Project-Capex in the Construction Industry
Pieter Niehues, Principal at INVERTO, on the rarity of professional procurement structures
Construction projects make the headlines time and again because of significant budget and scheduling errors. Is this symptomatic of the entire industry?
No, not at all. Major construction projects in the public sector are often planned without even thinking about the real world. This is not necessarily due to planning errors, but, in many cases, for political reasons. The private sector is not immune to poor planning, but it does not experience it on the same scale. This is because the consequences of poor planning in private companies are significantly more serious. It is true, however, that, professional procurement processes that would help to minimize poor planning are still rare in the construction industry.
What particular points apply to CAPEX procurement in the construction sector?
The most important thing is realistic time and cost planning, based on current market conditions. This can be done during planning by involving strategic procurement at an early stage.
What does that mean in practice?
Developers should explore the market early in the process, from 6 to 18 months in advance depending on the complexity. In addition to a dedicated company search, this includes recording and analyzing all construction capacities and market price movements. It should not be planned too ambitiously – lead times for construction companies must be taken into consideration. Nowadays, only those who secure the required capacities for their project in good time can reliably implement the project on schedule and at an optimized cost. What is even more important is having procurement experts on board who understand the tools needed for efficient contracting processes and know the market.
How is it then that construction procurement does not work, especially in a material-intensive sector such as the construction and real estate industry?
Simple project thinking usually prevails and cross-project coordination rarely happens in the construction and real estate industry. But this is also due to the structures in the industry. It is common for construction projects to be managed by planning offices that are usually hired for a specific project. Engineers and architects in the planning offices are then involved equally in procurement. However, they lack the commercial and strategic procurement knowledge to be able to use the right procurement levers efficiently. You need to break away from these deep-rooted, learned structures.
Are architects and designers interested in optimizing CAPEX?
Unfortunately, the Regulation on Fees for Architects and Engineers* is a disincentive for cost optimization for building projects in Germany. This is because architect and engineer fees generally relate to the amount of the construction costs. So, there is relatively little interest in reducing this. So why should planners be interested in investing in expert resources that would reduce their fees by optimizing procurement costs?
*In its judgment of 4 July 2019, the European Court of Justice (ECJ) declared the German scale of fees for architects and engineers inadmissible.