An introduction to procuring for value

Does your procurement process truly focus on value? Most construction projects only deliver value for the client once the facility is in use. Until then they are a nuisance, getting in the way of core business, but once put to use it is their impact on outcomes which matters.

As the figure shows, the benefits (outcomes) of good built facilities in use for clients and end users usually far outweigh the costs of design, construction and operation. At Constructing Excellence we strongly believe that everybody needs to understand these costs and benefits. We first wrote about value almost 10 years ago in Be Valuable. The precise ratios differ for every client and every facility, but understanding all the figures properly allows a meaningful business case for the investment to be made to achieve the desired outcomes at the outset of a project, which is vital for success.

Constructing Excellence
Procuring for value

Illustrative figures

For an office building, the ratio of capex:opex:busex might be of the order of 1:5:200 over a lifetime of 25 years’ use of the building. Add in the cost of activities from business case making to planning, briefing and design, maybe 0.1-0.2 on the above scale, and the value of outcomes (as high as 2,000 in a profitable bank, for example), and over 25 years you could argue that the ratio of value : design costs might be 20,000 : 1.

Whilst some commercial office buildings may approach these numbers, the range of possible numbers is large. Nevertheless, those up-front (left-hand side) activities up to and including construction will usually leverage value to the user (right-hand side) of a magnitude tens or hundreds of times greater than their costs. Yet there are plenty who act to reduce this value, either consciously to fit within a reduced budget (“it’s all we can afford”), or unwittingly by using a procurement process which awards to the lowest price bidder irrespective of the impact on value. Incidentally, a low tender price is far too often illusory, of course, the outturn cost is likely to be much higher by the time scope changes and claims are accounted for – but that is the subject of another set of stories!

Some key points about this theme include:

  • There is huge variation in these numbers for different building sectors
  • It is straightforward for individual clients to work out their own numbers
  • The right-hand side outcomes will always be of orders of magnitude greater than the left-hand side
  • Outcomes are not always measured in monetary terms, for example hospitals deliver healthcare outcomes, schools deliver educational attainment outcomes
  • Other units to measure value might be environmental, such as tonnes of carbon, or social, such as sustainable employment – but still the impact on the outcomes (right-hand side) is what should matter most, and decisions about expenditure on the left-hand side should always be taken with an understanding of the effect on the right-hand side
  • What do you want or need the numbers to be?
  • Work right-to-left in the briefing process will deliver a far superior process to understand value- and if necessary, much greater understanding of what compromises may be forced on the project if for example capital budgets are constrained.

There is plenty of insight available from others on this theme too, and lots of data albeit not always pulled together to show the whole picture. See for example “The value of good design” by (the former) CABE, or Hammerson’s very recent report on “The true value of shopping centres”.

If customers and suppliers of the built environment sought long-term value in this way, the prizes would be huge for all: customers could expect their performance to rise in value-based facilities, the industry could expect much higher margins linked to real value-added, and the public would benefit from improved quality of life and the sustainability of their lifestyle.

Too many people in procurement focus on the left-hand side without ever having regard to the value delivered, or compromised or even destroyed, on the right-hand side. Does your procurement process truly focus on value?

This blog is the fourth in a series prepared by members of the Constructing Excellence Procurement Theme Group to provoke debate and seek to provide thought leadership on a crucial aspect which we see as a major barrier to improving the productivity of the sector. Comments are welcomed on the Constructing Excellence LinkedIn page or on Twitter using the  hashtag #CEProcurement.

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