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For businesses in the construction supply chain, the cost of errors is 7 times the value of profits. Ouch!

That was one of the key findings of the Getting it Right Initiative, which published its guide for reducing the costs of errors in November 2018 . Calculations put the cost of errors at 21%, compared to average profits of just 3%, a 7:1 ratio.

Yet whist that finding is a stark reminder, the figures didn’t really represent news. A series of previous reports had identified the shocking cost of errors and waste in the industry, including The Latham Report, which estimated the figure at 40% back in the 1990’s.

There were, however, a number of new and revealing insights in the research carried out, including:

• How the total cost of errors is built up of different components
• Who feels the pain of errors the most
• The root causes of errors

The initial research was followed by further work to set out a strategy for tackling the issues, and guidance for organisations to benefit from reducing avoidable costs. These were presented in a series of publications, culminating in recommendations that might lead to practical improvements.

Ratio of Costs to Profits

Current 7:1 ratio cost of errors to profits.

The report identified 4 main elements making up the total cost of errors:

Source of graphic: BIMcert Limited

2 key aspects of costs are revealed in the report. Firstly, that the total cost of errors is significantly greater than may appear to be the case, because the ‘visible’ costs tell only part of the story. Secondly, that the ‘invisible’ costs outweigh the known costs by more than 50%.

Relating this back to the industry’s meagre profit levels averaging just 3%, it becomes clear that these unmeasured costs, amounting to 13% of project sales, outweigh profits by more than 4 times. Unrecorded process waste alone accounts for 7% of total project costs – more than double the average profits in the industry.

Pain and Gain

So who bears the pain? And who stands to gain?

“the cost of errors is 7 times the value of profits. Ouch!”

The research confirmed the long-held view that the majority of the initial cost of errors is incurred by ‘Tier 2’ businesses and those even further down the supply chain. Lead suppliers were largely unaware of the costs, yet these inefficiencies are passed on in the procurement process and included in the overall cost to clients. Whilst the effects are not clearly visible, significant avoidable costs are incurred, representing an enormous opportunity for improvement that remains largely untapped.

The good news for the supply chain is that, in bearing the majority of these costs, it is the organisations at ‘Tier 2’ and below that also stand to gain most from tackling the issue. If a business takes practical steps to reduce the cost of errors, the positive  impact on profitability can be game-changing.

Just a 15% reduction in avoidable errors, could more than double profit margins.

Root Causes of Errors

Identifying the root cause of errors is a vital step in improving performance. The research revealed a number of issues and these were ranked. The top 5 root causes were found to be:

Top 5 Root Causes of Error

Source of graphic: BIMcert Limited

3 of the top 5 causes relate directly to design. Interestingly, the guidance that followed the research focusses solely on the design process, clearly marking it out as the key area to drive improvements, with recommendations titled “A guide to Improving Value by Reducing Design Error”.

Tom Barton, Executive Director of the initiative explains, “…errors in construction, costing the UK Industry billions of pounds a year, are rooted in deficiencies in design: designs that are uncoordinated, incomplete, miscommunicated, unintelligible, late, or just plain wrong. It was clear that a key priority was to address the causes of these deficiencies”.

Strategy to Reduce Errors

A strategy is proposed to reduce the cost of errors. It is backed by a wide range of organisations, including many lead contractors and ‘big-hitting’ project clients, such as HS2.

“the positive impact on profitability can be game-changing.”

The areas of focus that are identified in the guide are closely aligned with ‘Level 2’ BIM principles. Clear requirements include:

• A clearly defined intent and a consistent focus on outcomes
• A well-prepared brief of needs and expectations
• Clearly defined design responsibilities
• A project-specific plan of work
• Establishing and maintaining the design process involving all key members of the project team
• A rigorous process for communicating design information

Action to Improve Your Cost to Profits Ratio

The thread that runs through this strategy is information. The key inputs, tasks, and outputs of the design process are all about producing and sharing information.

“Just a 15% reduction in avoidable errors, could more than double profit margins.”

Once we recognise that, the significant value of a structured approach to managing information become crystal clear. BIM represents good practice in managing information for construction projects, so the adoption of a disciplined workflow can significantly reduce errors, avoiding damaging costs, and boosting profitability.

And the impact of better information management can be significant, thanks to the ‘multiplier’ effect that reduced costs have on profit margins.

The ‘multiplier’ effect of reducing errors on profits.

Source of graphic: BIMcert Limited

A number of separate reports have provided clear evidence of BIM reducing design error, providing a return on investment for businesses taking a strategic approach to better information management in a structured business workflow.

The ‘Get It Right Initiative’ gives a timely reminder of the size of the problem, and conversely the significant levels of benefit that might be achieved – reducing design errors with BIM provides an enormous opportunity, and potential source untapped profits.

Where to Get Help

For help with your information management and BIM process, please contact us for blended support of tailored consultancy, training and certification to meet your particular needs and aspirations.