Delivering Cost Effective Public Works Projects through Cost-based Procurement · 2019-04-08 ·...
Transcript of Delivering Cost Effective Public Works Projects through Cost-based Procurement · 2019-04-08 ·...
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Delivering Cost Effective Public Works Projects
through Cost-based Procurement
Ir. John Kwong
Head of Project Cost Management Office
Development Bureau, HKSAR Government
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• Improve people’s living environment
• Promote economic growth
• Enhance Hong Kong’s long term competitiveness
Construction Industry
is TASKED to …
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Your Contributions
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Real GDP
CWP Expenditure
Establishment of CWRF
Rose Garden Project
Asian Economic Crisis
SARS Epidemics
Ten Major Infrastructure Projects
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How much should be allocated for public works?
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How much should be allocated for public works?
Real GDP
CWP Expenditure
Establishment of CWRF
Rose Garden Project
Asian Economic Crisis
SARS Epidemics
Ten Major Infrastructure Projects
3.4% of Real GDP
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2018-19 GDP $2,800B
Govt. Revenue $605B
Govt. Expenditure $558B
Infrastructure $86B
Infrastructure to GDP: 3.2%
Considerable Investment in Infrastructure
2018-19 Budget
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Challenges
Construction Industry in Hong Kong
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Significant future construction volumes
High costs
Unsatisfactory mega-project performance
Unsatisfactory site safety performance
Declining productivity
Lack of creativity and innovation
Core challenges facing the industry
Core challenges facing the Industry
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$240 B
$350 B
Significant future construction volume
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• Housing and land supply ( Lantau, NDA )
• Transportation ( 3rd Runway )
• Health care (Hospital Development Plan)
• Education (Hostel Development Fund)
• Sports and recreation facilities (5-Yr Plan)
• Other livelihood-related projects
Overall Expenditure
➢$1,000B in next 10 years!
i.e. > $100B @ year9
Major projects in the pipeline
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Significant future construction volumes
High costs
Unsatisfactory mega-project performance
Unsatisfactory site safety performance
Declining productivity
Lack of creativity and innovation
Core challenges facing the industry
Core challenges facing the Industry
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High construction cost
Hong Kong -3rd most expensive place to build!
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~100%
Tender Price Indices
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Important
industry milestones
Building challenges inPublic housing
Ten MajorInfrastructureProjects
Financial SecretaryTF on ManagingCost of Public Works
f
Project CostManagement Office
Construction coststaking off
Construction IndustryReview Committee
AirportCore ProgrammeOur pathway
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• Established PCMO in June 2016
• Direct command of Perm Secretary for Development (Works)
• Report to the Financial Secretary regularly
• Oversee cost management for all public works projects
• Promote cost management in private sector projects
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Project Cost Management Office (PCMO)
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⚫ Objectives:
- Contain risks of budget overrun
- Ensure cost-effectiveness of public works projects
⚫ Achievements:
- Cost saving of $27 billion or ~10% (out of $260 billion in 130 projects)
- Increasing cost awareness in Project Offices
Project Cost Management Office (PCMO)
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Why do we need to pay so much?
Conventional Wisdom
The designer is often content
to leave the matter entirely to
the contractor, and while the
latter will undoubtedly
overcome the problems
imposed by the design, this
often means that the cost is
higher than it need be.
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⚫ Need to have an encompassing design to avoid impossibility
e.g. conservative pile design, higher CFA/NOFA ratio, trenchless, etc.
⚫ Need to allow for unforeseen situations
e.g. uncharted utilities
⚫ Need to pay premium for transferring risks to contractors
e.g. cost fluctuations risks, interfacing risks, temporary works risks, etc.
High Cost + High Premium = High Price !!!!
Why do we need to pay so much!
Segregation between Design and Construction
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Price Index vs Cost Index
100%
12007
4 3 2 12010
4 3 2 12013
4 3 2 12016
4 3
HyDCCI & CEWICEWTPI
CEWTPI HyDCCICEWI
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⚫ Don’t want to exploit contractors or take advantage out of their difficulties
⚫ Only pay for something executed
⚫ Ensure the cost-effectiveness of public projects
What Government as a public project owner wants?
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⚫ Payment to the contractor on the basis of cost
⚫ pay for something executed, cost incurred (e.g. labour/materials cost)
⚫ Government can enjoy cost saving during works execution
Cost-based Procurement instead of Price-based Procurement
Cost-based Procurement
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⚫ cost-based
⚫ incentivize cost saving (pain-gain share)
⚫ collaborative, not adversarial
⚫ a well established international contract form
Why NEC Open Book Target Cost?
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Open Book Target Cost vs Price-based
Cost-based (e.g. NEC Options C/D) Price-based (e.g. GCC)
Saving from contract prices
⚫ Government pays less than the target costif final actual costs < contractor’s estimate
⚫ Government cannot enjoy cost saving evenif final actual costs < contractor’s estimate
Extra risk premium ⚫ Contractor needs not to price in extra riskpremium for risks shared by Government
⚫ Government is willing to take up more riskin return of a lower tender premium andpays only when risks are materialised
⚫ Contractor speculates extra risk premiumfor unknown risks
⚫ Government pays for the extra riskallowance which may not have materialised
Further cost saving ⚫ Contractor has more incentive to adoptinnovative and cost effective alternativedesigns or construction methods toachieve cost savings
⚫ Contractor has less incentive to proposeinnovative and cost-effective alternativedesigns or construction methods
Project Performance
⚫ Contractor has incentive to enhance project management , productivity, safety, environmental and quality – better time and cost performance
⚫ Contractor has less incentive to drive better project delivery performance
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Open Book Target Cost vs Price-based
Cost-based (e.g. NEC Options C/D) Price-based (e.g. GCC)
Saving from contract prices
⚫ Government pays less than the target costif final actual costs < contractor’s estimate
⚫ Government cannot enjoy cost saving evenif final actual costs < contractor’s estimate
Extra risk premium ⚫ Contractor needs not to price in extra riskpremium for risks shared by Government
⚫ Government is willing to take up more riskin return of a lower tender premium andpays only when risks are materialised
⚫ Contractor speculates extra risk premiumfor unknown risks
⚫ Government pays for the extra riskallowance which may not have materialised
Further cost saving ⚫ Contractor has more incentive to adoptinnovative and cost effective alternativedesigns or construction methods toachieve cost savings
⚫ Contractor has less incentive to proposeinnovative and cost-effective alternativedesigns or construction methods
Project Performance
⚫ Contractor has incentive to enhance project management , productivity, safety, environmental and quality – better time and cost performance
⚫ Contractor has less incentive to drive better project delivery performance
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Major Large Scale Projects in Target Cost Options
… many more to come!
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• Option selection• Specifications
• Fitness-for-Purpose• No-Frills• Cost Estimation
• Variations• Cashflow • Cost-based procurement
• AM/FM• Life cycle cost
Budget / Cost
Time
Budget Management
Planning & Design Construction
Expenditure Management
PCMO Cost Management Model
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Wider Collaboration
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V 1.0 July 2015 © NEC Contracts 2015 27
International Collaboration
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Project Cost Management Office
• Enhancing Project Governance - Promote cost-based procurement (and early contractor involvement!!)- Encourage adoption of innovation and advance technology- Monitoring project finance throughout planning, design, construction stage- Establishing cost information database and enhance ERA- International collaboration
• Uplifting Project Delivery Capability- Major Project Leaders Academy- Project Capability Building for construction professionals- System re-engineering for maximising delivery performance - Professionalism, commercial mindset and efficient execution
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NEC Journey in Hong Kong
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NEC Journey in Hong Kong
✓ 1st Government NEC ECC
✓ Option C was selected
✓ Awarded in 2009 and completed in 2012
✓ 15% time saving (6 month ahead)
✓ 5% cost saving ($4.1M shared gain)
NEC Consultant - EC Harris (now Arcadis?)
NEC Legal Adviser - Lovells (now Hogan Lovells)
DSD Contract Adviser - John Kwong (still John Kwong)
DSD project - Improvement of Fuk Man Road Nullah in Sai Kung (HK$76M)
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NEC Journey in Hong Kong
✓ 1st Government NEC ECC
✓ Option C was selected
✓ Awarded in 2009 and completed in 2012
✓ 15% time saving (6 month ahead)
✓ 5% cost saving ($4.1M shared gain)
NEC Consultant - EC Harris (now Arcadis?)
NEC Legal Adviser - Lovells (now Hogan Lovells)
DSD Contract Adviser - John Kwong (still John Kwong)
DSD project - Improvement of Fuk Man Road Nullah in Sai Kung (HK$76M)
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NEC vs GCC
• Government directive • World trend of collaborative contracting• Keep up to date with technology and
supply chain development• Drive for better project performance
• Fading out • No maintenance• Cannot cope with rapid changes in
construction industry
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-Hong Kong SAR Government will strive to delivering cost effective public works projects through NEC Target Cost Contracts
NEC in Hong Kong
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Delivering Cost Effective Public Works Projects
through Cost-based Procurement
-Thank You
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