Why a cost per square metre fails at tender

Almost every development starts with a cost per square metre. It is quick, it is defensible enough to put in an appraisal, and it lets a decision be made while the scheme is still an idea. There is nothing wrong with using one. The problem starts when that figure stops being a test and quietly becomes the budget.

By the time tenders return, the rate has usually been carried through four or five documents without anybody restating what it assumed. When the returns come in above it, the conversation turns to the market, the contractor or the design team. In our experience the market is rarely the main cause. The cause is what the original rate never included, and what nobody wrote down at the time.

Where the rate actually came from

A cost per square metre is an average of completed schemes. It carries the structural frame those schemes used, the specification they were built to, the ground they sat on, the procurement route they followed and the market conditions of the quarter they were priced in. None of that travels with the number when it is quoted.

Published benchmarks are worse in one specific way. They are honest about being averages, but they are read as forecasts. A rate drawn from twenty schemes tells you what a typical scheme cost. It cannot tell you what yours will cost, because the thing that drives your cost is precisely the way your scheme differs from typical.

That is not an argument against benchmarking. It is an argument for using a benchmark as a sense check on a measured build up, rather than as a substitute for one. Where we use a rate directly, at the earliest stage, the source and every adjustment sit on the face of the estimate so that a reader can see exactly what has been assumed.

What a rate silently excludes

Most rates are quoted against gross internal area and cover the building. Ask what sits outside that boundary and the list is longer than people expect.

• External works, landscaping, boundary treatment and the estate roads
• Incoming services, substations, diversions and utility connection charges
• Demolition, remediation, piling mat and anything the ground turns out to need
• Section agreements, planning obligations and community infrastructure payments
• Professional fees, surveys, warranties, insurances and finance costs

On a constrained urban site those items can carry a material share of the total, and they are the part of the budget least likely to have been measured. This is the single most common source of drift we see on residential schemes, which is why the residential development position we publish leads on it rather than on the building itself.

The four things that move between appraisal and tender

Specification

A scheme is rarely designed to the specification the rate assumed. Windows change, the facade develops, the landlord areas get a better finish, and each decision is small enough to pass without a cost check. Added together across a design programme they are not small at all.

The ground

Ground conditions are the classic late arrival, because the survey that would have priced them properly was deferred to save money at the point when the money was tightest. Foundations, retaining structures and remediation then land as a single unwelcome number rather than as a line that grew visibly.

Preliminaries and programme

Preliminaries are usually taken as a percentage. They are actually a function of time, access and logistics. A scheme with a shared access, a crane oversail agreement or sectional handovers carries a different preliminaries cost from a clear site of the same floor area, and no percentage captures that. On phased work this is often the largest single difference between the appraisal and the tender, which is why complex phasing is treated as its own commercial problem rather than as a variant of a normal build.

Inflation

An inflation allowance set at appointment and never revisited across a long design programme is an allowance that is wrong by definition. Inflation should be calculated to the midpoint of construction, restated at every cost plan issue, and shown as its own line so that its movement can be seen rather than absorbed.

Why the gap arrives all at once

Each of those four movements is individually explainable. None of them is visible in a single headline figure, because a single figure has nowhere to show them. So the budget reports as unchanged, month after month, until the first competitive prices arrive and the whole accumulated difference lands in one meeting.

At that point every option is expensive. Value engineering removes quality that was sold to the planners or to the market. Re-gearing the facility takes time and costs fees. Accepting the number consumes margin that the appraisal never had. The decision is being made under pressure, on a scheme that is already committed, using information that could have existed eighteen months earlier.

We wrote about how that pattern looks from inside a live scheme in hidden cost exposure. The mechanics are almost always the same. The drift is not one bad decision. It is twenty reasonable ones measured against a figure that could not absorb them.

What to do instead

The alternative is not slower and it is not more expensive at the early stages. It is simply built differently.

Start from measured scope as soon as there is anything to measure. An area schedule, a site plan and a structural principle are enough to build a first elemental position rather than a single rate. Where the design has not caught up, the gap is stated as an assumption with a value attached, not hidden inside an average.

Price the site separately from the building. Abnormals, infrastructure and external works get their own lines and their own evidence, because they behave differently from the superstructure and they move for different reasons.

Split the risk allowance. Design development risk, construction risk, employer change and inflation are four different exposures with four different retirement profiles. Held as one contingency percentage they cannot be released safely, because nobody can say which part has been earned. By contrast, held separately they can be argued, tested and drawn down as each risk closes.

Reconcile at every issue. A cost plan that reports its movement since the last version, line by line, turns a surprise into a sequence of decisions. That reconciliation is the document that keeps a board calm, and it is the one most often missing.

None of this requires a complete design. It requires that the basis of every figure is written down at the moment it is set. That is the whole of our cost planning and estimating method, and the reason a figure we issue tends to hold its shape when tender returns arrive.

Testing a rate somebody has handed you

If you have been given a cost per square metre and you need to know how much weight it will carry, five questions get you most of the way.

• What area basis is it, gross internal, gross external or net saleable
• What is inside the rate and what sits outside the building line
• What structural frame and what facade specification does it assume
• What date is it priced at, and to what date has inflation been calculated
• What risk is inside it, and can that risk be shown as separate lines

A rate that can answer all five is a considered position and can be relied on for what it is. A rate that cannot answer them is a placeholder. There is nothing wrong with using a placeholder, provided everybody reading the appraisal knows that is what they are looking at.

What this means for you

If you are about to commit to a site, the useful question is not whether the rate looks about right. It is whether the figure in front of you can be taken apart. A number that can be taken apart can be defended in front of a board, a joint venture partner or a credit committee, and it can be corrected while correction is still cheap. A number that cannot be taken apart will be tested anyway, later, by the tender.

Bringing measurement into the process early rarely changes the decision to proceed. What it changes is whether the decision was made with the real number.