There’s a strange contradiction between the importance of a mechanical, electrical, plumbing and heating (MEPH) package to a building project and the way it is procured and tendered writes Soben MD EMEA, Andrew Gallacher.
Many main contractors procure their MEPH packages on a lump sum basis based on drawings and specifications issued to supply chain. And if all goes well, that can be a successful approach. But it could be that main contractors are missing an opportunity by procuring in this way. Imagine an environment where costs are escalating, supply chains are disrupted, programmes are changing, or equipment needs to be substituted. Levelling and accurately comparing tender returns becomes challenging in such circumstances. Tender periods are tight, design information may not be properly coordinated, and the aforementioned risks have to be managed appropriately with the supply chain.
The recent impacts of the Covid pandemic and the war in Ukraine have brought these matters front and centre for the whole construction industry. Soben’s specialist MEPH team has been called in on several projects to help to resolve situations caused by these complex issues. Our general advice to main contractors is to arm themselves with a detailed breakdown of an MEPH package before they award the contract. This allows risks to be identified and managed.
MEP packages account for a significant proportion of the overall cost of a project. This can vary from 20% for an office development up to 50% for a hospital and 60% for a data centre. Yet, while most aspects of a construction project are broken down to a granular level via a detailed bill of quantities (BoQ), the cost of MEPH arrives as a lump sum from the specialist contractor with very little breakdown. There are several reasons for this: a main contractor may consider MEPH as a specialist trade and may not have the correct in-house resources to analyse the tender returns in detail; there can be a reticence from supply chain members to provide a detailed breakdown; or perhaps this is simply the way things have always been done.
In our experience, this approach can create difficulties from day one. It is challenging to make a proper comparison between tenders when there is an insufficient level of detail. We don’t know if the various bidders are working to exactly the same scope, what assumptions have been made and there can be a lack of clarity on the interfaces between MEPH trades. This could mean that elements of the project scope have not been picked up and allowed for.
Then there is the issue of risk. Although MEP firms do include contingencies within their bids, there is often no visibility of where or how much these contingencies are in a lump sum price. That means it is difficult to understand what risks have been identified, whether they have been addressed and how any residual risks have been priced. For public sector projects, there is an added dimension: without a breakdown of costs, it is not possible to demonstrate value for money. We were recently called in to provide a full set of BoQs for two projects that are part of a major programme of civils work. With a breakdown and estimate in hand, those assessing tenders can now properly benchmark prices from the supply chain – in line with good governance practice.
The other area where a lump sum MEPH price causes problems is when dealing with change during the construction phase. If there is no benchmark price in the first place, calculating the cost of a change and demonstrating value for money is more challenging and can lead to disputes and project delays.
Clearly, the higher the contribution of the MEPH package to the overall contract price, the more important it is to break the cost down into its component parts and services. This can also help with issues such as interface management, planning and buildability.
The benefits of procurement using a detailed pricing document coupled with procurement and enquiry management are:
- Gaps, errors and conflicts in design are identified to mitigate cost risk for all stakeholders.
- Robust document enables greater level of supply chain engagement
- Faster tender responses
- Confidence that MEPH bids are properly levelled and aligned
- Detailed, expert bid scrutiny with fair and reasonable OHP’s (overheads and profits) being paid to supply chain
- Risks are assigned to the party best placed to manage them
At Soben, we have seen a growing demand from main contractors for MEPH planning and estimating over the past 2.5 years. Although it may well make sense to hand over the design and construction of the MEPH package to a specialist company, detailed and thorough commercial governance during the tender stage is crucial if the MEPH elements of a project are to be accurately tendered, providing best value to all project stakeholders.
To find out more about how Soben can support your MEPH planning and estimating needs contact [email protected].