Specialist costs: M&E services

01 / Introduction

Building services installations typically account for 20-30% of the total value of a project - and sometimes a great deal more. The range and complexity of services installations has increased in recent years as demand has grown for intelligently operated environments, driving innovation to reduce carbon emissions, improve occupier comfort and extend building performance.

High levels of investment in public sector facilities such as those for Building Schools for the Future (BSF), which emphasise low running costs and occupier productivity and comfort, have generated a healthy workload for M&E contractors. Stringent Building Regulations require holistic solutions which in turn require greater integration between the design and installation of the building envelope and the building services.

Similarly, specialist building types such as data centres and high-tech factories require huge power and cooling capacities as well as extremely high levels of resilience and standby capacity.

On both high and low-tech projects, the opportunity to reduce energy demand and carbon emissions by smart design and installation is substantial - demonstrating once again the pivotal role of the M&E specialist in reducing carbon.

The M&E contractor market is quite diverse. As well as a large number of specialist subcontractors, large principal contractors such as Balfour Beatty and Laing O’Rourke have integrated M&E divisions that deliver conventional projects as well as large integrated projects such as power generating plant, hospitals and transport infrastructure. Main contractors have invested in building services engineering capability because of the benefits of de-risking and of direct access to a qualified, directly employed labour force. The industry is also supported by a large and innovative manufacturing base.

In the downturn, contractors’ workload did not initially fall. However, this level of workload cannot be sustained and the trough of the market is likely to occur between the fourth quarters of 2010 and 2011.

Unfortunately, with public sector programmes such as BSF under review, M&E workload in the UK is likely to be constrained, with large-scale new build programmes possibly being replaced by refurbishment or repair and maintenance work. The M&E content of this work is likely to remain relatively high, as services systems have a limited operating life, and investment in new systems has a positive impact on operating costs, carbon emissions and carbon reduction commitment penalties.

However, the prospects for M&E contractors are unlikely to improve in the short term. Controllable costs such as self-employed labour rates and margins are likely to remain under downward pressure for a while yet. In addition, M&E contractors in the UK may come under pressure from specialists based in Europe seeking work in the UK, while other contractors may explore alternative means of attracting projects, including providing sources of finance.

02 / The structure of the industry

Building services contracting differs from most other trades in terms of the role of direct labour, the importance of the work undertaken by sub-subcontractors, the extent of co-ordination required between trades and the extent of design work that can be shared between consultants and specialists.

• Electrical contracting is one of the few areas in the construction supply chain where organised labour is in a strong position. JIB-registered contractors should be able to demonstrate that 50% of labour in the supply chain is qualified and directly employed. This requirement can result in shortages during periods of high demand, so most contractors will directly employ a significant proportion of the labour force, and will also continue to invest in skills programmes and apprenticeships. The implication of this is that some electrical costs may not fall as sharply in a downturn as other trades.
• In other trades, there can be a greater degree of fragmentation in the delivery of work on site. Ductwork and ductwork insulation, for example, are often carried out by different trade contractors. Similarly, water and air systems can be installed by different specialists. Furthermore, specialist trades related to discrete systems such as sprinklers, fire alarms and lightning protection need to be brought into the supply chain. Other elements of the supply chain are component manufacturers, as well as specialist consultants such as testing and commissioning engineers.
• Depending on the procurement route adopted, an integrated services contractor may be asked to deliver a one-stop service that could include some or all of the services design, as well as the co-ordination and management of the works on site.

At the other extreme, some main contractors have chosen to split up the M&E works into trade and system packages so as to minimise layers of overhead and management, and to maximise commercial leverage. This may enable a contractor to offer a lower bid price, but with no single party taking overall responsibility for package integration, easily resolved co-ordination issues might not be picked up until a late stage in the subcontract programme.

Another aspect of services design and procurement that differs from architectural and structural trades is the scope for ambiguity around responsibility for design, design review and co-ordination. Delegation of design responsibility from the consultant is commonplace throughout the industry, either through full design-and-build procurement or contractor-designed work packages. Most M&E work involves elements of design by the supply chain, including:

• Finalisation of the services design once plant and specialist systems are selected. This means that there is usually an element of overlap between the work of designer, the contractor and the manufacturer
• The extent of the design work undertaken by the consultant. Services engineers are appointed on the basis of a range of professional duties which describe the extent of design, co-ordination and review work. The interpretation of duties by individual consulting firms can lead to a degree of ambiguity in the levels of service delivered. Depending on the consultant’s interpretation of the duties, the M&E contractor and the supply chain may have a more extensive design completion role on some projects rather than others
• Limitations on the scope of design work undertaken by the consultant. Abridged duties, for example, where a contractor is required to complete the sizing and spatial co-ordination of the services installation, is often a source of misinterpretation.

Services engineers are generally appointed on the basis of duties set out by the Association for Consultancy and Engineering (ACE), which describe the extent of design, co-ordination and review work for which they are responsible.

Although described as detailed design, Normal Services, the ACE schedule of services, is often limited and can require a contractor to complete the sizing and spatial coordination of the services installation.

As a result, the specific range of consultant duties on a project should be reflected in tender and contractual documentation, so that the full extent of a service contractor’s design responsibility is reflected in the contract sum.

In the current marketplace, any inconsistency in contractual documentation has the potential to be used as the basis of a claim. As a result, the specific range of consultant duties on a project should be stated in tender and contractual documentation.

Testing and commissioning is another critical element of the installation process, but one that is not always given the priority it deserves. Initiatives such as BSRIA’s “Soft Landings” programme involve the consultant and contractor team being engaged to work with the building user during design, pre-handover and during the first three years of operation to support operative training, performance optimisation and capture of user feedback.

03 / Cost and value drivers

Services contracts provide many opportunities for adding value, but are also vulnerable to price movements in basic commodities. End users have benefited from substantial improvements in the performance of many systems - often at little or no cost premium. Much of the innovation comes from the global plant and system makers, which have access to large R&D budgets and which are driven by their own product cycles. Specialist contractors also have a role driving the adoption of these technologies - either as value-engineering proposals or as part of their own design solutions. However, in the downturn, most R&D and innovation has been curtailed.

In the current market, cost levels are unlikely to be sustained for long, but some consolidation will be necessary to moderate high levels of competition between specialist contractors. However, UK contractors are also being challenged by competitors from Europe and particularly Ireland. Not all of the opportunities to add value or save cost will benefit the client in the current market - as contractors also need to rebuild margins.

The main value and cost drivers are set out below. The main cost drivers associated with design - loading assumptions, requirements for system diversity and resilience - are excluded as these are not generally controllable by the supply chain.

Value drivers

• System efficiency and product innovation.

The low-carbon agenda has been adopted enthusiastically by plant and equipment makers, enabling much of the carbon reduction required to be delivered at a relatively low cost. Examples include the increased efficiency of chillers and variable speed DC motors on pumps and fans.

In mechanical services, many of the low-cost benefits have been secured, so further performance improvements are likely to involve a cost premium.

• System standardisation and product value engineering. One response to market conditions by the makers of semi-bespoke components such as air handling units has been to focus on “no frills” standardised products that can be produced at minimum cost and lead time.
• Plug-and-play technologies. Other areas of product innovation have been in component development, aimed at simplifying and speeding up on-site installation work. Examples include structured cabling in cores, internet protocol security and controls that use the IT network, or intelligent fire detection systems.
• Building information modelling (BIM) and services co-ordination. Increased use of BIM in high-value, high-risk areas such as plant rooms and risers is enabling contractors to design systems more effectively, and to take into account the need for installation, maintenance and replacement. The take-up of BIM continues to be uneven, particularly as end-user demand for FM applications is low. However, the potential benefits in terms of clash detection, automatic component scheduling and so on are increasingly important for specialist contractors, so the extent of BIM usage is increasing.
• Prefabrication. An increasing proportion of engineering services workload can be prefabricated, although the cost benefits of off-site work still have to be considered on a case-by-case basis. Plant room assemblies, riser modules, fan-coil unit and valve assemblies are good opportunities for prefabrication, whereas many contractors prefer to site-install elements such as pipe work, where there are fewer programme and quality benefits to be secured, and a greater risk of re-work should co-ordination errors occur. Investment in BIM-based design is increasingly a prerequisite for effective off-site prefabrication.
• Design rationalisation. Value engineering supported by the contractor can identify opportunities for rationalisation, although best practice has eliminated most of the quick wins. Specification reviews and rationalisation of containment are two examples from electrical contracting where savings can be secured. Similarly, moving from a unique specification to a performance specification on some lighting components may give greater flexibility.
• Globalisation. An increasing range of standard-compliant products can be sourced from low-cost manufacturers in China and the Far East.

Cost drivers

• Regulation. As described above, many component makers have been able to improve system performance and reduce carbon emissions without incurring cost penalties. However, there are some systems, such as ventilation, where some cost penalties are incurred as a result of the need to reduce fan speeds to save energy, which in turn requires larger ducts and air handling units. Sourcing of low-cost sheet metal for ductwork and simplified air handling plant has helped to mitigate these costs. Further pressure will come from the 2010 Part L - most likely around the need for a greater proportion of renewables.
• Commodity prices. Building services installations require a lot of metal and are sensitive to commodity price movement.

Copper prices fell by about 45% between May 2006 and the trough of the market in 2009. Since then the movement of cash into commodities in search of better returns and as a hedge against dollar depreciation has pushed up copper prices by more than 20%. Most M&E products have a high degree of value added, so a big jump in commodity prices should not result in a corresponding rise in factory gate prices. However some products, such as steel and copper pipework and large diameter cables, contain a higher proportion of metal and will be affected more, albeit that the costs of fittings, terminations, labour and preliminaries comprise the bulk of the price.

Prices for supply are typically fixed on the award of a contract so the contractor needs to price for the risk of fluctuation during the tendering period.

• Labour. M&E labour in the UK is well organised, and a large proportion of the workforce is either directly employed or engaged on long-term contracts. Labour-only subcontractors tend to be paid lump sums rather than on a piece rate basis. There is currently plenty of labour capacity, so less pressure for discretionary bonuses. Electricians have benefited from a three-year wage deal negotiated by the JIB in 2007, and received a 5% increase in January 2010. Heating and ventilating engineers’ earnings have been frozen since October 2008, and will increase by 2% in October 2010; plumbers’ earnings have been static since 2009 and are due to increase in January 2011 by June’s retail prices index. Workload is not expected to grow at a rate that will threaten the good availability of labour.
• Currency fluctuation. Most products are sold in UK sterling, so currency fluctuation is less of an issue than for curtain wall.
• Preliminaries and margins. Building services contractors have higher overall margins than main contractors - reflecting the costs of running design teams and the high level of co-ordination and supervision required on a typical project, and the need to invest in fixed assets such as prefabrication facilities and BIM libraries. Some firms will recover preliminaries costs through the margin, so a like-for-like bid comparison is not always straightforward. Margins have been driven down alongside labour, material and component costs. Some internal costs, including bidding costs, are likely to have increased over this period. Some recovery in levels of margins can be expected, but not until positive sources of workload such as the commercial and infrastructure sectors have staged a more robust recovery.

04 / Procurement

Single-stage procurement has become increasingly common in the competitively tendered market, whereas in framework arrangements such as BSF, challenging cost targets are driving a high level of innovation through consultant and contractor-led design-and-build arrangements.

As described above, sharing design responsibility between consultant, contractor and specialist creates challenges for M&E procurement. This can be addressed through clear communication of design responsibility, good quality information exchange and the timely engagement of specialists so they can contribute to design completion. Two-stage tendering addressed many of these communication issues, and also gave clients greater opportunity to contribute to the selection of their specialist contractors. However, it was not always successful in delivering value or certainty at the peak of the boom.

Among the challenges of single-stage tendering are:

• The increased cost of competitive bidding resulting from the involvement of a larger number of subcontractors in the tender process
• The fragmentation of the M&E work into a large number of separate packages - increasing the co-ordination burden on the main contractor or a principal services subcontractor
• Shortened tender periods compared with durations on two-stage tendered projects
• Reduced opportunity and incentives to contribute to value engineering and buildability improvements, including less direct access to design consultants
• Greater risk associated with price fluctuations prior to the finalising of supplier contracts.

In the medium term, with clients motivated by their own challenging affordability targets, it is unlikely that a large number of projects will revert to a two-stage tendering strategy, although many clients do recognise the benefits of a collaborative approach.

Steps that can be taken to get the best out of the M&E supply chain include:

• Reviewing designs for completeness and co-ordination before issue, ensuring that the programme allows time to do this
• Managing an effective change control system throughout the design, procurement and construction programme
• Clearly communicating design responsibilities and actively managing interfaces
• Naming suppliers and products only where necessary so as to give tenderers the maximum competitive opportunity
• Reviewing tenders received to ensure that they are deliverable and adequately resourced.

By following these steps, clients will give specialist contractors the best opportunity to return the right price, rather than just the lowest price.

Acknowledgments

We would like to thank John Grounds of Davis Langdon Engineering Services, Chris Church of Briggs and Forrester, and Lee Compton of Phoenix Electrical for their assistance in preparing this article.

05 / Indicative costs of building services installations

The following are overall costs for building services installations, suitable for use in estimates produced at RIBA stages A and B.

The costs include the services contractor’s on-costs, overheads and profit and builder’s work but exclude the following:

• Specialist installations including catering equipment, exhibition and show lighting, cleaning cradles
• Lift and conveyor installations
• External services and services connections
• Main contractor overhead and profit, preliminaries and contingencies
• Professional fees
• VAT
• Inflation beyond Q2 2010.

Costs are based on an outer London location current in the second quarter of 2010, for a large-scale competitively procured project.