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01 August 2023
In this global insight piece, Linesight Director Brian Coyle and Associate - Cost Management Carl Lobato discuss the key benefits and how ECI delivers value in construction projects.
The Australian construction market is particularly challenging for general contractors and subcontractors at present. Inflation in material costs, labor shortages and rising interest rates have created a difficult situation for many companies, particularly those locked in fixed-price contracts and legacy projects won prior to or during the COVID-19 pandemic. According to the Australian Securities and Investments Commission, 2,117 companies went into administration during the financial year 2022-23 [1], with the construction industry accounting for more than a quarter of corporate insolvencies.
This situation has ramifications throughout the construction industry, and significant implications at a project level. With the traditional competitive design-bid-build procurement model, which is still prevalent in the Australian market, clients may find that there are fewer firms prepared to tender, due to the associated risks as referenced. This leaves developers in a tough position, with limited options for negotiation. It is particularly problematic in the booming data center sector, where they are racing to meet exponentially growing demand.
In line with this, it has resulted in an increasing number of our clients with large, complex projects in industries such as data centers and life sciences to consider alternative procurement strategies, such as early contractor involvement (ECI).
With an ECI strategy, the general contractor is engaged prior to the design phase, at the same time as the design consultants. Their engagement will be based on the provision of professional services support during the design phase, followed by managing the project during the on-site / construction phase. During the design phase, their level of design responsibility and input can vary depending on the needs of the client, but the critical element is that they will be involved in the development of the scheme from an early stage, and will therefore be able to inform aspects such as constructability, design optioneering, safety-in-design, cost assessments, and consideration of alternative materials.
One of the most significant advantages of ECI is the ability to maximize the general contractor’s expertise to fast-track the program. With this key partner already engaged, the drawings for the civil and early works packages can be prioritized, and construction can begin while the rest of the design is still underway. This strategy does require a highly cohesive team approach on the part of all stakeholders, but when managed correctly it can provide real program benefits. It is particularly relevant on major data center and life sciences projects, where speed to market is always a high priority.
From a pricing perspective, ECI delivers the benefits that are often assumed to derive from traditional competitive procurement. In an ideal world, the design-bid-build model would involve a number of general contractors competing against each other to offer the lowest price. In reality, and especially in the current market, there are only a certain number of firms able to undertake larger, more complex projects, and even fewer that are willing to engage in a tender process in which price and margins are the only or main consideration. Crucially, this applies to specialist trade contractors too. The subcontractor pool in Australia is still quite shallow, particularly for large complex projects in the Data Centre and Life Sciences spaces, so many of the same firms will be bidding to each general contractor. This often results in a situation where the only significant differentiator in a tender submission will be the general contractor’s preliminaries, margin and project allowances.
In contrast, ECI is a much more attractive prospect for general contractors. When the prize is earlier, longer involvement in a project (for example, a three-year program of work instead of two), they are more likely to put their best foot forward to secure the work. With a longer lead-time and greater insight into the pipeline of work, the general contractor is better able to guarantee the desired management team. This is also an effective way to lock in prime subcontractors too, a key advantage when both labor and subcontractors are in short supply.
If run correctly, the ECI tender process and associated workings can safeguard against future issues with the successful general contractor, both from a budgetary and technical perspective. An ECI tender should involve a rigorous review process, in which competition is based on a broader range of criteria, weighted appropriately, including the experience of the proposed team, the firm’s track record on similar projects, their safety record, program and proposed completion date, value engineering initiatives, project approach, and more.
Price is obviously still a very important element too. Bidding companies submit their proposed prelims, resource loader, margin and hourly rates. Combined with an independent estimate for the subcontractor or trade portion of the works, based on the level of design available, this can be compiled into a forecast for the overall project cost to provide the developer with a greater level of certainty. As the design progresses, the winning general contractor can also be required to provide periodic cost plans as part of their ECI scope, independent of the continuous involvement of a cost manager or quantity surveyor.
Moving forward, ECI is expected to account for a growing proportion of tenders as clients choose this approach to improve project outcomes. When conditions are challenging, it’s essential to take a clear-eyed view and to be realistic about the strategies that will deliver the desired result – and in the current market, the certainty that ECI can provide is perhaps one of the most valuable commodities of all.
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