How to avoid the need to reduce operational costs to offset CAPEX
Craig Adams, Managing Director at Palladium Alpha, the management and consultancy firm in facilities management and project management, explains how investors and developers can reduce or even remove the common need to reduce operational costs to offset capital expenditure (CAPEX) on construction projects, within any industry.
So many projects, industry non-discriminate, are failing at investment level as the initial financial planning was lacking a fully integrated approach to the entire process, from the start. Once the design phase is complete, and a project is on site, there then sees the risk of inflated costs due to so many scope gaps and as a result the asset is at risk of underperforming financially. When the asset is at risk the next focus the client has is reducing his operational facilities management costs to offset his CAPEX which is not a solution to the problem. It simply creates a new and ongoing one.
At Palladium Alpha we work with investors and developers across the UAE and the UK. In the facilities management space Palladium Alpha’s services offers clients a complete set of services in order to avoid issues such as the one we discuss today. We offer asset condition surveys, strategic reviews, bench marking, FM management and strategic tender management. Under the scope of project management services, the company can provide project planning, programme management, cost control, design management, delay analysis, risk management including construction management, as well as quality control, assurance and health and safety management. Looking after each element of a building’s lifecycle, we see time and time again the issue stakeholders face when they find themselves faced with the need to offset a large, unforeseen CAPEX. Operational costs should be between 75-80 per cent of total cost over a building’s life time, reducing this outside of a sensible value-engineering system means a reduced life span of your building. What makes the most sense every time is to reduce both CAPEX and operational costs, from the start.
Palladium Alpha also provide life-cycle analysis of assets, energy management, risk assessment as well as policy and procedures creation and reviews, profit and loss advice and software systems and implementation, all due to our market experience in knowing the value of pre-emptive over problem solving work.
The answer to this seemingly inevitable issue is the more integration there is at the start the less inflation there is later on. Get all your stakeholders together: operators, investors, banks, consultants, developers, architects and facilities management company and develop an action plan detailing the entire process from start to finish using the expertise around the table and the foresight of each critical element knowing what’s to come. Consider key items such as:
- Feasibility study
- Design of all stages
- Operational costs and budgets, we recommend this as an ongoing weekly process for the duration of the project
Palladium Alpha is currently employed on an education project in Dubai, working directly for the investment group. We were asked to manage the project end to end with a goal of doing so on time and within budget. The project was set to complete on time and under budget from the off. The project is high risk and high value at AED235m, with over 700,000 SQFT across seven buildings of five floors. Our role was to manage the developer, consultants and contractors.
Timely procurement was dealt with by us taking over a number of the elements and driving through appropriate offers that met, or in a lot of cases beat, forecasted budgets, could be delivered in time and met the correct commercial terms. We took control of provisional sum items to ensure the materials being offered genuinely met the specifications and where required ensured the supply chain provided third party, independent tests to prove the materials met the specifications. The overall CAPEX hard costs saving was approximately AED22million with operations savings of 30 per cent upfront, at proposal stage.
Another recent project where we were able to save on both CAPEX and operation costs, due to thorough procurement and the fact were brought on early enough, was a commercial failed asset. We managed to complete eight per cent under budget and deliver on time. The asset managers brought us in before deciding to acquire the property, so we naturally started with an evaluation. The project consisted of two floors and three buildings. Working directly for the asset management group considering acquiring the property, we were requested to come and look at the feasibility of the project to restart the construction and to meet their new budget. We had a short timescale to complete the feasibility study on costs and suggest with a great level of comfort which contractors could engage with this project to deliver it within the time scales given. We engaged two contractors and ran a two-stage tender while engaging a structural consultant to ensure the current structure would have no issues under the new proposed design. We also involved some key supply chain companies to ensure we kept control of cost which greatly helped us meet the budget. The CAPEX hard costs saving was approximately AED7m with operations savings of 18 per cent upfront, at proposal stage.
The way we approach each of our projects is to always have the FM company involved at schematic design stage and have the MEP company to do the value engineering to keep CAPEX low and have zero operational increases from MEP and FM down the line. It also controls the quality of the finished asset having less need for additional access hatches added or equipment relocated due to poor coordination at the construction phase, for example.
While BIM is used far better today during construction, we still see many clients who don't see the full benefit of it during their FM stage. We see companies, who are focused on the lowest cost fail, don’t appreciate how using the correct software throughout greatly improves not only transparency but efficiency. Too many times a specification will call for LOD 400 and in so many cases the data turns out to be not fully LOD 400 compliant. We have seen projects midway through, when client changes are made to the design, effecting the MEP then the contractor and consultants all move away from the BIM modelling and start to just use marked up drawings on site with engineer approval. This in too many cases doesn't capture the as-built status then the knock-on effect is that the FM team can be looking for something in the wrong place or wrong machine, totally unaware. We see much of this actually stems from overly tight programmes which are ultimately client driven. Even though Dubai Municipality became the first public authority in the Middle East to mandate the use of BIM for most large-scale projects in the Emirate, we are still seeing this not implemented and at the cost of the project.