What type of facilities and maintenance contract model is going to work for your organisation?
All portfolios, whether owned or leased, need to be maintained to remain functional and fi t-for-purpose supporting organisational productivity. The maintenance planning, implementation and management of the asset life cycle for the building fabric, finishes and building services includes:
- responsive maintenance – being the corrective works initiated when issues arise such as service breakdowns, physical damage or urgent works required for reasons of health, safety or security
- planned maintenance – including regular technical and statutory works aimed at retaining asset condition and required functionality or to meet statutory requirements, and
- preventive maintenance works – based on the knowledge that a building element may be performing below standard or having imminent breakdowns to restore the asset to its optimal operating condition.
In all forms of contracting, one aspect of the cost analysis that is often neglected in determining the optimal contract structure is the difference between management costs and costs managed.
Management costs relate to the resources required to plan and manage all the different cost components that maintain the assets. These costs are applicable to resources internal to the organisation and external management resources within the service provider – the latter usually expressed as a management fee. These cost components of the portfolio maintenance tend to be very closely scrutinised, but are usually less than 19 percent of the total costs of service and maintenance delivery.
Costs managed cover the vast majority of portfolio costs, including all forms of maintenance and upgrade works, building and soft services, utilities and workplace changes. Any saving in the management costs has a relatively small impact on the overall costs, but any saving in the costs managed will have a significant impact on portfolio performance, representing value-for-money outcomes for the business. But driving down the management costs aggressively, and under-resourcing the management structure, will result in the inability to identify savings in the costs managed.
Outsourcing Contract Evolution
Over the last few decades, the maturity of maintenance works outsourcing has evolved through various approaches as the balance between risk transfer, cost structures and management control has gone through various contract structures.
The optimal balance is usually dependent on the criticality, condition and age of the assets, as well as the maturity of the client organisation in scoping, procuring and being able to manage these contract arrangements.
The first generation of service tended to be trade- or multi trade-based, with management planning and control retained within the client organisation. The next generation of outsourcing was based on the belief that industry specialists had better skills and experience in planning and managing maintenance and trade services. This led to the managing agent approach with ‘pass through’ costs and performance incentives, but negligible risk transfer.
The third generation of outsourcing saw partial risk transfer and value enhancement incentives transferred to the service provider. This produced a level of asset performance guarantees and lump sum cost certainty, in return for some form of pricing premium.
Full asset performance risk transfer in service and maintenance is fundamental to the fourth generation of contracting. These are generally used in Private Public Partnership (PPP) arrangements related to newly designed and constructed property and infrastructure assets.
The key decisions that need to be made in terms of the contract structures are many; however, the maturity of the organisation in managing contracts and the knowledge of asset condition and future use strategies are key to transferring asset performance risks and value enhancement opportunities to service providers in cost-effective contract packages and structures.
Trade and Multi Trade Contracts
With these contracts, the client organisation, as principal, undertakes the scoping, scheduling and prioritisation of the maintenance spend.
Some trade services are bundled together into works packages and are tendered out by engaging directly with the trade and multi trade contractors. The client retains the requirement to oversee and manage the works and the contract performance. This form of contracting is often used in situations where there are constrained maintenance budgets and long-term commitments are avoided.
However, with this form of contracting, usually based on an agreed schedule of rates or lump sum quotations, there is no or limited risk transfer possible. In addition, with the limited maintenance spend bundled together under these contracts, the economy of scale benefits (from procuring maintenance work together) are not realised.
This approach can be administratively burdensome, dependent on the number of contracts required to deliver the trades across the portfolio and usually requires an increased number of internal contract administrators reflecting the relative immaturity of the client organisation. There is likely to be uncertainty in future maintenance costs.
Here the client organisation engages an industry specialist service provider to do the maintenance planning and tendering of the works based on the asset life cycle strategies and requirements. Although the managing contractor will generally tender out the trade packages, these subcontracts are usually structured directly between the client and the trade subcontractors.
The managing contractor, using their own information and asset management technologies, oversees and manages the performance of the subcontracts for an agreed management fee. In addition, the managing contractor may be required to carry out statutory testing, servicing and responsive works, for which ‘pass through’ costs – usually with no margin – are recovered.
Although some risks may be able to be transferred, such as meeting statutory compliance requirements, response times and some elements of costs within ceiling limits, there is limited risk transfer to the managing contractor either for the quality of the works or the overall maintenance costs. Fee abatement and performance incentive structures are usually included in the managing contract structure in an attempt to align the client organisation and managing contractor objectives.
The primary advantages of managing contracts are accessing industry skills, cost-effective use of information technology infrastructure and speed to market, as detailed asset condition data and information is not required prior to contracting.
Head or Principal Contracts
Although there are similarities with managing contracts, there are greater elements of risk transfer in these structures. The head contractor can usually either undertake the works directly, using their own labour, or subcontract as the principal with subcontractors. As such, the head contractor will carry some performance risk and any cost overruns or savings are absorbed into the lump sum or enjoyed as extra profit.
For the client organisation, risk transfer can be structured into the pricing for some aspects of the maintenance works and there will be a single point of contact, providing contract administration benefits. As such, in this form of contract structure, there can be components of maintenance budget known and fixed.
A key aspect in procuring these types of contracts, is having detailed asset condition information and data, so that the risk transferred can be priced competitively during the tender process.
Asset condition uncertainties represent areas of risk and, accordingly, pricing premiums will be added. If current building condition audits do not exist, however, the procurement time-frame may not permit these to be completed on a timely basis. This may result in some trade packages only being able to be tendered after the main contract has ‘gone live’ and asset conditions become evident. As a result, the main contract pricing mechanism will not represent the overall cost of the maintenance works, until all these subcontracts have been procured.
Another risk transfer mechanism that may be used in head contracts is based on setting a reimbursable repair works limit (RWL), which is applicable to items of responsive maintenance. In these arrangements, the head contractor is responsible for the rectification of all maintenance items below a predetermined threshold dollar value and is required to provide a lump sum price for these works based on the analysis of historic trends.
Any cost overruns or savings are for the contractors’ account, providing a degree of cost certainty for the client organisation. Obviously, there needs to be sufficient historic data related to these maintenance items for the contractor to be able to provide an acceptable lump sum price.
Asset Management Contracts
In these types of contracts, the contractor is required to maintain the assets for the duration of the contract at a specified condition standard and at the agreed price. All planned, preventative and responsive work is scoped, funded and carried out by the contractor carrying the risk of all expenditure.
This approach in effect transfers the custodial risk of the assets to the contractor in terms of compliance, management of the life cycle and the budget. It means the client organisation can enjoy certainty in the level of asset performance with a single point of responsibility at a known cost, with a margin for risk priced into the contract amount.
To provide value for money, the full condition of the assets needs to be understood by the contractor, for pricing purposes. Without this knowledge, the risk premium will be too high to provide a cost-effective outcome for the client organisation.
For a portfolio of existing property assets, the procurement process is usually complex and will require an extended period of asset condition discovery. In addition, to be effective there needs to be recognition that there will likely be an increase in initial maintenance costs to improve the condition of the assets, but there will be more certainty of maintenance costs and asset performance.
Compared to other forms of structures, properly structured asset management contracts can provide longer-term maintenance cost savings. These forms of contracts are used extensively in the PPP developments of newly constructed social infrastructure assets linked to complex fee abatement mechanisms. To be effective, clients need to have mature contract management experience and skills, in order to oversee these complex arrangements.
In practice, forms of maintenance contract exist along a continuum of risk transfer structures. As such, hybrid contracts have evolved that include elements of management and head contracts, with some services managed and costs ‘passed through’ to the client while other services are priced with the risk transferred to the contractor.
For example, in hybrid contracts, the contractor may tender and oversee packages of trade contracts for specialist functions for a management fee payable in full, only on achieving defined performance criteria. Certain other works may be provided under fixed cost head contract arrangements, with the contractor either undertaking the works directly or via subcontracts. In addition, there may be works to be done under a predetermined RWL limit, the contractor having provided a lump sum and taking on the cost and performance risks.
As in most aspects of managing a built environment comprising many varied portfolios of property assets, there is no one approach that will suit all client organisations. Decisions should be based on the nature of the portfolio, asset condition information available and the maturity of the client organisation in managing risk transfer contracts. In the decision process the difference between management costs and costs managed should not be ignored.