Bradley Harrison, associate director and cost manager at EDGE discusses how to find balance and prioritise the important factors in cost management
Effective, robust and reliable cost management has never been so important in the construction sector – not least of all within residential development. Housebuilders and large-scale residential developers are facing challenges when it comes to balancing affordability given increasing pressures from new and upcoming legislation.
The shift within the construction industry, particularly for residential development, has been and is a challenging time, following a very tough period of material and labour price increases, energy costs as well as capacity pressures for contractors. This has been driven by various economic and political factors, which have disrupted typical construction practices and impacted both viability and the allocation of risk in construction contracts.
Additionally, alongside Section 106 obligations, affordable housing provisions, Community Infrastructure Levy (CIL) payments and rising land prices, there is now an added layer of complexity with mandatory Biodiversity Net Gain (BNG) obligations, the cost, and time, implications of complying with the Building Safety Act (BSA), and the recent changes to Building Regulations. While all introduced with good intentions, complying with these new standards will not always generate an increased sales or rental value.
These issues can lead to a squeeze in profit margins that can cause major viability issues for developers, affecting a wide range of residential sub-sectors including housing, apartments, student accommodation, later living and care homes.
All these complexities have created the perfect storm for the sector and with the Labour Party’s renewed drive for housing through the creation of 1.5 million homes over the next government, robust and effective cost management is now imperative.
Early instruction and identification
Involving cost managers at the earliest stages of a project helps to identify potential cost drivers and risks. The main priority is to identify potential ‘abnormals’, typically a pre-requisite to unlocking funding which will assist in any viability issues.
With the constraints of the residential sector, accurately cost planning is critical to keeping projects on track. Across both the public and private sectors it is important to provide clients with accurate construction costs, based on robust cost data, to enhance the strength of the clients’ appraisal. Our cost database has helped inform the decision-making process for multiple clients, including Sheffield Housing Company, who we have supported in the delivery of thousands of new homes together with benchmarking.
Fluctuating inflation rates, emerging legislation and changes to standard practice have all caused uncertainty in the market and previously accepted risk profiles have been impacted as a result. Effective risk management should be incorporated by all disciplines from the outset. This could extend to the drafting of contract amendments which prevent delays caused by lengthy negotiations, or the appointment of commercially astute design teams to ensure cost-effective solutions are implemented which align with budget and specification aspirations. Cost managers must ensure that project risk allowances are accurately quantified, allocated, mitigated where possible, and monitored throughout the project life cycle.
Sometimes, deviating from the status quo is necessary to provide best value. This includes recommending the use of an unfamiliar procurement route to a client, as was the case with two of our schemes with Forge New Homes. While the proposal posed new risks, our early engagement with suitable contractors ensured that the decision was market-led and ultimately resulted in two viable developments.
Robust cost management is a balancing act
A more holistic approach can prove beneficial when it comes to looking at the wider implications of issues that may materialise during projects. Taking time to discuss the approach and analyse the entirety of the scheme will enhance outcomes. This is important for residential projects that may span longer timescales, and therefore run into more variables, such as our work on the Harworth Group’s Project Spur – a single family build-to-rent portfolio of around 1,200 homes across ten of its development sites.
Understanding various construction methods and trialing new technology is important to get the most out of the assigned budget – all of which requires collaboration and careful planning.
Modern Methods of Construction (MMC) have been explored as a solution to rising costs and dependence on key trades, from full volumetric systems to the use of timber framing. However, there has been concern regarding the cost-effectiveness of MMC, which is part of the reason it hasn’t had the uptake the industry predicted. That’s not to suggest that it couldn’t work. In build-to-rent and student accommodation projects we have seen MMC adopted successfully.
However, the industry needs to look at ways to diversify project delivery to maximise outputs given the limited capacity of the existing labour pool, if there is any chance of reaching the government’s ambitious housing targets. We should also look at how companies could be incentivised to increase the number of apprenticeship schemes to assist with reducing the labour issues.
Additionally, typical and bespoke procurement routes should be explored to ensure that the selected route is the most effective solution. We have seen firsthand how important building strong relationships with suppliers is for securing competitive pricing and reliable delivery, as evidenced by the Construction Management procurement route we used on a programme of works with McCarthy Stone. In some cases, supply chains can be created to collaborate across a pipeline of work to allow the client to benefit from economies of scale.
The road ahead
While the challenges facing the residential development sector are significant, there are opportunities for innovation and growth. This includes cost managers evolving their role into more of a strategic partner, helping to navigate the landscape while still providing that critical eye on viability.
Early engagement with planners, contractors and the supply chain ensures that market-led decisions are made, preventing any abortive works being needed. The future of residential development depends on the ability to balance affordability, sustainability and safety. Effective cost management is the cornerstone to achieving this.
