In this article, Director Jeff Whitfield examines some of the issues surrounding the evaluation of prelims and overhead costs. Find out what he has to say on the topic that affects so many construction disputes and conflicts:
Over my three decades in resolving construction disputes, a significant proportion of the cases I have testified upon, have required the evaluation of preliminary allowances or costs as a prime component in the overall quantum evaluation.
Prelims Defined
Given my experience as a QS who has prepared bills of quantities on the client side, and as an estimator preparing tenders on the contractor’s side, I would say this:
Preliminaries are the necessary site overheads, reimbursements and other expenditure required to enable the successful delivery of any construction project.
Preliminaries necessarily include expenses for site setup, materials, services, fees, and those general running costs not attributable to any particular work section. They may also include any work product which cannot reasonably be evaluated alongside the scope of work that it supports.
Thus, the valuation of prelims is both complex and variable, it can be significantly different from project to project.
For example, a single building project executed entirely on a single site, may be quite straightforward in terms of preliminaries. Whereas a marine vessel constructed in a yard with multiple components like pipe spools and packaged equipment being imported to site, will be quite involved. Further, vessels or installations that are finally completed offshore, can become extraordinarily complex in terms of calculating land based and offshore prelims.
In all cases, the proper and fulsome calculation of prelims ensures that contractors have a reliable cost basis from which to determine the proper evaluation of the main construction activities.
In Summary, Prelims Fulfil Three Main Requirements:
- Preliminaries must cover all of the otherwise unpriced overhead costs essential for managing a construction project.
- Preliminaries may include preparatory work, temporary works, materials, services, fees, and site establishment expenses.
- In my expert opinion, based on past experience and derived historical data, prelims typically account for between 5 and 25% of total project costs depending on the complexity, type and scale of project.
However, to allow a simple percentage based on ‘past experience’, can be risky if not reckless.
Valuing Preliminary Allowances
It is crucial for the project manager and any quantum-based consultant to understand exactly what preliminary items have been costed and what potential expenditures have been allowed in the preliminaries allowance, to be able to properly manage construction and exercise judicious cost control.
NB: This is an oft-overlooked but crucial rule relating to the preliminary costing process. It matters little which items we include in the preliminary budget, but matters much more that we know what our preliminary allowance includes and what it excludes.
One of the perpetual problems with preliminaries is that one estimator’s scope related services (scaffolding, completed work protection, weather protection etc.) are another estimator’s prelims. It is therefore essential that we know, with precision, which items have been included within the preliminary allowances by our estimator, and which have not.
The items not included in the prelims, but which are necessary for the execution of the measured works, must then be priced with the measured work items to which they are related. If items are not clearly and separately identified, it will be difficult to persuade a tribunal of any kind to award additional costs in the case of delay or disruption.
The random apportionment of a fixed percentage based on past jobs might find favour with a tribunal on minor matters, but it could well be considered reckless if the value of the prelims can be shown to be unrelated to the work scope.
This diversity of inclusion and calculation is the reason why historical prelims show such divergence (5-25%). As an expert witness I cannot say emphatically that a low preliminary allowance, like 5%, is obviously inadequate. Many of the things that I might view as prelims, may have already been included in the prime cost of the work scope as scope related costs, by a competent estimator.
Generally speaking, but not always, prelims are expected to encompass the site overheads vital for smooth project delivery. Specifically, those overheads that are not readily allocatable to specific elements of the measured works. By accurately estimating and managing prelims, contractors can warrant fewer budgetary surprises and ensure that the key building activities progress seamlessly.
Prelims are also a key part of the initial tender agreement between the client and the contractor.
What Are Construction Preliminaries?
‘Preliminaries’, a unique industry term, are designed to provide contractors with a detailed outline of the attendant costs of executing a project as a whole. When the quantity surveyors/estimator understand what has already been included in the preliminaries, they can set about pricing the work scope itself.
I note at this point that in some civil engineering projects, ship building and the offshore industries, separate allowances are made for ‘Method Related’ costs, or for ‘Yard Rates’. This is to ensure that all non-work specific costs are covered before the measured work is valued. Either way, these are the items that should be covered by the gross preliminary allowance.
In short these would be;
a) Estimated costs for preparatory work, materials, and ongoing expenses
b) Site-specific overheads directly related to running the project
c) Main contract preliminaries not allocatable to a specific element, sub-element, or component
In short, preliminaries encompass costs that are vital for the project, but which are not reflected in the pricing of the finished build. They will, however, help to ensure a smooth, uninterrupted schedule of cost recovery to allow discreet pricing of the main construction activities.
On the whole, a contractor usually prices these items as one-off costs for the duration of the project, albeit they will often include some ongoing costs which are incurred on a weekly or monthly basis. Helpfully, this means that in an extended period they could be properly extrapolated over the delay period to ensure proper reimbursement of preliminary costs up to completion.
In summary, preliminaries are expected to provide the financial provision for contractors to complete construction projects from start to finish even if the project is delayed. This is one of the reasons why a portion of the prelims are paid in each application.
My Construction Preliminaries List
Many disparate items fall under the preliminaries umbrella. While the specifics vary by project, some typical examples include:
- Site setup – Temporary fencing, office cabins, storage, scaffolding, waste management, etc.
- Site safety – Initial safety precautions, protective equipment, first aid supplies.
- Utilities – Temporary water, electricity, lighting, and drainage.
- Security – Site access control, CCTV surveillance, fire alarms.
- Technology – computers, software, licenses, tablets, servers etc.
- Insurance – Public liability, contract works, professional indemnity.
There are also general overheads that stand to be incurred like:
I. Supervision – Site management team and administration.
II. Quality control – Inspections, testing, health and safety audits.
III. Consultants – Architects, engineers, quantity surveyors.
Other typical prelims items include temporary roads, accommodation, equipment, cleaning, printing, telecoms, transport, and more.
Whilst the lists demonstrate the wide range of preliminary costs needed to facilitate the actual construction works, we need to recognise that whilst not part of the permanent works, these are still vital components within any building project. We also need to recognise that some of the above may be included in other sections of the tender breakdown, especially under NEC contracts, and thus may not appear in the prelims.
A deep understanding exactly what falls under the preliminaries banner on each different project, helps contractors accurately price and deliver projects smoothly from start to finish.
Preliminaries in Disputed Construction Contracts
I am now referring to projects that are distressed and are causing, or are projected to cause, conflict between the payer and the payee.
Preliminaries clearly play an important role in construction contracts and bidding. The miscalculation of prelims, a misunderstanding of what is included within preliminaries, or the use of generic percentages can be problematical or worse, irresponsible. Whilst this does not happen frequently, in my experience, there has still been many an assertion made in hearings that the prelims were negligently calculated from the outset.
Tribunals usually understand that, in a typical tender process, contractors submit bids based on the client’s brief, specifications, drawings, and or a bill of quantities (BOQ). The uninitiated can easily comprehend that the BOQ lists all the measured work items, but preliminaries are often a mystery to them because large sums of money are often grouped into separate but inadequately defined lump sum sections.
This rough estimation of preliminary allowances allows contractors to concentrate on pricing the physical works (measured by quantity surveyors) whilst still accounting for the additional preliminary costs needed to complete the job. Unfortunately, a lack of detail in preliminary costings will present difficulties in a dispute.
Tribunal understand that prelims will vary significantly between contractors, and that grouping them separately enables clients to carry out a proper tender comparison of bids based on the defined measured works alone.
Generally speaking, during pre-contract planning, contractors will estimate prelims costs based on the project scope and their own operating methods. These detailed costs are built into their overall tender submission. Occasionally a generic percentage of historical allowance is attributed rather than a discrete calculation. Wherever possible, a more detailed option should be adopted, in my opinion.
Any listed lump sum prelims items will become fixed as part of the agreed contract value as the contract is awarded. Thus, any increase or decrease in actual prelims costs will result in the contractor’s gain or loss as the contract value will not change
Preliminary planning is crucial for contractors to deliver projects on time and budget. Likewise, a full understanding of how prelims fit into specific construction contracts permits fair bidding and smooth project execution.
Properly Costing Construction Preliminaries
As discussed above, when estimating and pricing preliminaries, a responsible contractor will consider various costs required to mobilise and run a project, such as:
- Site establishment – site offices, temporary facilities, utilities, security and technology
- Management and supervision – project manager, supervisors, admin staff
- Plant and equipment – hoists, cranes, generators, tools
- Temporary works – formwork, falsework, scaffolding
- Insurances – contractors all risk, plant, public liability
- Bonds and guarantees – bid bonds, performance bonds, retention bonds
- Quality assurance – inspectors, testing, site records
- Safety – PPE, first aid, traffic management
The diversity of prelims makes their costs hard to benchmark, and so experienced contractors often rely on past project data to estimate them.
In disputed cases, as an expert, I list those preliminary items costed and included in various projects and opine on whether they have comprehensively listed and valued. I examine each listed heading that has been reasonably assessed to ensure that it forms the basis of a fair evaluation.
In short, as one would expect from dedicated professionals, the preliminaries must be listed and valued with care. Hopefully, there are no percentages or rounded figures placed in the table as undefined ‘allowances’. By investing time upfront in scoping and pricing prelims accurately, contractors can enhance the certainty of outturn cost, to the satisfaction of all parties. Including the instructed experts and tribunals in any dispute.
The Importance of Accuracy
For quantum experts the signs of a rough and ready calculation that may be considered approximate at best, are easy to spot and to challenge. This is not true where the prelims costs have been considered, listed and priced thoughtfully and independently. In cases where the prelims are adequately defines the experts must then start from the presumption that they reflect the anticipated preliminary expenditures required for the works and that they include realistic/calculated costs, not wild extrapolations. This is good news for tribunals and for experts, as realistic figures will narrow valuation disagreements and save the parties money on dispute fees.
The resultant prelims total on disputed projects should produce a cost figure that falls within the usual range, and the headings should reflect the expected areas of expenditure. When an estimator has applied thought and consideration, and there is no suggestion of a cavalier approach to evaluation or of recklessness/negligence, the experts need not open up the prelims to re-calculation post contract. If they do the tribunal may reject their findings and disallow the cost of the exercise.
An oft asked question in disputes is this, is it possible that the outcome of a project can cast doubt on the accuracy of the original allowance? Of course it could, but that does not mean that the original allowance was negligently applied or sufficiently erroneous to be rejected by a court or in an arbitration.
Contracting is a vibrant and living industry, projects are changing continuously due to changes in materials, law, technology and societal expectation. Thus, any construction project is subject to all of the vagaries we experience in life as individuals, many of which will change the best laid plans and require redirection or impact on cost schedules.
The key to success for contractors and clients is to react quickly to changes and ensure that the end result is controlled and not to dwell on any hindsight calculations based on current knowledge that might suggest a figure tendered in relation to preliminaries was too conservative.
To be successful in this industry we need preliminaries to be calculated in the way they were meant to be:
I. All heads of cost are listed.
II. All heads of cost are duly considered.
III. All are independently valued.
Remember too that whilst under-pricing prelims risks the under-resourcing of a project and jeopardising performance, overpricing prelims risk reduces competitiveness and may result in a loss of turnover.
Careful prelims scheduling is vital for contractors. A clear, comprehensive schedule avoids unexpected costs arising on-site. It also provides a management tool for monitoring expenditures and evidencing loss.
As an expert witness I hope to find nothing in the documents that suggests that the calculation of preliminaries was anything other than professional, careful and considered.
- The purpose and objectives of preliminaries was clear.
- Each head of preliminary provision was listed and considered.
- Each heading was costed independently.
- The list was expansive and inclusive.
- The result was within usual norms.
In such cases, and without specific examples of negligence in the calculation of prelims, it is difficult for an opposing expert to assert that the calculations were carried out in any other way than professionally and diligently.
Should you have a query or question around any of the topics raised in this article get in touch with Jeff Whitfield or contact one of the team today.
