External Project Managers Are Expensive. Why Shouldn't We Save Money By Keeping Project Management In-House?

Case Study – Cost Variation Trouble

A university had been using an internal project manager to oversee a project. The university decided that they wanted to carry out more work, but this was going to overstretch their project manager. Rather than simply going directly to the builder, they made the decision to engage us as an external project manager to oversee the new works.

They were aware that once they had received a price for the work, the builder might try to increase their profit margin through unsolicited cost variations. This can happen when builders give a low fixed price based on the plans to win the project—even if they are aware that it is unrealistic—because their intent may be to exploit design deficiencies or other errors and incorrect assumptions the client has made.

More often than not, once the contracts are signed, there is suddenly an avalanche of cost variations, as the builder “realises” there are “additional expenses” that haven’t been taken into account in the original price. Because clients are often not in a position to negotiate with the contractor, as they have little experience in doing so, they have little choice other than to pay the extra costs.

Alternatively, builders often increase their profit margin by cutting labour costs or using substandard materials. In either event, the client may need to take that builder off the job and bring in another builder, which is costly and time consuming and creates a huge amount of work.  

On this project, we were engaged to vet and review the contractors’ existing variations in order to negotiate a far better price for the client, and subsequently ensured that pre-agreed rates would cover any potential future variations. This meant that there were contractual mechanisms in place that protected the client from any cost variations that the contractor might try and claim once the project was underway. We were also in a far better place to have tougher conversations with the contractor and to tell them that there was no room to renegotiate on the price. 

It’s really about making sure the client knows exactly what they’re paying for. Most people receiving a construction quote will have no idea what the individual items are—they may just be serial numbers for structural components. If you don’t know what a 360UB45 is, how are you meant to know if $10,000 is a good price for that item or not? 

Planning Equals Protection

It’s never advisable to just march into the jungle, hacking away at the undergrowth and hoping you’ll come out at the right place on the other side. You need to make sure you’ve looked at the terrain, planned the route, and have all the necessary tools and supplies for the journey.

Although it is the project manager who will be kicking everyone’s butt to go fast once the project is underway, everything needs to go through meticulous planning before getting to that stage.

During the planning stage, everyone else will want to get going, and the project manager will be the one reining things in. This is because big construction projects involve a great deal of money, which means there’s a lot at stake. You want to get it right. One example of how this works is the contract.

If your organisation needs to expand and requires new buildings in order to achieve this expansion, you go to the builder, agree to their price, and then sign the contract. Great. Now the project can begin!

But who wrote the contract? You or the builder? In the majority of cases, the builder gives the client the contract. After all, the client has never done any building work before, so how are they even meant to know what should go into a construction contract? It’s worth thinking about that for a moment: clients don’t even know what should go into a construction contract.

If you’re the one spending all the money, then the rules of the game need to come from you because it’s your money. By bringing a project manager on board, the contract will be derived from the client and then given to the contractor for them to accept.

Although it may take a little extra time initially, the protection given by a contract drawn up by a project manager is worth the extra time. In the longer term, it is significantly better to know you are protected, rather than simply trusting that the builder has drawn up a fair contract that meets your requirements and signing on the dotted line.

Contracts that do not serve the needs of the client are one of the main reasons why the construction industry is so full of legal disputes—because clients don’t understand what they’re getting themselves into. Engaging a project manager from the project’s outset is never going to be as expensive as running a full-blown legal case once things have gone wrong and you discover your contract doesn’t protect you.

By ensuring your project has gone through a rigorous planning process, and you have as much protection as possible, the likelihood that everything will run smoothly is far greater—and the costs are almost certainly going to be kept far lower in the long run.

 

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