2019BookofCases

7 L EAN C ONSTRUCTION I RELAND A NNUAL B OOK OF C ASES 2019 In situations of high uncertainty, a client may choose to fund design to the point when it is apparent either that the gap between allowable and expected cost can be closed, or that the gap cannot be closed. Another key decision to be made by the clients/owners is what instructions to give regarding the design phase. Is the project team to limit their search to designs that: a) deliver targeted net benefits within a fixed cost; or b) increase net benefits even if that increases cost? For this latter alternative, the clients/owners must be able to carry a contingency for funding such opportunities. For example, injuries to nurses could be reduced by installing patient lifting devices, or revenues from performing particular types of surgery could be increased by enabling such surgeries to be performed in less time, but at an increased cost for support services. Key Points • Decisions about moving projects forward are made with uncertain information. • Different methods of conceptual estimating have different levels of uncertainty. • Targets for net benefits in use can be either fixed or variable. If fixed, then the allowable cost is also fixed. If the target for net benefits is variable, the allowable cost is fixed relative to the net benefits target. How to Enforce Targets Once targets are set, the next step is to steer each phase of the project toward project targets. Doing that works best when it is in the interest of the design and construction firms to meet targets. That can be done through positive or negative incentives, or some combination of the two. A client/owner may engage a construction manager or design-build firm to deliver a TVD project where those firms bear the cost risk. However, the greater the uncertainty and complexity of the project, the more premium the client/owner will be charged in order to offset that cost risk. If the cost risk is too great to shift completely, the client/owner will have to take on some or all cost risk. The benefit of doing so is two- fold, avoidance of premiums for taking on risk and the increased control clients/owners have over project delivery. Capital projects at the University of California San Francisco typically employ rewards to all design and construction firms on each project for hitting specific targets, for example, schedule milestones. Their success inspired the Board of Regents that govern the 10 campus University of California system to demand that all campuses follow San Francisco’s example. When BAA undertook the Terminal 5 Project at Heathrow Airport, the project’s expected cost was fully 80% of BAA’s net worth, and it was entirely possible that the complexity of the project would result in cost increases that would have pushed BAA into bankruptcy. Faced with this situation, BAA decided to take on all cost risk. By doing so, they could avoid paying the premiums that come with risk shifting, and equally or more important, they were able to deliver the project using Lean management methods, including TVD, to increase the probability of getting what they wanted within an acceptable cost. Framework suppliers (design and construction) had positive incentives through shared cost savings. The project was completed successfully. Given the positive achievements attained with the T5 delivery model, BAA is re-embracing the T5 approach on its new high-risk runway project which will provide greater certainty and control of cost through the adoption of Lean management methods. Sutter Health’s recently completed US$1.5Billion hospital in San Francisco was undertaken using a form of IPD in which a target cost for the project was set. Sutter Health bore the risk of paying costs in excess of that target cost. Some design and construction firms were engaged on fixed price contracts, but key designers and builders were reimbursed for their cost of work and had the risk of receiving reduced or zero profit. If project cost exceeded the target, that excess reduced the profit pool. The project was completed successfully for all parties. S teering Design to Targets To decide if to fund a project, the only estimate of cost needed is for the capital cost of the project and for the cost to use the constructed asset over its life. However, design decisions are made system by system and component by component. Hence, in order to steer design to cost targets, the cost must be broken down into the systems and components of the asset to be designed. Otherwise, there is no way to know what systems and components should cost, and hence no basis for providing feedback to designers. Table 1 provides an example of the level of detail in cost targets used to steer design and construction. “Steering” design is done through feedback, both prior to and after the production of design alternatives. Designers can see from the cost model what funds are allocated for different parts of the asset to be constructed, and alternatives can be assessed for their conformance to those allocations. Designers are not told how to design, but are rather provided feedback about those designs meeting targets. Generally speaking, if a solution is not found that meets the allocated cost for a specific function or component, the cost overrun must be made up through cost underruns elsewhere. Table 1. Target Costs for a Healthcare Project (courtesy of The Boldt Companies) Key Points