How can Construction Management (CM) optimize your indirect construction costs?

One of the most commonly used figures for contracting in construction projects is the “fixed cost” modality with a General Contractor (GC). With this figure, the client and the contractor agree on an initial global price that could not have variations, except for change orders requested by the client. Although this type of contract can reduce risks for the client, there are certain advantages and disadvantages that must be considered.

Having a fixed cost reduces the risk for the client and the contractor bears any risk if costs rise, as well as bears all the benefits of lowering costs. However, this benefit for the client is linked to the fact that the scope and specifications under which the fixed price has been agreed are fully defined, and this is where the risk of change orders for this type of contract lies. Any activity that has not been considered or any specification that has been omitted within the original agreement, implies a change order for the contractor and, therefore, an adjustment in the price.

In addition, the contractor would always be motivated to reduce costs in order to increase the profit, which is why an independent technical inspection is crucial to validate the quality of the work performed.

There are different variations of the standard fixed cost contract modality that seek to mitigate these situations, such as the Fixed Cost Contract plus Incentive Fees or the Fixed Cost Contract plus Performance Fees. In all these cases, the contractor is usually the one in charge of managing all the work subcontracts: windows, doors, elevators, etc., charging an administration and utility fee that typically ranges between 8% and 15%, depending on the size and the complexity of the work.

At Mar Azul we offer support to our clients under the figure of Construction Management (CM). Under this figure, the project would not have a general contractor or GC, but different subcontracts would be handled, which would be managed by a CM.

Under the figure of CM, the work of all the client’s contractors and suppliers is managed and supervised, also supporting the price negotiations of all contracts. This figure guarantees that all the savings generated by the management will belong to the client and, in addition, achieves significant savings in the indirect costs described above, reducing them to approximately 4% – 5%, depending also on the size and complexity of the project.

This figure also outsources the inspection of the project for better quality control during execution. Some benefits of the CM figure include:

The client keeps all the savings with contractors and suppliers as a result of value engineering, optimization, and price negotiation;
Control of the real cost of project change orders, without paying additional administration and utility margins;
Control of the quality of labor and materials of specialized contractors and suppliers;
Control of withholdings and deductions to be applied to contractors for defective work; and
After-sales and warranty control, once the delivery has been made.

At Mar Azul we advise our clients on which is the best route for their project, depending on each situation. We have clients who have opted for the figure of GC in some of their projects and CM in others, depending on the particularities of each case.

At Mar Azul we are happy to support our clients in these analyses. Contact us to advise you on the best structure and contractual modality for your project.