The whole-life cost of assets is becoming an ever-more important factor in investment decisions. Rising energy prices, inflation and climate change have all shifted the focus beyond initial capital expenditure. Maintenance and operation costs over 30 years can now be up 200 times the initial capital cost for construction (Evans et al., 1998).
The NEC4 Facilities Management Contract (FMC) makes provision under secondary option X21 for changes to be made to the scope to reduce whole-life costs. Similar provisions exist in the NEC4 Facilities Management Subcontract (FMS) and have been in other NEC4 contracts since 2017.
Reductions in whole-life cost using X21 are not intended to reduce payments by FM clients to their service providers. Proposals by the service provider to reduce payment are the subject of clause 16, for which the service provider is incentivised by sharing savings under the efficiency percentage (main option A, clause 63.12) or by increasing their gain share (main option C, clause 55/63.13).
Managing change under X21
The service provider initiates the X21 process by proposing to the service manager that the scope is changed to reduce whole-life costs. Proposals needs to be made with enough confidence that the change will bring about a real reduction in the costs of operating and maintaining the affected property (X21.1).
Before making any formal proposals, the contract implies the need for early engagement with the service manager to see if the change is something they are prepared to consider. The service manager will need to consult with the client and ideally involve the service provider in a tri-partite informal discussion.
A proposed change to the scope using X21 is a change made after the parties have entered into the contract. It is therefore possible that the proposals have already been considered and discounted. Nevertheless, if the service manager is prepared to consider changing the scope, the service provider submits a quotation to the service manager for acceptance.
The contract requires the quotation to include: a detailed description of the proposed change; the forecast cost reduction to the client of the affected property over its whole life; an analysis of the resulting risks to the client; the proposed change to the prices and the performance table; and a revised plan showing any changes to the timing of the service.
Following consultation on the quotation, the service manager either accepts it or states their reasons for not accepting it. Either way the service manager is required to respond to the service provider’s quotation within the period for reply stated in contract data part one (X21.3). When preparing FMC contract data, consideration should be given to including an exception to the standard period for reply to other communications. This is because the length of time the service manager will need to make a decision will need to take into account client approvals and its governance on change management.
If the quotation is accepted, the service manager changes the scope and, where relevant, the prices and performance table. The service provider’s revised plan submitted with the quotation becomes the latest accepted plan as defined by clause 11.2(1) and managed under core clause 3.
A change to the scope to reduce whole-life costs is not treated as a compensation event. This does not mean the service provider is not rewarded for its cost saving proposals but simply that the process for any changes to the price the client pays the service provider is not subject to the rules under the contract for assessing compensation events.
The service provider’s quotation includes any proposed change to the prices; this gives flexibility in how the change is assessed and gives the service provider a commercial incentive to make such proposals.
Whole-life costing
Whole-life costs have been defined in different ways (e.g., ISO, 2011). The FMC does not define whole-life cost or provide criteria for preparing or evaluating the service provider’s forecasts of cost reduction. Furthermore, the output from a model developed for forecasting whole-life costs is highly sensitive to input data and assumptions made. Service providers therefore need to be well informed to be able to make these judgements and to analyse the resulting risks to their clients. Clients should also be aware of the potential for optimism bias by service providers in their proposals.
The FMC, like all other NEC4 contracts, is drafted for use in a wide range of circumstances, and this flexibility needs to apply to whole-life costing too. For example, a whole-life cost assessment for a newly built office block would be quite different to a 60-year-old steel bridge. Further, the whole-life cost assessment may focus on just part of an asset, such as the ventilation system in an office block or the horizontal load bearings of a bridge.
An FM client wishing to use secondary option X21 may consider including criteria in the contract, either stated in the scope or in additional conditions (Z clauses). These criteria can include: baselines for repair, replacement and maintenance costs; carbon footprint; discounted cash flow; inflation; legislation changes; net present value; internal rate of return; predicted design life of components; obsolescence; operational constraints of the asset (e.g., outages); sustainability; and whole-life cost study period.
Using project orders as an alternative
Changing an asset to reduce whole-life costs can also be implemented using an FMC project order under secondary option X27. A project order is instructed by the service manager and is intended for additional work that is within the scope but for which a separate programme is required (X27.2).
The change process is similar to that for compensation events, with specified time periods for submission and acceptance. The service provider submits its quotation to the service manager for acceptance using the rates stated in the price list or otherwise, following the rules of defined cost and the schedule of cost components (X27.7).
The process for an X27 project order is client led, giving the client greater control in managing changes to cost and programme than the service-provider-led approach of X21. The latter however provides greater flexibility in how the change is managed and opportunity for the client to benefit from the service provider’s knowledge and experience.
Conclusions
Whole-life costing should play a key part in the decision-making process during the construction, operation, maintenance and replacement of assets. The provisions within the NEC4 FMC offer various effective contract mechanisms to FM clients and their service providers wishing to seek reductions in whole-life costs and increase value for money.
David Hunter
Daniel Contract Management Services Ltd
December 2022
This article was first published in the NEC User Group newsletter Issue No. 122 December 2022
References
Evans, Haryott, Haste and Jones. The Long Term Costs of Owning and Using Buildings. Royal Academy of Engineering – November 1998.
ISO (2011) ISO 15686-1:2011 Buildings and constructed assets — Service life planning — Part 1: General principles and framework