interest in a building where the design has been procured by the owner and they have little or no responsibility for lifecycle defects and maintenance.
The bottom line is that the contractor is in the best position to manage the risks of design procurement, construction and operations of the asset (and some would say to negotiate the financing). They are the experts in how the design will be built, and how the assets should be maintained and operated to maximize value for money.
The idea of ACP is that the risk is assigned to the entity best capable of managing it. In the example above, that would be the contractor, who now becomes a much more active player in the process, beginning with negotiating the financing.
Bowcott believes that leading construction companies, such as PCL, Aecon, EllisDon etc… are moving away from historical run-to-failure models and are beginning to embrace whole-life planning, lifecycle costing, planned and proactive maintenance and other industry best practices. Bowcott states quite simply: “It’s the right way to manage an asset from development to demolition.”
At this point, the contractors are getting on board because they have to be, but the leaders within the Canadian market place are trying to be proactive and distinguish themselves in the market.
The impact this will have for large commercial contractors… could be tremendous. As owners of various assets embrace a more long-view methodology of procuring their assets, with an eye to creating value for money, versus previously “low bid,” the tools of the general contractor become vital. Who best to procure design to ensure buildability (in addition to asthetics) to procure the right material and labour, to negotiate financing, and to ensure proper operations and maintenance are used in the operations phase to maximize value over time. The contractor faces a tremendous opportunity within this model.
The impact this will have for smaller construction firms and sub-trades… Firstly, smaller construction firms need to be aware of this change as it’s not just for larger projects. The model can be applied to small and mid-sized projects. Knowing this, smaller contractors need to educate themselves and prepare a strategy to ensure the market doesn’t leave them behind. There will always be bid-build jobs but not seeing the opportunity in this model, regardless of the contractor’s size, could be a fatal mistake. On the subcontractor side of the equation, they also face tremendous opportunity. Having a strong knowledge of how the products and services they offer will help create sustainable, value for money, propositions will be vital to success.
The impact this will have for designers/engineers… Design/Engineering firms are used to dealing with owners and assisting owners in procuring the construction. These firms will also have to educate themselves on this movement as they are now forced to work much closer with contractors and operators (often the contractor determines the design/engineering firm that will be used so the roles can reverse under this model). These firms will also have to recognize the greater need for designs that are buildable and that offer value for money in the operations. Knowing sustainable products, methods of construction, and methods of operations/maintenance will be their value proposition.
The impact this will have for owners of construction (real estate, energy, mining, institutional, etc.)… Owners of construction are pushing this movement as their companies look to more sustainable business models. The assets they develop to make money are also being procured using more sustainable models. Not dissimilar to automobile owners making the decision to buy cars based on up front cost AND maintenance costs over the life of the car, owners of assets are moving in this direction. Value for money is a reality and with technology being more thoughtfully integrated into asset development and operations it is clear that models that promote sustainability will incentivize the use of new technologies that offer lower costs over the life of the asset (and also offer certainty of asset performance – Asset Performance Certainty).
The impact this will have for finance industry… The finance industry continues to grow expertise in the project finance market place. Previously the sophistication level of project finance was mainly financial modeling, however, under more sustainable procurement models the finance industry is learning more about the design, construction, operations and subcontractor marketplace learning about operational practices that promote sustainability and create asset performance certainty (which is ultimately what equity and debt want – we want to get paid back what we expect we were going to get paid back).