Fitout projects are no time to relax, warns Rodney Timm of Property Beyond. He reveals the hidden traps and how to avoid them.
As leases come to an end, there is usually the need to plan and manage a new fitout project in the premises. This project may involve relocation to new premises or possibly the reworking of the existing layout if there has been a successful renegotiation.
After all the challenges of the lease negotiations, many believe the fitout project will be less complex with fewer hidden traps. Unfortunately, this is seldom the case – and adopting the seemingly easier contracting option quickly proves once again there are ‘no free lunches’.
There are many and varied service providers in the project management space. The industry tends to cover a broad spectrum of service levels and fee structures. Although the generic project manager’s brief usually revolves around delivering the right outcome (design and specification) within the agreed budget and by the programmed completion date, different service arrangements may vary these deliverables. Provided all these parameters are tightly determined upfront and are understood by the client, problems experienced are usually limited, based on the tasks to be undertaken and professional nature of the service delivery.
However, as with most industries, the less professional and scrupulous operators can result in problems and conflicts arising. Some of the issues may include undisclosed commissions and margins received from contractors (and, consequently, an entrenched loyalty to the construction team). There may even be undisclosed commissions based on design specification received from suppliers, although very tight price competition between suppliers may ameliorate this practice. Questions may also be asked about unused contingencies that have been built into contracts and that are not expended during the fitout projects.
Workspace design within the new (or reworked existing) premises often reflects waste and extravagance – resulting from inefficient designs, poor specifications and lack of ‘value for money’ decision-making. Design waste may result from the project manager’s ‘cost cutting’ efforts by appointing the lowest priced designers on limited design briefs. In these low-priced briefs, the design team is not able to demonstrate their true design flair and the value that good design can bring to a project.
Alternatively, with a focus on making a ‘big’ project the design brief may be focused on customised workplace arrangements with no ‘value for money’ considerations. The design detailing may be inappropriate with bespoke solutions and extravagant material selections that are seldom noticed once installed and probably were not required by the client. Simpler solutions using manufactured products would likely have had similar outcomes at a fraction of the cost.
The topic around optimal design solutions can be multifaceted and complex. The key focus should be that, unless there is a very strong need for custom design, the fitout supply industry has now evolved to the point where modularity of solutions, using less customisation and more manufactured packages for total solutions will likely provide the optimal ‘value for money’ outcome.
As is the case in most industries, the outcome of the end product, being the office fitout, is directly related to the quality of the tender documentation and process. With rushed deadlines usually the norm rather than the exception in fitout projects, tender documentation can be scant and lacking in well-structured detail. Tenderers have to ‘make do’ with the tender documentation received and price as best they can.
But, with poor documentation, it is usually the desperate tenderer or the tenderer who has made mistakes who wins the contract. This process will ultimately lead to poor delivery in terms of quality and time delays. In addition, it is not unusual for contractual and variation claims and arguments to abound along the way.
Other poor tender results also occur when contractors need to allocate significant risk allowances to cater for uncertainties in poor tender documents or to counter onerous contract clauses, resulting in inflated contract prices.
Over the last few decades, guaranteed maximum price (GMP) contracts have grown in acceptance by clients needing contract price certainty. Budget blowout on projects can be career limiting for many, so transferring price risk is often desirable. But the process of arriving at the GMP is by its nature skewed in favour of the project or construction manager.
The timing of the determination of the GMP is key to the issue. If the GMP is set at an early stage in the project agreement, the design and specification will not have been finalised and will be open to manipulation and poor quality outcomes to ensure the GMP threshold is not exceeded. Alternatively, if the GMP is developed after the client has approved the design and the tender packaging process has been completed, there may be little additional value to the client.
From a time perspective, this will usually occur long after budgets have been set and the pricing risks will have been offset to subcontractors and suppliers. The primary beneficiary in this scenario will be the project or construction manager usually enjoying an enhanced GMP margin.
Another trend that has evolved over the last decade is the ‘one-stop shop’ offer, combining the lease negotiation, workspace design, fitout project management, relocation and even completing the make-good in the prior leased premises. This approach offers a compelling proposition to many busy corporate executives, particularly those executives unfamiliar with the idiosyncrasies of the leasing, fitout and make-good industries.
This means one point of contact, one point of accountability and seemingly all the required skills bundled into one organisation. This is good for many, but what are the pitfalls?
Usually the lease negotiation process, either in the existing or new premises, is offered as a ‘free’ or low-cost loss leader service. Although this may sound great, there are implications. To survive these, professional services companies need to make profits somehow in the overall process and this is often in the more lucrative and less controllable project management fee arena.
Potential conflict implications are many. For example, project managers are seldom going to recommend to clients that they should remain in their current premises with minimal changes even if it is the best ‘value for money’ option. This outcome is not good for fee and margin calculations.
Another issue with ‘one-stop shop’ service is the potential lack of the appropriate skills. For example, project managers may not have the appropriate (and very different) skills required for lease negotiations. And, being project managers focused on low costs, they may not have the right perspective during the negotiations, driving for the lowest upfront cost lease structure and forgetting to negotiate all the complex ‘fine print’ clauses.
There are many tenancy obligations hidden throughout the lease agreement that will ultimately cause the tenant significant additional costs and complexities during the occupancy of the premises in the longer-term.
FULL BRIEFS AND CONTRACTS
Generally, optimal fitout projects are delivered using fully documented design by quality service consultants that provide the best forum for price competition between contractors. Avoiding GMP and ‘one-stop shop’ arrangements, with transparency in all cost arrangements, provides ‘value for money’ outcomes.
For clients with multiple premises, the ideal situation is based on longstanding relationships with trusted specialist advisers, suppliers and contractors, backed up with relatively standardised design solutions. Business trust and relationships built up over multiple projects provide all parties with the opportunity to price their services appropriately with a reasonable profit for effort and risk. Based on honest relationships, this approach will consistently provide quality ‘value for money’ outcomes for clients.