Owners need to know the cost of program management (PM). One of the first questions they ask is, "Will hiring a PM firm save me money? Or should I increase in-house staff? Looks good, sounds great, I think I need it, but what does it cost? Can I justify it through savings in the program?"
All are good questions, and the answers are not really black and white. There is no universal formula for calculating the cost of a PM firm. It's not a fixed percentage calculation, because the real issue is time.
Issues and answers
Percentage or man-hours? Time is the issue -- and the enemy. The methodology requires that you look at the program at hand, apply the necessary staff to the program over time, calculate the personnel and overhead costs, add profit and arrive at a figure.
The longer the program, the more man-hours involved and the higher the cost. The cost of a program manager for a $50 million program spread out over five years is considerably more than the same program over three years.
At one California school district, the educational consultant assumed the construction and renovation program would take five years. The fee calculated for that five-year program came to about 10 percent of the program cost. More customary fee ranges are 2 percent to 7 percent, depending on the depth of services provided.
Knowing this fee was too high, we examined the proposed program, developed a plan to conduct the same program in three years and recalculated the fee. It came to about 5 percent. And then when the program was over, an additional $250,000 in fees was returned to the owner because the program went so well. So the overall fee was about 4.5 percent of the program.
In-house or out-of-house? In-house managers and administrators on a large renovation and construction program face a dilemma. They normally manage a business, run a hospital, educate students, administrate an operation, etc.
But when faced with a renovation and construction program, they typically have minimal experience. It's not their business, so it's a natural reaction to bring someone on board to manage the program. The age-old question: should the program be managed by someone in-house or out-of-house?
There are advantages and disadvantages both ways.
Some managers will say, "I don't need to hire an outside PM firm. I can staff up in-house to do this program and save money."
Well, maybe. But maybe not -- if they include the cost and downstream problems. Some owners have the experience necessary to manage a program, and some owners choose to staff up in-house to fulfill the role.
The city of Phoenix, however, did a study that showed they saved money by hiring an outside firm when all the in-house overhead costs and benefit plans were included in the calculations.
Disadvantages of staffing up
Staffing up at the beginning of a program is the easy part. But when the program is over, downsizing and eliminating that staff can be difficult due to union rules, civil servant statutes and personnel policies. Bureaucracies can become self-justifying. When a program is finished, a PM firm goes away. There is neither residual staff nor continuing costs.
When you hire a PM firm, you hire a company of trained professionals. Construction is a bumpy road at best. Unexpected things happen, and slip-ups are common. There are too many moving parts of a program (contractors, subcontractors, suppliers, bonding companies, safety, labor, weather, economy, politics, etc.) to assume that all will go according to the documented plan.
When something out of the ordinary does occur, someone in a PM company probably has previous experience with it and can bring that knowledge to the table.
For example, about one-third of the way through a high school renovation project on a job in Arizona, our MEP contractor went bankrupt overnight. We searched around the company and found a PM on a project in another state who previously had been the general manager of an MEP contractor. We dispatched him on a plane to the troubled project, and he had a solution immediately.
The bankruptcy had cost the MEP contractor personnel their jobs, but their equipment and tools were already on-site. Our experienced person advised us to hire the staff and continue on with job. We did and we didn't lose any time. Actually, we saved money on that contract.
When staffing up in-house, attracting the most highly qualified staff can be a problem. Your primary business is not their profession and their future. The best people may be reluctant to be hired for a single program assignment. Or when the program begins to wind down, their thoughts will turn to their next assignment and your program might suffer from not having their full attention. There is also a chance that key staff will leave before project completion, which is never good.
Much of a project's history (we call it tribal knowledge) is buried in the minds of the project staff, and it is difficult to pass on that information. Continuity of the project staff through completion is crucial to a successful finish.
A PM firm lives and dies with its references. A PM firm's goal is to leave a client with a great reference in hand, so there is a built-in motive to bring the best quality and service.
While it is true that most people want to do a good job and take pride in their work in all situations, the short-term, in-house staff will not be as motivated as a PM firm to provide exceptional quality and service.
Good project control and estimating, scheduling and accounting systems are absolute musts for a successful project. It's unlikely that in-house staff will be equipped with the necessary systems and technology.
A good PM firm has systems and procedures perfected through years of use. Working without them is like flying a plane without a compass -- you don't know where you are or where you are going. And there is a big potential for crashing.
The PM is the project CEO
A $100 million corporation has products, customers, laborers, good systems, suppliers, overhead cost and good management. The success of that corporation just doesn't happen in a vacuum.
A construction program is very similar. It has one product (the buildings) and one customer (the owner). It has contractors, subcontractors, laborers and suppliers who come together once to deliver one product.
It has overhead costs associated with the site and product delivery, good systems and should have good management. What are the chances it would all come together correctly without good management? It just won't happen on autopilot.
Is a PM firm an extra cost to the project? A PM firm should be able to save the owner the cost of their fee -- or more -- by such means as:
* Pre-purchasing materials
* Horizontal purchasing
* Contract strategy
* Contractor and subcontractor pre-qualification and selection
* Contract marketing
* Change order negotiation
* Quality control
* Best management practices
It's difficult to prove cost savings in advance, just as it is difficult to prove the success of a CEO before he takes office. But there are clues to future success based on past experience.
So how much does it cost?
Typically the cost of a PM firm ranges from 2 percent to 6 percent of the program's cost.
It is important to bear in mind that this isn't an apples-to-apples comparison since the services provided a different for each program. Every program requires a different level of service.
The number of contractors the PM firm manages also contributes to total costs. The more contractors there are, the higher the fee. A complicated renovation project will demand many small contractors.
With a new construction project, it depends. If general contractors are involved, there may be few contractors to coordinate. But if there are multiple-prime trade contractors there may be many contractors to manage.
Obviously, the cost of managing one contractor is far greater than managing a hundred. That applies to the number of AEs as well.
How does the PM calculate the fee? The firm will examine the specifics of the program, estimate the staff required to manage it, and attach the staff to the schedule for design and construction.
They will then add on the cost of providing working space, equipping the project team, travel, communications, estimating assistance, Web page development, servers and e-mail systems and other costs that may be incurred. Then they will add on profit.
Besides program size, duration and number of contracts, here are some other issues that affect a fee calculation:
* Renovation, new construction or deferred maintenance
* Public relations assignments organization
* Geography of the program -- distance between facilities
* Reimbursement provisions
* Design review and management
* Participation of owner's facility
* Local cost of living
The fee should be either a fixed fee or a fixed fee with reimbursables, not a percentage fee.
Since one of the primary roles of the PM is to keep costs down for the owner, it is inherently a conflict to base the fee on potentially escalating construction costs.
It is also a good idea at the outset to require the PM firm to provide details of the fee calculations -- so that if there are changes in scope or duration the fee can be recalculated easily.
If the basic parts of the fee have been established at the outset, with nothing hidden, a fee adjustment is an easy task.
The goal of any good PM firm is a satisfied client. One successful strategy to achieving the desired outcome for complex programs has been the concept of the satisfaction fee.
In our model, the PM firm takes a portion of its fee, the client adds a similar amount and they put the total at risk. The pay out is based on the client's satisfaction.
In quarterly "Brass to Brass" meetings, the client grades the PM on performance in pre-determined categories. Simple concept: no satisfaction, no satisfaction fee. These meetings are crucial for the senior management team -- both PM and owner.
It keeps the work on track, strengthens their relationships and it produces ideas for continued improvement.
Working in the built environment is a bumpy road at best -- surprises are all too common and most projects, especially large ones, can encounter troubled times.
Well-defined, agreed upon goals, and strong relationships at the top are tools that a competent PM employs to work for solutions and deliver good projects in a cost and time effective way.
Thomsen is chairman and CEO of 3D/I, a firm that specializes in the management of large scale, multiproject building programs. More information can be found at www.3DI.com.>