rics americas property world summer 2010

SOUND PROJECT CONTROL METHODS

TAILORING THE PROCESS TO LOCAL NEEDS

THE INDEPENDENT COST ADVISOR

PROPERTY

2010 | SUMMER EDITION | RICSAMERICAS.ORG

AN INFORMATION RESOURCE FORRICS MEMBERS AROUND THE GLOBE

CONSTRUCTION PROJECT MANAGEMENT: LAYING THE FOUNDATION FOR RECOVERYP3s RENEW CANADIAN INFRASTRUCTURE

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RICS Property World | Summer 2010

ContactsPublishing and advertising managed by:RICS Americas [email protected]

Editor:Matt Bruck, RICS Americas Managing Director

Executive Editor:Steve Wolfe, RICS Americas Director of Operations

Managing Editor: Will Safer, RICS Americas Communications Associate

Designed by:Aaron Mickelson

Printed by:Earth Enterprise

Published by:RICS Americas 60 East 42nd Street Suite 2918 New York, NY 10165 T +1 212 847 7400www.ricsamericas.org

front cover © Feverpitch

While every reasonable effort has been made to ensure the accuracy of all content in the journal, RICS will have no responsibility for any errors or omissions in the content. The views expressed in the journal are not necessarily those of RICS.

RICS cannot accept any liability for any loss or damage suffered by any person as a result of the content and the opinions expressed in the journal, or by any person acting or refraining to act as a result of the material included in the journal.

All rights in the journal, including copyright, content and design, are owned by RICS, except where otherwise described.

Contents

5 Room in the Boom Ross Templeton, MRICS

9 Tailoring Business Processes for Success in the Construction and Development Industry in India Jonathan Lance, MRICS, and Simon Taylor, FRICS

12 Bills of Quantities–A New Perspective? Martin Darley, FRICS

14 Brazil–A Strategic Market for Business Expansion in Construction and Property Neil Shaw, FRICS

16 The New Craze? Elin Lake-Ewald, MRICS

19 Effective Project Control: The New (Old) Methods Alexia Nalewaik, MRICS, and Simon Taylor, FRICS

23 MyF+G: Terms of Engagement Susan Blexrud

25 Independent Trusted Cost Advisors Martin Grace, MRICS

29 Ethics in U.S. Business and the Commercial Real Estate Market Stan Mullin, FRICS

4 Find extended articles, charts and more online ricsamericas.org/property-world

WelcomeWelcome to the latest issue of Property World.

RICS Americas publishes this magazine to highlight

the excellent work being done by our members

and member firms across the entire region.

This issue is certainly a product of our times,

with a selection of articles that focuses on

ethics in business, project cost savings and

seeking opportunities across borders.

Ross Templeton MRICS explores how Public Private

Partnerships are vital to renewing Canada’s

infrastructure. Simon Taylor FRICS and Alexia

Nalewaik MRICS note how quantity surveyors

help clients curtail risk in an increasingly uncertain

building environment. And Stan Mullin FRICS

reminds us all of the importance of maintaining

high ethical standards in our business dealings.

These articles also highlight the value that RICS

brings to its members’ lives. We are connected

across disciplines and time zones by a common

mission to uphold the highest standards as we

execute our responsibilities to our firms and clients.

I hope you enjoy reading Property World and will

consider writing an article for a future issue. Also,

don’t forget to explore the online version of the

magazine at www.ricsamericas.org/property-world,

where you’ll find associated podcasts, member

profiles and information about all RICS’ activities.

Best regards,

Tom Justin FRICSChairman, RICS Americas

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Room in the BoomWith public private partnerships for renewing Canada’s infrastructure creating new opportunities for North American chartered surveyors, BTY Group’s Ross Templeton, MRICS, PQS, advises newcomers to the market to think globally but reduce risk locally.

Canada’s Public Private Partnership (P3) market is burgeoning. Having grown steadily since the first P3 project

transactions in the late 1990s, it is now set for more dramatic expansion. BTY Group has worked on more than 30 P3 transactions, primarily in the Lenders Technical Advisory and Independent Certifier roles. BTY Group sees concerted government effort across the country to renew aging infrastructure — both

P3s have proven their value

With dozens of successful P3 infrastructure projects constructed and now in operation, this form of alternate procurement has established a strong track record in Canada. A January 2010 Conference Board of Canada report stated that “value-for-money studies comparing the projected costs of P3s and conventional contracts showed that the Canadian P3s initiated from 2004 onwards have so far delivered important efficiency gains for the public sector (i.e., taxpayers), ranging from a few million dollars to over CDN$750 million per project.”

Recent high-profile P3 successes are also helping improve public opinion of the model, particularly in British Columbia and Ontario, which have led the way in developing the country’s P3 models. The Canada Line, Vancouver’s new urban rail service that commenced operations ahead of schedule in August 2009, is posting ridership numbers approaching the original forecast of 100,000 passengers per day. The CDN$762 million Golden Ears Bridge in suburban Vancouver opened in June 2009 on time and on budget.

Ontario has approximately 28 infrastructure projects completed or underway; most are hospitals, prisons, courthouses, police stations and a massive provincial data center. Their

hard and soft — paving the way for a new, deeper and wider wave of P3 infrastructure projects in Canada. This infrastructure wave will help the construction industry “continue to outperform much of the Canadian economy through the recession period from 2009 to 2012,” according to the Construction Sector Council, an industry lobby group, in a recent report.

It’s a new world for

offshore proponents,

lenders and investors.

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success to date has led the province to make the P3 model its mainstay in planning for a massive CDN$90-billion, 15-year mega-scheme aimed at renewing the province’s roads, jails, schools and, most urgently of all, hospitals. At the recent opening of a new cancer center in Ottawa, the province’s premier, Dalton McGuinty, pledged his commitment to the rebuilding plan:

“We’ve got to keep the capital-spending dollars flowing.”

Flexibility in the Financial Crisis

While the financial crisis forced some P3 projects to alter course, it also revealed the model’s ability to adapt itself to challenging market conditions. The CDN$2.46 billion Port Mann Bridge in British Columbia started under the PPP model but converted to design build when the province and the Macquarie-led consortium were unable to reach final agreement, according to Patrick Boocock, a partner at Brookfield Financial. The adaptability was exemplified when Deutsche Bank withdrew from the CDN$759 million Niagara Health Complex in Ontario’s Golden Horseshoe. Then only a sustained group effort by Borealis Infrastructure (OMERS’ infrastructure group) as preferred equity investor, continued commitment from Canadian lenders to the P3 sector and significant progress and completion payments from the province ensured continued project financing.

The Province of British Columbia also showed adaptability when it chose to procure two of its most recent P3s: Fort St. John Hospital, which closed in July 2009, and BCCA Prince George Cancer Centre, with a P3 modification that required private sector proponents to inject 20 percent equity into the project with the remainder of the funding coming directly from the province.

In Ontario, where seven projects closed in 2009 and another three are expected to close in 2010, the province is using substantial completion payments to help reduce the total dollar value of private sector funding while maintaining an appropriate risk allocation framework. All the projects were financed either via an underwritten bond solution or a direct private placement with Canadian life insurance companies.

Strong Fundamentals for P3 Deal Flow

With greater certainty from more settled financial markets and a number of P3 projects nearing construction completion, the market is expected to see secondary sales of assets with proponents looking to free up capital for new pursuits.

The P3 market will also have stronger and more widespread federal and provincial government support — including a CDN$33.6 billion federal infrastructure spending plan — that promises to widen the sectored scope of potential P3 projects and provide more support for creating greater P3 deal flow, especially through municipalities. That widening scope also promises to drive more robust due diligence requirements on the P3 value for money proposition from all involved — government agencies, private sector proponents and lenders.

Canada’s CDN$125 Billion Infrastructure Deficit

Canada’s total infrastructure deficit is estimated at CDN$125 billion. A prime driver of the need for new infrastructure is Canada’s population growth. Fueled by immigration that is concentrated mostly in urban areas, the Canadian population growth rate is higher than those of most industrialized countries.

The steady pace of urbanization and population growth is driving the need for new and upgraded infrastructure, particularly roads and sewers, with highways and bridges right behind. Roads and highways, sewer systems, wastewater treatment facilities and bridges comprise some 80 percent of all engineering infrastructures owned by federal, provincial, territorial and municipal governments. A 2003 Government of Canada study showed that three of the four components — roads and highways, sewer systems, and wastewater treatment facilities — were well past the halfway point of their service lives.

In the wake of the financial crisis in a still fragile economy, these governments remain under increasing pressure to deliver value for money in developing new and upgraded

Niagara Health Complex

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infrastructure, whether for the “hard” infrastructure just noted, or the “soft,” or social infrastructure such as schools and public safety facilities, including courthouses and police complexes. Even as P3s remain the dominant procurement for large-scale infrastructure projects, they are also becoming a preferred option for soft infrastructure as governments at every level seek to deliver optimum value to taxpayers.

Healthcare for an Aging Population

Canada’s population is also aging; by 2019, people older than 65 are expected to account for more than a quarter of the population. By 2029, more than a third. This profound demographic shift will require expanded healthcare facilities to provide appropriate care for the elderly. While healthcare projects have become a staple for P3 projects across Canada, the number of P3s in this sector is expected to grow rapidly as health care authorities strive for efficiencies in providing care for the growing population of the elderly.

In 2010, construction industry expert John Bisanti, senior vice-president at Mississauga-based EllisDon Corp., Canada’s second-largest construction company, told the Toronto Globe and Mail back in February that he expects to see 18 projects valued at more than CDN$3.5 billion in the social infrastructure sector alone — mostly hospitals tendered in Ontario — and a further CDN$1.5-billion’s worth in British Columbia, New Brunswick and Nova Scotia.

Growing Government Support for P3s across Canada

The governments of British Columbia, Ontario and Quebec already have well-established agencies (Partnerships British Columbia, Infrastructure Ontario and PPP Quebec) dedicated to identifying and delivering public-private partnerships. British Columbia in particular has been a P3 leader with nearly CDN$10 billion invested in partnerships to date. BC’s capital policy requires that a P3 must be considered the base case procurement option where the provincial contribution to the capital cost exceeds CDN$50 million. More than 30 partnerships have been completed, or are being completed on time, or early, and on budget.

Ontario formed Infrastructure Ontario in 2006 to foster the development of P3 projects delivering private finance and private sector operation. The governments of Alberta, Northwest Territories and New Brunswick have pursued several P3s and are in the process of procuring or constructing more. The governments of Nova Scotia and Prince Edward Island recently announced plans for partnerships with the private sector to deliver public infrastructure. And municipalities in almost every province and territory have pursued PPPs in recreation and culture, water/wastewater, landfill gas, downtown redevelopment and public transit.

A CDN$33 Billion Infrastructure Boost

The Government of Canada recently created PPP Canada, a Crown corporation, and a CDN$1.2 billion P3 fund to develop the P3 market. This fund will help various levels of government to support P3 infrastructure projects as part of the Ministry of Infrastructure’s CDN$33 billion Building Canada Plan. More than half of the funding under the Building Canada Plan will be provided as base funding for municipalities. In total, that amounts to more than CDN$17.6 billion over seven years.

Combined with other sources of capital, including Infrastructure Ontario’s municipal loan program and similar programs adopted by various provinces, this provides municipalities with significant capital to build vital infrastructure. While very little of this capital has been deployed, the CDN$1.2 billion P3 fund could be instrumental in supporting the development of a streamlined procurement process that would be especially helpful for municipalities — a large number of which have projects that require funding.

Municipalities, however, typically lack the resources and budgets to effectively procure major pieces of infrastructure, such as a wastewater treatment plants. A full P3 process and standard documentation can overwhelm smaller scale projects. A stream-lined procurement process — with appropriate budgets — for municipalities would enable them to pursue infrastructure projects for which funding is available under the Building Canada Plan and get the necessary expertise to move projects forward. Such a streamlined process would provide the private sector with significant confidence that projects will proceed as planned using standard documentation and risk allocation frameworks typically used on larger provincial projects.

Golden Ears Bridge

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Opening Up Long-Term Capital Sources

With large-scale infrastructure projects — such as Ontario’s 407 toll-road expansion — likely to test the capacity of the traditional long-term domestic lending market, there could be an opening for foreign lenders to re-insert themselves in the Canadian market. The testing of traditional long-term domestic lenders could also open up another source of long-term capital: small- to medium-sized domestic life insurance companies and pension funds that are keen to enter the sector as a primary funder but lack the scale and experience to do so. Boocock said he sees a possible solution in the formation of a senior debt fund that is able to coordinate smaller lenders and underwrite commitments to proponents. For such a fund to work, institutions must be willing to rely on a centralized underwriting team with the power to make investment decisions and proponents must be willing to partner with these institutions.

A More Selective, More Competitive Market

Even with more settled financial markets, greater government funding for infrastructure renewal and replacement and potential new sources of long-term capital, the Canadian P3 developer market is experiencing capital restrictions. As is the case globally, these restrictions are causing developers to be much more selective in the projects they pursue. When combined with the fact that a number of global integrated infrastructure providers have established themselves in the Canadian market, this selectivity is making for a much more competitive and complex market.

Global Players, Local Risk

Every opportunity has its attendant risks and the emerging boom in Canada’s infrastructure renewal is no different. Beyond the normal risks associated with a P3 project, there is an added potential risk to global proponents and/or lenders seeking to participate in P3 projects in Canada. It’s a new world for offshore proponents, lenders and investors, geographically, legally and logistically. The added risk is the lack of knowledge of local capital, life cycle, facilities management and operational pricing and practice in undertaking projects in Canada.

Having advised on more than CDN$15 billion capital P3 investment in Canada during the last 10 years, BTY Group has learned first hand how critical local knowledge is to mitigating local risk — and

it has seen how the lack of local knowledge can trip up an otherwise well planned and well executed project. BTY Group serves as both Lenders Technical Advisors and as Independent Certifiers for both social infrastructure projects such as hospitals, schools and public safety facilities, and for transportation infrastructure such as roads and bridges.

While there is a lot of room in Canada’s infrastructure boom, the most reliable risk mitigation comes from the people who know the ground upon which you propose to build. Think globally, reduce risk locally. •

Ross Templeton, MRICS, PQS

Public Private Partnerships (PPP) advisory group Partner

BTY Group www.bty.com

Bridgepoint Hospital, Toronto

Calgary Trail Overview © Anthony Henday

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Tailoring Business Processes for Success in the Construction and Development Industry in IndiaJonathan Lance, MRICS, and Simon Taylor, FRICS, explain why it is important to tailor business processes to maximize the return on investment in an evolving market like India.

With its huge population base, one of the largest workforces in the world, and a burgeoning middle-class, India

has attracted the attention of investors globally, looking for the next world area of growth. During the past couple of decades the economy has undergone a rapid transformation with a shift from government-controlled enterprises toward a free-market economy similar to the United States. The growth currently is being fueled by entrepreneurs, who are stepping in to take advantage of opportunities in several sectors, where years of pent-up demand are translating into huge returns. As an example, during the past decade, the private telecom sector has replaced an outdated government-managed communication system with a network that has empowered every corner of the country. The number of mobile phone subscribers has increased from a base of 10 million in 2002 to 400 million subscribers in 2009, at an annual growth exceeding 60 percent.

The impact of the investment growth is most evident in the real estate sector. High growth in sectors such as telecom, information technology and business process outsourcing has fueled the development of commercial real estate with more being added every year. Concurrently, the higher purchasing power of the middle class has fueled fresh demand for quality residential real estate. In addition, the development industry has benefited from higher demand from consumer-driven

service sectors such as retail, hospitality, education and healthcare. According to the Cushman and Wakefield Investment Report of 2009, during a five year period from 2009-2013, pan-India demand for commercial office space is estimated to be 196 million sq. ft. , with demand for retail space estimated to be 43 million sq. ft. and demand for residential estimated to be 7.5 million housing units. With investments starting to flow again after the slowdown experienced due to the global financial crisis, the high demand for real estate ensures a strong trajectory of growth in the sector.

While the landscape of the country is changing overnight with new real estate being added every day, what is more interesting is the transformation of the Indian economy and its impact on the people. The visible transformations are obvious to all those who visit the country and compare transformed cities like Gurgaon to older cities like neighboring New Delhi. With an overloaded and outdated infrastructure, New Delhi is unable to meet the needs of residents or businesses. But newer cities like Gurgaon are filling the void, by providing world-class buildings and trying to avoid the mistakes of its older neighbor. Malls are replacing traditional open air markets, hotel development has been prolific to match commercial development and high rise apartment buildings are replacing independent houses sprawled out over a large area. However, an invisible transformation is also happening in the mindset of the population.

© F

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Leon

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The discerning consumer is more aware of global standards and is becoming more selective, and as the middle class develops and provides necessary technical expertise to support economic growth, businesses are stepping in to fill the demand-supply gaps for consumer goods like technology and international couture, and taking advantage of emerging global trends such as medical tourism.

However, the transition for any economy that goes from government-control to free-market at an extremely rapid pace is not easy. With India it is no different. It takes time and investment to update the infrastructure required and to develop a trained workforce able to support continuous growth and provide input to the development of efficient business practices. Business processes in Western countries are tailored to an expensive workforce and focus on cutting costs by replacing the workforce with technological innovations, to increase productivity and generate cost savings.

The rapid growth of the Indian economy has put an immense strain on the availability of skilled human resources. The problem has been exacerbated by years of underinvestment in education and vocational training, which are still regulated by outdated government policies. This has resulted in a large pool of unskilled workers that is extremely cheap and smaller pools of available trained workers as the demand for skills grows. The problems are compounded by the Diaspora, as many highly skilled Indians move overseas to areas where the market for their expertise is already developed.

As the old economy and culture learns to co-exist with the new, these market restraints represent roadblocks to success of business models, if such restraints are not addressed upfront. In particular, business models designed to work in the West will meet with little or no success if they are not tailored to suit the current workforce and consumer culture and do not account for the rapid, transformational dynamism of the Indian economy.

Real Estate Development and Construction in India

Construction industry methods of design and execution vary widely, as can contractual obligations and environmental impacts. As such, the construction industry is, even to this day, uniquely different to any other product development process that is able to take advantage of repetition, environmental control and a high degree of automation. How successful a construction project will be will depend on how well the inputs (management, creativity, materials, labor, etc.) are designed, planned and controlled to manage arising variances (e.g. impact of execution risks during the construction period). By controlling the quality of the inputs, firms are able to identify innovative methods of execution by using new materials, equipment and processes to improve cost, schedule and/or quality (performance). However, to capture that value improvement, the team must be able to draw on thought leadership and consistent expertise in sufficient numbers to develop the new processes, and execute them to a high degree of certainty and tolerance. Since the workforce is integral to the development process, it is important to understand the main differences to appreciate the need to tailor construction plans to India.

New construction in India has a taste for the mid to high rise development formats that are found in any American city. This

mostly has been driven by young Indian companies and foreign corporations seeking a foothold in the Indian economy. The demand is for buildings that match the expectations of international companies and that provide the prestige value required by the new entrepreneurs. These buildings strongly imitate the design and layout of similar developments in the West and the speed at which development has needed to take place has meant that focus has been on appearance, rather than life-cycle performance. The balance of value, or utility, enjoyed by the developer and lessee is quickly impacted when design does not reflect the local culture, environment and operational capabilities.

Consider as an example the design and installation of external walling systems. Curtain walling is available internationally and if imported will meet uniform tolerance standards for fabrication. What may not be considered by the designer is the impact of the following factors:

1. Diurnal temperatures, which vary widely during the year. To achieve an energy efficient building, the curtain walling will need to exceed the performance standard of walling used in the Americas, and consider the impact on street side temperature levels due to reflection. Dust and smog also has an effect on overall performance.

2. Construction methods and quality of installation. High performance curtain walling requires attention to detail, in accurate alignment to supporting members, design of attachment and jointing and correct application of gaskets and seals to accommodate expansion. These details assume more importance in harsh climates, particularly where attention to fine detail by the installing crew is less likely to be adhered to, and will promote aesthetic aging quicker.

3. Facility Management processes. In India, the methods and standard of care by custodians is markedly different to that observed in the West, particularly with higher technology components that require specific expertise to maintain. The life-cycle of the building will be reduced or replacements costs will increase above the level typically encountered in the west. Component design will need to anticipate the operations and maintenance regime and ensure materials are hardwearing and accessible for cleaning so unsightly dirt buildup is prevented. This can be significant and many relatively new buildings only three-to-four years old easily can look 10 years old if this is not accounted for, which will quickly detract from the value a lessee will see in space more than five years old.

Thus, some steps to help ensure successful investment in India would include: consideration of local strengths and weaknesses, particularly training needs; partnering with local companies able to tailor your vision to the market; and closer analysis of the whole lifecycle, which will impact expected returns.

Training

As described, the middle class is growing rapidly, as investment in new industries increases, and leaders emerge with entrepreneurial skills to develop market solutions. However, it is not growing rapidly enough, and regardless of the plethora of emerging colleges and industry schools, the old culture and traditional

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practices persist, which means processes must be adjusted to match a narrower skill set until sufficient learning traction is achieved, and innovation can commence. This will affect choice of materials, location, supervision and management style, incentives and how in-house training can be delivered effectively.

Partnerships with Local Companies

Success in one region does not guarantee success in another, particularly one that is newly exposed to Western processes and expectations. Rather than being merely a low cost alternate location for outsourcing/manufacturing capacity, India presents prime opportunity to capture a growing market by developing world class products that support Indian aspirations. This means developing a partnership with local companies (architects, engineers, doctors) who will assist with design and implementation of processes that might be unfamiliar in India. For example, there is little demand for light steel framing or prefabrication systems in construction, primarily because the contracting industry is more familiar with concrete and brick, regardless of the many advantages for low rise construction.

Focus on the Lifecycle Impact of Construction

We described above how lifecycle forecasts will be impacted due to climate, quality of construction and maintenance regimes, among many other factors. If a venture is to be successful over the long term, attention to details not normally considered in the West must be adhered to so that the product will stand the test of time in a

different environment and enable a focus on gradual development of local standards and expertise to mirror the changing demographics.

What is required is a step back from casting Indian developments in the image of the West and considering how they need to be modified to account for cultural, environmental and process differences, all of which will change both the end product and the way it is executed. There are notable examples of Western companies entering the market on the basis of replicating past successes, only to fail to deliver sustainable (efficient and ongoing) projects and businesses. As a corollary, some of us remember the early ‘80s house building industry in the United Kingdom, when timber framing was being introduced and gained a terrible reputation due to leaking, mold and structural failure; as we now know the issue was not with the principle of timber framing but with the way it was designed and the standard of construction site quality control, especially in a damp climate. The same holds true for India, where design and construction standards will mature over time but must be guided to maturity by using appropriate materials, enabling training and providing strong input into developing local quality standards to meet international expectations that cope with local restraints. •

and Jonathan Lance, MRICS, MBA, MRE

Managing Director Aspiron Consulting Pvt. Ltd.

New Delhi, India

Simon Taylor, FRICS Principal

Questant Corporation

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Bills of Quantities–A New Perspective?Martin Darley, FRICS, reflects on the changes to Bills of Quantities and questions their relevance in today’s complex procurement environment.

When I started my career as a Junior Quantity Surveyor (QS) back in the 1970s in the industrial North

East of England, Bills of Quantities were productions akin to a Hollywood script. They were written bound books produced for each stakeholder in the bid process. The contractor would return two hand-priced editions for the quantity surveyor to check, tabulate and make recommendations to the architect as to the contractor to be awarded the works. Unless the architect issued variations, the bills were effectively a lump sum price for the project.

Even this brief description illustrates the laborious process that a Bill of Quantities document was. But to produce the quantities involved a process even more labor intensive. Dimensions were taken off scale drawings by laying a scale rule across the drawing, then the dimensions and description of the labor and materials to be included were hand written, in a form of shorthand developed by the QS. These were then arranged in order for the bills, either elemental (think Uniformat), or trade order. Having done this, the document was typed, proofed, read, sent to the printer and proofed again, before being printed and bound. Looking back these were true ‘Works of Art’ as much as tools of the trade.

Being laborious the bills were expensive, so methodologies evolved to make the process more “automated.” These included the advent of cut-and-shuffle paper: a perforated sheet that could be torn up and shuffled, much like a deck of cards, to represent each line of the bills. The QS had to write the description, and a typist was still required to produce the bills; the photocopier reduced the need to involve a printer in the process. The next development was “standard phraseology,” a book of codes representing standard descriptions for Bills, into which the QS could add “star” items to describe the particular piece of work unique to an individual project. The typists were replaced by a technical writer of a sort, who pulled standard descriptions from the data library and added rogue items. The system was able to retain rogue items for future reference.

It is worth a moment to reflect how the Quantity Surveying profession had evolved to this point. Builders used to produce their own estimates for the work and submit them to the architect who had the job of normalizing the submitted bids and checking for compliance. Each builder retained a specialist to do the work of producing his own bills, estimate, and price. The architect took the lead and started to produce his Bills for the contractor to price.

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This lead to the advent of a new specialist, the Quantity Surveyor, and the establishment of the profession and growth of RICS.

To further standardize, the QS produced Standard Methods of Measurement (SMM), the common rules by which the entire industry describes work and what was and, sometimes more importantly, what was not included. I tend to think of Bills of Quantities as transparent distribution of risk. The contractor prices the work quantity as describe to the specified quality. The owner accepts the price as a fair and reasonable for the work to be done. The contractual documents, specifications, preamble, and terms and conditions of contract provide the contractual mechanisms to administer the contract through to agreement of the final account.

Early in my career I drifted from the traditional QS area of the practice of building and commercial property into heavy engineering, measuring everything from chemical plants to oil platforms for the North Sea. My employer, Turner & Townsend, was an industry leader in this field, drafting an SMM for mechanical engineering work that became the foundation for the SMMIEC (Standard Method of Measurement for Industrial Engineering), which is still used today and available at RICS Books.

While working as a QS on various nuclear projects we experimented with ideas of using MTOs (Material Take Offs) from engineering drawings to produce bills for piping installations, utilizing engineers to translate PFD (Process flow diagrams) and P&IDs (Piping and Instrument Diagrams) into approximate quantities; the challenge being that these are not scale drawings. The process used enabled two-stage tendering to maintain a project schedule. Step one was selecting the contractor based on a menu of prices. Step two was establishing the agreed price based on better-defined quantities on firm design. As always, RICS was the standard bearer, drafting the procedures for two-stage selective tendering.

It was also about this time that I was at a charity fundraiser for a local hospital where I was introduced to a project engineer. He told me with complete assurance that he “had seen the future of quantity surveying” and that “I did not have one!”

In this future he saw a profession that would be rapidly replaced by computers and computer aided design integration. They would exchange data automatically, taken from design drawings provided by contractors to owners.

That was almost twenty years ago and rates were still hovering around the physiological barrier of 10GBP per hour. Since then we have seen partnering, open book contracting, target price, risk/reward, design build, and so on. One project I worked on christened the term EPICOM (Engineer Procure Install Operate and Maintain) — a total hands-off approach by the client, while retaining certainty on price.

But let us fast forward now to 2010.

Although I have the professional training and qualifications as a QS, I do not have a Quantity Surveying job. I am a Project Controls Manager. I have taken the broad skills that being a Chartered QS/Chartered Project Manager have given me

and applied them to the cost and schedule management of oil and gas projects. In that role I have seen the resurgence in interest in the BOQ procurement process. Why is this?

All owners and contractors have been searching for an equitable sharing of risk — and certainty of price. The Bill of Quantity approach can provide this. The client takes risk on scope and the contractor risk is on productivity: each is best positioned to manage those risks. In addition, the use of the two-stage bidding process provides the opportunity to shorten the overall project schedule or work-around schedule constraints.

Today’s bills are produced using in-house or bespoke software to provide the platform. My own company is partnered with Causeway, a leading provider of cost management software called CATO (Computer Aided Take Off). Via a network of super-users the tool has been modified to be fit for purpose. The basic mechanics of CATO are intuitive to the QS — I describe it as electronic “cut-and-shuffle.” However, the software is a platform and has the capability to import data from 2D and 3D CAD. Its features enable the tagging of measured items on the design drawing to track the basis for bills and determine any subsequent changes.

The QS is able to facilitate bidding by exporting information to one of the most basic tools of commerce, Microsoft Excel. Contractors from any region of the globe, with little knowledge of Quantity Surveying techniques, can participate in the bidding process, pricing the spreadsheets via e-rooms. Bid analysis is rapid, allowing time for added value activities: further sensitivity analysis, what-if scenarios, validating estimates assumptions and more. The whole procurement process is more robust and compliant with growing finance regulatory requirements and the desire for greater process transparency.

The systems have the flexibility to adapt to various SMM, such as SMMIEC or NRM (New rules of measurement).

All the data available in the bill production process will facilitate new areas of QS expertise in knowledge management, limited by only the imagination of the professions. We are seeing the emergence of Building Information Management, improved enablers for Whole Life Cycle approach to property management, and e-procurement.

That Project Engineer at the charity event was right, in a way. The measurement role of the Quantity Surveyor, as it was, has disappeared. But it certainly has been replaced by a technology solution that allows us to spend more time adding value — and less time on the burdensome mechanics of the bill production process.

And that is not a bad thing. •

Martin Darley, FRICS, CCC Director

Turner & Townsend

Markets


Brazil–A Strategic Market for Business Expansion in Construction and PropertyNeil Shaw, FRICS, puts forward the case for Brazil’s rise among major world economies — and advises investors to engage with qualified, local property specialists.

Brazil, with a population of nearly 200 million, is considered by many European and North American investors as the

last emergent market for business expansion, principally because Russia, India and China have different business cultures that are confusing to many investors. The business and social environment in Brazil is sophisticated, however the first rule is not to understand Portuguese but the underlying business culture of the country, and the whole South American continent.

And “Let the buyer beware.” If you don’t know the market it is important to get credible advice from professionals on the ground.

“There are unscrupulous people in business here who are prepared to take advantage of ill-advised international investors.

But don’t be put off. This is a nation of stability. It is an election year in Brazil, which typically creates doubts in the business and financial communities. In this election cycle, though, it isn’t an issue. The two main candidates (according to recent opinion polls) appear to be palatable to most in the electorate: José Serra of the Brazilian Social Democratic Party (PSDB) and Dilma Vana Rousseff Linhares of the Labor Party (PT).

A recent survey conducted by KPMG noted that the Brazilian business community is the most optimistic

in the world regarding the global economy. Also, I’m happy to note that RICS research has indicated that the investor activity rising across 70 percent of the world’s markets is being led by Brazil.

Most of the principal banks, investment companies, asset managers and private equity companies have a presence in Brazil or are in the process of establishing representation. In terms of project finance the risk is medium. Brazilian property developers and contractors are experienced. Many of the major developers and contractors, such as Cyrella, Rossi, Rodobens Negócios Imobiliários, have carried out IPOs and some have already raised additional funds through further offerings and debentures, although many more require financing.

The overall economic forecast for 2010 is positive. According to the Federation of Industries of the State of São Paulo (FIESP) there will be an expansion of about 6.2 percent in the general Brazilian economy during the year, assuming a growth of wages and credit plus a less adverse international scenario. Industry should resume its growth after the significant effects of the global crisis these last two years. The industry sector’s GDP is estimated to rise 8.5 percent, driven primarily by manufacturing (9.5 percent) and construction (9.3 percent). The projection for the agriculture GDP is 3.9 percent and 4.8 percent for the services sector. These positive indicators should be bolstered by

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higher domestic demand and improving exports. Brazilian industrial production should resume at pre-crisis levels, closing the year with an estimated increase of 12 percent. FIESP is projecting a 24 percent growth in credit, returning to the levels of the global pre-crisis period.

There are also many government initiatives intended to generate growth in the construction and property sectors

Programa de Aceleração de Crescimento (Growth Acceleration Program), or PAC:

This is a major initiative to incentivize infrastructure investments for economic and social expansion. The planned investments are in the region of R$1.59 trillion, with more than R$600 billion after 2014. R$1 trillion is expected to be put toward the energy sector with almost R$900 billion for Petrobras. For transport, the forecast is R$109 billion on highways and the expansion of the railway network.

“Mina Casa Minha Vida” (My Home, My Life):

The housing market is buoyant at present due to major developers receiving stimulus from the federal government, which allocated R$34 billion for low/middle income Brazilians to have access to affordable housing. This project is carried out in partnership with the Brazilian states, local municipalities and the private sector. Unfortunately, there has been a slight setback as the government’s 2010 target of building two million units was below the market expectation of three million units. Furthermore, 60 percent of all new units will be targeted to families with incomes of up to three times the minimum wage. The original program had only 40 percent going to this segment. Developers and contractors, such as Cyrella, Rossi and Rodobens Negócios Imobiliários are very active in this sector.

PND or Programa Nacional de Dragagem (Port Dredging Program):

The federal government is planning to invest R$1.6 billion in this sector to allow the entry of larger water vessels, thereby increasing overall operating capacity by 30 percent. The government’s goal is to complete the dredging of seven of the seventeen targeted strategic ports by the end of 2010 with the expectation that the dredging sector should attract investments of R$800 million this year.

There are other factors driving optimism in the Brazilian market, such as:

• Funding - Lower interest rates, greater access to credit and government incentives should result in significant growth rates in the volume of funding in future years.

• The 2014 Football World Cup is heading to Brazil. • The 2016 Summer Olympics will be hosted

by the city of Rio de Janeiro. • There have been new deep water oil discoveries and it is

estimated that Brazilian oil exploration output will grow by 70 percent of present levels by 2017.

The infrastructure and housing sectors are being stimulated by government programs, which clearly have impacted companies within the supply chain. For example the construction materials sector is booming. Sales of building materials grew 25.87 percent

in March 2010 compared to the same period last year, according to industry association Abramat. Abramat is forecasting a continued recovery of the materials industry in the coming months.

The office development market is showing very positive trends. According to Jones Lang LaSalle, São Paulo and Rio de Janeiro finished 2009 on a positive note. The total stock of quality office space in São Paulo grew by 7 percent during the year, with approximately 200,000 square meters of new space. Of this total, 62 percent came from five buildings that were completed in the last quarter of the year. In Rio de Janeiro the total stock grew by 6 percent in 2009 with the addition of roughly 90,000 square meters of high-end space, setting a record for new stock in a single year.

In relation to residential development Secovi SP (the Commercial and Residential Property Syndicate of the State of São Paulo) predicts 2010 will be a record year with an estimate that 38,000 new homes will be sold in São Paulo, the highest level in 30 years. This is being driven by abundant credit, the government housing program and the overall positive conditions in the market. To meet the increased market demand since the start of the year, especially for smaller properties, developers have accelerated their activities. The volume of residential launches during the first quarter of this year was the highest of the decade in the São Paulo metropolitan region.

Most major Brazilian contractors and developers are actively exploiting the new opportunities, generating favorable conditions for future expansion in construction and property development.•

Neil Shaw, FRICS

Shaw Consultoria Ltda São José do Rio Preto e região, Brasil

Typical “Rodobens” semi-detached 3 bed house for middle class occupation

Strategic Plan & Participation in R$485 million IPO

Arts & Antiques


The New Craze?Elin Lake-Ewald, MRICS, reports on the market for art in South East Asia and explores its development in the United States.

Explosive,” was the first word uttered by Abraham Joel, noted collector and dealer of Indian Art, when commenting on the South

East Asia contemporary global market. He noted: “At the Osian Auction in Mumbai (March 2009), the bidding was high level and fierce, and it is sustained by the overall market for Indian art.” Joelsuggested exalted levels for native art are fuelled by the equally exalted Indian growth rate — predicted to possibly reach 9 percent by end of

and acclaim abroad. Never before have Indians at home been so prosperous as to support a proliferation of galleries, exhibitions, and even investment funds devoted to art.”

As of this year, the dominant masters of Indian art are Husain, Francis Newton Souza, S.H. Raza and Tyeb Mehta, the latter of whom’s work has sold for well over $1m at auction.

Also included in this category is Mohan Samant, who has a highly successful career that across the globe. The region’s up-and-coming stars include Nilesh Shilkar Saurname, Prashant Salui, Anupam Sud, Paramjit Singh, Mrinalini Mukherjee and Jayashree Chakravarty who are well sought after by collectors across the globe including in the United States.

Paradoxically, in a country with a long tradition of graphic sexual iconography, two of its most prominent contemporary artists, including Husain and Prashant Salui, considered the most promising emerging Indian artists, have run into trouble for their work’s erotic content — to the extent that Husain, threatened by death, chose exile in Dubai. Also, at the time of writing this article it was learned that Indian artist Subodh Kerkar was receiving threats from Hindu nationalists for depicting the elephant headed god Ganesha in various poses, including walking naked carrying a garden rake.

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2009. He believes this is the result of a still stable economy sustained by tight banking regulations.

According to Indian journalist Somini Sengupta, in an article sent from New Delhi to the New York Times in May 2007: “Never before has (Indian art) fetched such extravagant prices

More Americans are becoming attracted to the advantage in collecting relatively inexpensive art during a growth period.

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Arts & Antiques


Auction houses have been promoting the South Asian market since the late 20th and early 21st century. Bonhams’ Modern and Contemporary Middle Eastern and South Asian Art department has long been offering Modern and Contemporary Indian and Pakistani paintings in London, displaying work by Indian artists Jamini Roy and Souza, along with work by Pakistani artists such as Chughtai, Sadequain and Jamil Saqsh.

Christie’s geographical range extends from Afghanistan to Indonesia and from the Himalayas to Sri Lanka. At the South East Asian auction by Sotheby’s Hong Kong in April 2009, there was a 77 percent sales rate, with the highest priced items selling more readily than those in the lower categories. Indonesian Nyoman Masriadi was one star of the evening when his painting, Negotiation sold for $217,000. However, it was far less than the artist’s comparable painting had sold for the year before at the height of the market. Other artists that drew interest in this sale were Ahmad Zakii Anwar, Geraldine Javier, Handiwirman Saputra, and Nyoman Masriadi.

Modern art in another South East Asian country, Tibet, is somewhat apart from art in other nearby nations, perhaps not yet as developed and certainly not as well known. There appears to be no one dominant style among the Tibetan artists. Tserang Dhandrup, from North East Tibet, paints highly detailed views of ancient cultural centers; Gade, one of the better-known artists, mixes ancient icons with contemporary symbols.

Tsering Nyandak paints wildly joyous canvases full of color and ironic comments on Tibetan life and photographer Tenzing Paljor captures the landscapes of remote areas of his country where the Tibetan Buddhist way of life is preserved. Gonkar Gyatso offers more commercial limited editions of his work in Dubai, which has turned into a major outlet for South East Asia artists.

This present market for Indian and South Eastern art appears to be surviving rather better than its Western brethren. Christie’s latest London sale, in June, of South Asian Modern and Contemporary Art, sold 91 percent by value and 79 percent in terms of lots, garnering £2,430,375 ($3,973,450). The top lot was Husain’s oil on canvas from the Ragamala Series that went for £397,250 ($649,504) to a U.S. collector. Other top lots were by Rashid Rana, Ram Kumar, Jamini Roy, F.N. Souza, S.H. Raza and Akbar Padamsee.

Meenakshi Thirudkode, an Indian art critic and independent curator living in New York, has begun a monthly column on contemporary South Asian art.

According to Thirudkode, a “mad frenzy” for collecting Indian art began in 2001 with American and European collectors joining in, and now, in a recessionary period, may be profiting from the disappearance of speculators in astronomically priced art of the last few years. Compared to the ‘sky’s the limit’ prices for contemporary art seen in the recent past, the cost of buying a first-rate piece of ethnographic art is relatively small. This echoes Joel’s sentiment when he stated that emerging Indian artists’ work can be purchased for under $1,000 — perhaps a third of the price emerging Western artists can charge for comparable work.

Although the majority of major Indian artworks are purchased by Indians in the United States and in their native country, more Americans are becoming attracted to the advantage seen in collecting relatively inexpensive art during a growth period. And this is not unlike what happened more than a decade ago when contemporary Chinese art began its spectacular ascendance.

Maqbool Fida Husain’s Couple

Arts & Antiques


The growing number of East Indians living and working in the United States translates into the emergence of galleries, particularly in New York and Washington, specializing in Indian art, as well as the collecting of this art through auctions and retail. New York’s O’Toole-Ewald Art Associates has been asked to appraise a number of such collections, indicating that the market for contemporary Indian art has established itself firmly on American soil.

Christie’s New York in 2008 set four world records for the highest prices ever achieved for Indian and South East Asian art. A Sarnath sandstone figure of Buddha achieved $4.47m, a 13th century Tibetan thangka reached $1.5m, a rare painting by Nainsukh of Guler achieved $2.2m, and a Baphuon sandstone figure hit $2.1m. Ancient art these may be, but as older art disappears into museums and private collections and cannot be replenished, it is often the case that adventurous collectors will move into more modern areas of art. Within the next few years, we may very well see an evolution in the collecting of contemporary Indian and South East Asian art.

Since initial research on the status of the Asian, and particularly the Contemporary Indian Art Market, there have been some unexpected shifts, reversals and recoveries.

Following the startling boom in the prices of Indian Art, with reporters quoting an upswing between 150 – 485 percent, mirroring India’s economic growth, the entire art market fell precipitously, and with it so did India’s — as much as 75 percent. Then, almost as suddenly, it began to rise again. One helpful reason might be that while previously Indian Art was collected only by Indians, now it has a worldwide collectors base.

Two examples:

“Chalo! India,” the largest exhibition of contemporary Indian art, attracted thousands to Vienna last fall, inaugurated by Austrian President Heinz Fischer. Artists such as Subodh Gupta and Bharti Kher were featured in the

two-month long event. And a month before that show, there was an Indian Art Summit in New Delhi, with 55 galleries participating.

In London, Barclay’s Wealth recently sponsored two contemporary Indian Art exhibitions,

“The Mother Theresa Series” by M.F. Husain, and “The First Five Rays of Raza” by S.H. Raza. Also in London, and currently open, is the Saatchi Gallery’s latest exhibition, “The Empire Strikes Back: Indian Art Today,” which debuted at the end of January 2010. Given Saatchi’s success in promoting the work of unknown or emerging artists, sales should be on the uptick for contemporary Indian artists fortunate to be in the show. •

Elin Lake-Ewald, MRICS, ASA President

O’Toole-Ewald Art AssociatesIvan Santigo’s From Where I Am

Jamini Roy’s Mother and Child

This article first appeared in the RICS Arts Surveyor Journal November 2009

19

Construction


Effective Project Control: The New (Old) MethodsAlexia Nalewaik, MRICS, and Simon Taylor, FRICS, argue for increased transparency in the construction supply chain.

While the construction industry worldwide struggles to dig itself out from the current downturn (literally and

figuratively) and projects stall because confidence has waned, it is worth reflecting on happier times two to three years ago, when financing was freely available and forecast margins would likely cover any increase in cost. Sadly, in the push for profit and growth, basic good practice principles were forgotten. Take some example sectors: Infrastructure and rebuilding after the

California, New York and New Jersey; commercial real estate and healthcare in Everycity USA. All were good project candidates but they struggled to establish firm cost baselines and left the door open to abuse by the supply chain.

A key component missing from the procurement of services and contracts was then, and is now, transparency. Construction projects temporarily bind together parties with competing objectives, resulting in a situation characterized by high potential for conflict. Cost visibility is vital in bridging the value gap between contractors and owners, adds confidence and certainty, and enables a continuous focus on performance and absorption of change, rather than opening the door at the end of the project to disputes over the perceived impact of change.

The Quantity Surveying profession grew from a specialist expertise in measuring construction components and understanding means & methods, which remains the gold standard in many parts of the world, used by owners to bid work and by contractors in developing their pricing. The element of transparency comes from the use of a common methodology for quantification of scope, developed using

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hurricanes Katrina and Rita; the pharmaceutical sector, where seemingly every product was a blockbuster product or could be adapted for various applications; school development in

Unfortunately, the estimating function is not often utilized to its full effect.

Construction


industry-standardized rules of measurement. The advent of Building Information Modeling (which requires standard component coding structures), and the increasing demand for open-book reporting, collaboration and risk-sharing between project parties, should drive a renewed industry-wide focus on seeking a bidding and cost management methodology that is relevant to today’s construction sector, thereby enabling owners to re-enter the market with confidence.

A Fractured Industry

The classic project team remains largely characterized by a separation between legal entities, both in forms of remuneration and level of risk and liability for the performance of the product. Each entity is expected to work closely with other team members but is bound to the owner directly under separate contracts. The traditional construction contract clearly defines each party’s responsibilities and the consequences of failure to focus on the product. Avoidance of accountability and protection of self-interest results in the erosion of focus on collective success.

A typical scenario consists of:

• The Owner and their technical representative (which may be a separate Program Management company, auditor or a lawyer)

• A project office team comprised of an architect or designer, engineering disciplines (contracted through the architect or directly by the Owner), an estimator/quantity surveyor (contracted through the architect, project manager, or Owner), construction manager (CM) and other specialty consultants, and

• A construction field team comprised of a general contractor (or construction manager at risk), and several levels of subcontractors.

The number of potential variations in this team structure is dizzying and varies to account for available expertise, address any legal or regulatory constraints and hopefully best capture the objectives of the Owner.

This separation of design and execution functions is unlike the organizational structure found in almost any other industry and often leads to conflicting obligations for individual project parties. This is particularly true for the Contractor and sub-contractors, who bear the cumulative brunt of project cost obligations, via the expectation that the end product will be provided at the agreed upon amount (often a fixed price lump sum), regardless of the quality or completeness of design documents and assumptions made by the project planning team.

Issues With the Current System

These traditional preconstruction processes and team arrangements lend themselves more to managing individual liability and detract from effective execution planning. Constructability input from the construction experts (the Contractor and subcontractors) is rarely

sought before bidding commences and, until the bidding process is complete, confidence in the forecast of final cost remains low.

A great deal of detailed knowledge and information is provided by the estimating function; in its purest form, it equates to an independent review of the project’s scope and theoretically enables a focus on problem areas and constructability issues. Unfortunately, the estimating function is not often utilized to its full effect. The team could, by adopting a consistent approach to identifying errors and omissions, improve design accuracy before bidding takes place, so that late, expensive changes can be avoided or reduced. Scope quantities could also be provided to contractors for use in developing accurate bids, reducing low bidder risks and future change orders. Unfortunately, these opportunities are hindered by inconsistency in scope breakdown and schedule of values (SOV) detail, because the material takeoff methodology varies from estimator to estimator and firm to

firm, such that any reconciliation process becomes difficult and missing items are less visible or easily can be assumed

to have been included “elsewhere” in the SOV.

Consider, also, that professional standard of care does not guarantee defect-free buildings. On the

contrary, liability laws provide that professionals (such as architects) are expected to exercise learned judgment, based on experience and education. These professionals are held

accountable for the process, not the results. Design documents do not specify every element

of construction in excruciating detail — certain items are left to the skill and discretion of the

builder but the contractor is not held responsible for the consequences of defects in the design documents.

Imagine, therefore, the challenges experienced by trade contractors when assembling a bid price from drawings

and specifications. Whereas the estimators had the benefit of several months and access to the design team, thus

enabling a deeper understanding of the intended scope, the contractor typically has less than a month to produce a price

and develop execution and logistics plans, often revising their bid price in-situ at the time and place specified for bid delivery.

The basis of the scope analysis, a quantified measurement of the building, is not provided to the potential bidders, so it can be assumed that each bid will be based on different measurements, means & methods and degree of understanding. The Contractor has a high risk of accidentally omitting or misinterpreting scope items; contingencies are added to the price and schedule. In a low-bid environment, the bidder who submits the lowest price for the scope (or makes the biggest mistake) wins the contract and during construction any changes from the price, scope and design assumptions are pursued vigorously.

The fractious environment of design, engineering and construction seems to have been crafted to create conflict and additional cost. Is there another way?

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Construction


The Path Forward

Clearly, the industry can gain by engendering a stronger, more cohesive design and construction team. Scope definition and comprehension is the common thread between all parties and communicating this transparently and consistently for use by all will boost effectiveness and lead to improvements and innovation. This is where a consistent measurement and quantification basis can provide an industry standard “symbolic” interpretation of the drawings and specifications that is understood by all, without loss of competition or negotiation leverage. The measurement rules used by quantity surveyors provide two key levels of consistency, by:

1. Establishing which items shall be measured, how each shall be described, what components are included and how each item shall be coded for consistency across all projects

2. Dictating how each item shall be measured, what is to be included in the quantity and what is to be excluded

By requiring such consistency across the industry, a number of benefits quickly emerge for Owners, quantity surveyors, cost managers, project managers, construction managers and Contractors:

• Reconciliation of estimates will be greatly simplified, as detailed items will be coded and described similarly; an apples-to apples comparison will be possible, without much guesswork

• The systematic approach to developing the estimate will aid the design review process and help to identify errors, omissions and constructability issues

• The Owner will have an improved understanding of risks and contingency requirements and will be able to incorporate appropriate cost control mechanisms into the bid documents

• The chance of error will be greatly reduced and (with practice and familiarity with the methodology) measurement will ultimately become more automated.

There is some opportunity for pricing improvement as well; by providing a consistent basis for bidding, the spread of bids received can be expected to narrow because each bidder will have incorporated the same scope of work without omissions and with reduced error. By enabling a bid process with fewer errors and risk, there will be potential for lower prices because Contractor price and schedule contingencies will become more realistic.

This bidding methodology has been used in many other countries for generations, including the United Kingdom, South Africa and Australia, and continues to be used by Owners and construction managers. The process is particularly effective in Private Finance initiative/Public-Private Partnership (PPP) projects where long term service agreements depend heavily on accurate pricing at the offer stage.

Recent pilot projects in New York have helped to amplify the potential in the Americas. In mid-2005, The City of New York, through its Department of Design and Construction (DDC) and efforts led by Commissioner David Burney, sought ways to combat declining interest from contractors and high levels of

change during construction, and achieve a more consistent bid basis, increased collaboration with consultants and contractors and greater confidence in achieving project objectives. The DDC has strict public procurement rules requiring award to the lowest responsive bidder, which on occasion meant awarding work to contractors who did not have the necessary expertise, but had submitted the lowest priced bid. Change order approval was extremely slow due to audit requirements, and overall price levels reflected the cost risks borne by the contractors. With a booming market and plenty of private development opportunities, public sector work began to fail to attract competitive bidders.

The solutions proposed resulted in the Defined Quantity Contracting strategy, which included the following key features:

• Standardized expectations of the format and detail to be provided in the final estimate, through use of a published standard measurement methodology. This represented a ‘road map’ of the design documents, with clear references to specifications and drawings.

• Bid documents that included the (unpriced) quantity take off and descriptions, requiring bidders to use the quantified measurements as the basis for their bid

• Provisions that enabled the Contractor to be made whole for any errors in quantities as shown in the bid documents

• Consistency and continuity in the methods for processing change orders and payments, with no change to those procedures.

This restructuring of the procurement process resulted in: an equitable sharing of risk; additional assurance that scope was complete and described correctly; added focus on the accuracy of the final estimate; transfer of detailed knowledge from preconstruction to the Contractor; use of the described scope and quantification by bidders which lessened their fears about miscalculating or misinterpreting the scope; more

transparency for both Owner and Contractor in quantifying the basis for change orders, and the ability to exert more focus on performance. Although the projects are still ongoing, the process benefited from extensive outreach to the trade contractor community and resulted (at the peak 2007 construction market) in bid awards at or near budgeted amounts. This was

Consider, also, that professional standard of care does not guarantee defect-free buildings.

Construction


a substantial achievement, as the study initially anticipated higher prices from use of the process, with pricing expected to reduce over time as familiarity with the process increases.

Now, in 2010, a similar effort is being undertaken by a large public sector Owner in California. Using Defined Quantity Contracting on a small and simple project, the Owner is pioneering the effort to create a more equitable and transparent bidding environment within the limits allowable by low-bid public procurement laws. The current economic situation is the primary motivation for this pilot; extremely low bids, thirty to fifty percent below the estimated cost, are being received on projects statewide and projects under construction are experiencing an unprecedented increase in change orders. The Owner seeks a method by which bids can be compared for responsiveness and responsibility, on an apples-to-apples basis. To date, surprisingly few revisions to the bid package have been necessary, although instructions to bidders required some expansion and clarification and it is expected that the pre-bid meeting will be dynamic, with much Q&A. No changes have been made to the contract, payment application process or change order process. The expectation is that lessons learned can be captured after this first iteration and the methodology refined on future, larger projects.

A similar benefit can be extended to the use of Building Information Models and Integrated Project Delivery teams. The ability to derive schedules and estimates of cost from the design model provides a

good opportunity to improve early decisions to optimize the final product, by capturing real time information integrated with the design solution. The BuildingSmart Alliance (of which RICS is a signatory) is standardizing the way design objects in the various systems are coded, so estimates and schedules can be (almost) fully automated directly from the model. One component of this is the use of standardized quantification principles, to make the model measurement more consistent industry wide. As with the Defined Quantity Contracting effort, the overall aim is to improve the timing and accuracy of estimating, provide a consistent, transparent basis for decision-making, enable highly effective collaboration between team members, and create opportunities for more effective partnering with contractors and suppliers.

Through the use of these innovative design and procurement methods, the vision of a more integrated, less adversarial industry with a clear road map for increased efficiency can be realized. The quantity surveying professions have a perfect occasion to instill these principles in current processes before significant economic recovery gains traction and while conditions for embracing innovation remain opportune. •

and Simon Taylor, FRICS

Principal Questant Corp

Alexia Nalewaik, MRICS, CCE, MSc Principal

QS Requin Corp.

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Education/Key Accounts


MyF+G: Terms of EngagementFaithful+Gould brings its corporate identity into focus for employees worldwide with MyF+G. A lesson for global firms.

Rarely in corporate culture is there an opportunity for employees to self-engage on the level that Faithful+Gould

has made possible for its global roster of 2,000 employees — including those in more than 20 U.S. offices. Simply dubbed MyF+G, it’s designed as a grassroots engagement program that allows employees to express their views in a comfortable forum and suggest ways the company may improve.

The program was born out of Faithful+Gould’s five-year corporate planning structure and was rolled out in summer 2008 with six

Constructive Expertise is a logical beginning step in engagement. Second, making sure every employee sees the impact he or she has on the business. Third, growing the talents and capabilities of Faithful+Gould’s employees.

Using a toolkit that includes a USB flash drive, employees are encouraged to adapt more sustainable business practices to lessen individual carbon footprints. One USB flash drive, used judiciously, can save reams of paper (and trees).

Here’s how a typical session works.

All managers are invited to conduct sessions with their teams on a regular basis. Each session is designed to last 30 to 45 minutes and managers are given permission to interrupt the workday to conduct sessions. In addition to a step-by-step engagement guide and the flash drive, materials such as juggling balls, foam cubes and other “toys” encourage teamwork.

“It’s a ‘do with,’ not a ‘done to’ philosophy,” said Caron Waddington, training and MyF+G project manager. “It’s all about how we involve employees to create change and improvement. What works? What should we being doing? What should we stop doing?” (Waddington’s work is overseen by a steering group and spinoff groups. She manages the MyF+G process for worldwide business.)

sessions focusing on the big picture of the new corporate identity, “Constructive Expertise,” and what that identity conveys in terms of Faithful+Gould’s people and services.

The goals of MyF+G are threefold. First, understanding the corporate identity of

“It made us realize the value of people with a collaborative mindset”

Education/Key Accounts


Waddington cited a key piece of feedback from the first session.

“Employees wanted to know how to advance at Faithful+Gould. This told us that we needed more defined career paths, including quantifying education and experience, as well as what behaviors are required for long-term success,” she said. “It made us realize the value of people with a collaborative mindset and the commitment to making sure, from a corporate standpoint, that Faithful+Gould has the training to support collaborative behavior.”

Taking that philosophy a step further, the company has augmented its job descriptions with a series of role profiles that include personal skills and characteristics.

“The first key is awareness,” Waddington said. “MyF+G heightens the awareness that behavior and personal skills matter greatly in how we provide our services.”

Faithful+Gould’s emphasis on collaboration begins at the top with Richard Hall, CEO of worldwide operations. In his seasonal message he said he was particularly gratified to note that the annual employee Viewpoint Survey reflected the progress of MyF+G with improved scores for employee engagement and feeling valued. “I’m absolutely convinced that Faithful+Gould people care a great deal about this business, our reputation, and the colleagues they work with,” Hall said.

On the heels of the first six successful sessions, the next series, called “Excellence,” rolled out in early spring 2010. Designed in two parts, Excellence will introduce “The Business Scorecard,” which emphasizes three characteristics: positive, professional and collaborative. Employees will participate in sessions that define how to deliver Constructive Expertise using The Business Scorecard and on how that delivery translates into greater success in the upcoming business quarter.

But enough theory. The employees have their own way of stating their commitment to MyF+G and the results they’re seeing.

Matthew Owens is an estimator in the Washington, D.C., office of Faithful+Gould.

“The MyF+G sessions to date have made me feel more connected to the message of what the company is trying to project to its clients, and also involved with the direction in which the company is heading. I believe it’s had a positive effect on staff by creating a greater collaborative culture in which all staff — whether they are technical or administrative — feel a part of and have a voice which can be heard,” Owens said. “These sessions have also made me appreciate that although Faithful+Gould has a responsibility and desire to help me develop professionally, I in turn have more of a responsibility in making this happen.”

Faithful+Gould Director Stuart Flaxton, who facilitates MyF+G sessions from the London office, said employees were learning they could have a real impact on the path the company takes, despite the company’s great size.

“From my experience the key success factor in the MyF+G program has been the level of staff engagement; people have seen it as a means of having influence on the direction the company is taking and a vehicle for sharing their own views and, more importantly, their ideas. With a company of our size that’s pretty rare,” Flaxton said. “And people have grabbed the opportunity with both hands, which has been incredibly important as once someone feels that they have the ability to foster change, then they are far more likely to contribute to making this happen.

“Far too often I work with companies who put great stock in composing detailed ‘Mission Statements,’ which you can’t help but feel have been produced simply because they believe they should have one and which are more of a case of being ‘seen to be written’ rather than ‘written to be seen,’” Flaxton said.

“MyF+G is fundamentally different to this as it is based on sharing what our values are and agreeing how we can best present these to our clients and colleagues,” he said. “The proof is in the pudding — if you ask people from many other large organizations what the values of their company are, I suspect they would struggle to respond; if you ask someone from Faithful+Gould to explain ‘Constructive Expertise’ I doubt you will be able to stop them talking and, what’s more, you would hear the word ‘I’ an awful lot as well.” •

Susan Blexrud

Communications Consultant Faithful+Gould

25

Project Management


Independent Trusted Cost AdvisorsThe Best Way to Manage Cost Risk on a ProjectMartin Grace, MRICS, explains how property owners protect themselves by engaging with top cost consultants.

For an Owner undertaking a development, their goal is to complete a successful project. Typical expectations are desired

quality, construction to schedule, cost within budget and completion with limited disputes or litigation. To achieve this, good planning and management is essential. In these current lean and challenging times, sound financial and managerial decisions are more crucial than ever in order to impress potential financiers, investors and end users, otherwise the project may never

duties are not handled by an expert such as a cost consultant (estimator). How can this and other crucial decisions be addressed? Read on!

Key Independent Personnel

Owners should hire key personnel with experience and a proven track record for their type of development. All disciplines should be handled by qualified experts and this extends to cost management.The cost management duties of a project extend from the preconstruction (design) to the construction stages and are known as the “hard” construction costs.These costs on average amount to 70 percent of the total budget. The remaining 30 percent of the budget are the project costs known as the

“soft” project costs. With such significant levels of funding involved, you would think an owner would employ a cost expert to manage this risk as part of their trusted advisory team. Does this commonly happen? The answer is “no.”

In the United States, typically independent project managers or architects’ project managers organize and manage the cost management process. In most cases they do this by employing a cost consultant who is under the architect’s wing as part of the design team. While in many

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get off the ground. One of the most important aspects of any project is the budget, yet many projects fail because the cost management

As a trusted advisor, the cost consultant has greater powers to manage the cost process to benefit the owner.

Project Management


cases this arrangement can be successful due to good management during the preconstruction stage, there are other instances where this arrangement fails for a variety of reasons.The main reason for failure is because cost consultants are not actively employed to provide key cost advice at the crucial decision making stages of projects and in some cases not at all. These projects can encounter budget busts, time lost due to redesign and in some instances a canceled project. The arrangement of employing a cost consultant as part of the design team is flawed. Why? Simply because the cost consultant does not have the powers to manage the design cost. The architect is effectively the manager of this process and is free to choose whether or not he implements the cost consultant’s advice.

A better option is to employ a cost consultant independently as part of the owner’s trusted advisory team. It is in the owner’s best interests to have both a project manager and a cost consultant who are both independent from the design team. This arrangement can be more effective allowing the project manager to handle the overall management and planning of the project and leave the cost management duties to the cost consultant. An ideal project framework for this arrangement is illustrated in Figure 1 above.

As a trusted advisor, the cost consultant has greater powers to manage the cost process to benefit the owner. It is recommended the cost consultant is engaged to handle all “hard” and “soft” costs from “cradle” to “grave” to steer the owner in the right direction. Under this arrangement the cost consultant has a central role in dealing with the parties involved in the development (such as lawyers, financiers, etc.), the project design team and the construction build team.

It is highly recommended that the owner brings the cost consultant on board after the project manager is engaged and before the design team is selected. The first task should be to review or calculate all budgets. This ensures strict cost management is applied immediately and efforts are not wasted pursuing design options that are not economically viable.

Is this arrangement going to cost the owner more money? The simple answer is “no.” The owner can save money on other consultant fees as well as reduce the risk of budget increases and claims by stricter cost management.

Owner

Owner's Team of Trusted Advisors

Project ManagerTasks: Delivery and management of projects byplanning, organizing and managing resources.

Cost ConsultantTasks: Preconstruction cost management, constructioncost management, development cost management.

Parties Involved in the Development

• Land Owners• Financiers• Partners• Lawyers• Tax Specialists• Municipalities• Consultants• Realtors• Purchasers• Tenants

• Insurance & Bonding Consultants

• Suppliers, Vendors & Subcontractors

• Operations, Building Management & Maintenance Teams

Construction Build Team

General ContractorTasks: Providing management andresources to construct the project.

Other PartiesTasks: Subcontractors, Suppliers providing

resources to construct the project.

Construction Design Team

Tasks: Architecture and Engineering of the project.

Independent Review Team

Tasks: Independently reviewing the preconstruction process.

Figure 1: Ideal Project Framework

27

Project Management


Credibility

The recent tightening in lending restrictions has now emphasized the need for an owner to have a more solid business plan and requires the owner to provide more collateral to get funding. To alleviate this greater risk, it is even more crucial for an owner to have the correct team in place in order to move forward with a project. An owner’s trusted advisory team including a cost consultant provides the owner’s plan with greater credibility which will appeal to Financiers and Investors.

Project Development Costs & Budget Management

A cost consultant is ideally placed to assist the owner by managing the total project cost. This includes all project “hard” and “soft” costs. A failing with many owners’ budgets are that they are optimistic and unrealistic, therefore, it makes sense to utilize an expert to assist. The cost consultant can ensure strict cost management is implemented and ensure realistic costs are established for construction costs and project costs such as land, financing, fees, commissions, insurances, bonds, legal, taxes, levies, operational, fittings, fixtures, equipment and contingency costs.

Preconstruction Cost Planning

For effective design cost management, the best method to adopt throughout the preconstruction period is a cost plan. In the United States, cost plans are based on Uniformat II Elemental Classification for Building Specifications. This method, set up by the cost consultant, prepares a framework which provides the design team with an effective cost management mechanism for the project design. The cost plan is prepared at the concept design stage and updated at the schematic, design development and pre-bid/contract documents stages.

Nearer to bid stage, the preconstruction estimate should also be prepared in Masterformat 2004. This method enables reconciliation or comparison with the general contractor’s bid. However, it is important to identify that this method is not effective for design cost planning even though it is used by some owners. In some cases, other owners undertake the design process with effectively no cost management methods in place and may rely simply on a ballpark estimate from a general contractor as their method of cost planning. Owners are taking a risk by relying on the general contractor’s estimating accuracy, particularly if the provider is not being compensated for this service. The estimate may be either inflated or unrealistic.

During the design process, the cost consultant will closely monitor the building size, design and material selection by undertaking various studies. This will include evaluating various design options and value engineering. As part of the value engineering process, alternates are a good way to maintain the owner’s requirements. In most cases alternates identify a reduced cost, but if the budget allows, the owner may want to know the cost to increase scope. It is good practice to build into the design cost control measures such as alternates or phasing as options, in case the project encounters budget problems. It also allows the owner to have the flexibility to

make quick decisions to ensure the project stays on budget if an issue is encountered and to avoid delays resulting from redesign.

Contract Documents Preparation

It is crucial that the owner obtains as much cost information from the general contractor at bid stage prior to signing a contract. This will make it easier to analyze the bids and to identify alternative costs should the bids be over budget. This also establishes that cost management measures are in place for the construction phase. The cost consultant can assist in ensuring that the information sought is implemented in the bid documents. Typical information will include a bid divisional summary subdivided into trades, alternates, phasing costs and various items for change order analysis including; labor hourly rates and general condition/overhead/fee percentages.

Obtaining this information provides the owner with greater negotiation powers and reduces risk. From a budget standpoint, the trade breakdowns provide information needed to review the general contractor’s cash flow and ensure the owner will not be overbilled for the early trades. Overbilling at the beginning of a project is typical among general contractors and places risk on the owner particularly if the general contractor is declared bankrupt before the job is completed. Next, obtaining all cost data before a contract is signed with the general contractor is crucial. Once the contract is signed the general contractor will be less willing

to offer a fair and competitive rate and that makes things more difficult to negotiate change orders. Lastly, the bid documents should consider requesting any cost breakdowns that the owner may need to provide to the end users, particularly if there are multiple buildings, tenants or purchasers. From a budget standpoint, it makes more sense for the owner to obtain these costs from the general contractor to ensure any cost splits are accurate.

Building Life and Efficiency

Smart owners are not just interested in the initial “capital” cost of the building; they want to know the total life cost of the building so they can see the long term return on their investment. The cost consultant can prepare a life cycle cost analysis which includes the capital, operation, maintenance and replacement costs together with any LEED® initiatives. This enables the owner to make key decisions particularly in relation to design and cost. The current upsurge in upgrading

Is this arrangement going to cost the owner more money? The simple answer is “no.”

Project Management


or fitting out existing buildings due to restrictions in the financial sector could well lead to owners evaluating the life of their existing buildings. RElifing® initiatives developed by Rider Levett Bucknall identify to the owner the potential extended life and value that can be achieved from an existing building, something they may not have previously considered.

General Contractor Procurement

The selection process for the general contractor is crucial to the owner and needs to be implemented correctly, otherwise it could cost the owner a great deal of time and money and may result in dispute or litigation. The cost consultant is able to advise the owner of the advantages and disadvantages of different procurement routes and identify if an option carries a cost premium. Good examples are when you limit competition by single sourcing general contractors, subcontractors and suppliers by narrowing the choice. Another example is Cost Plus contracts, where there is less incentive for the general contractor to be efficient. In the case of Fast Track projects, in order to manage the risk created in meeting the owner’s schedule, a higher amount of cost contingency will be required to deal with the errors that this process creates.

When you consider other procurement routes such as Design Build, Construction Manager/General Contractor (CMGC) and Construction Management at Risk (CMAR) that bring the general contractor on board early on in the preconstruction design phase, cost management needs to be closely looked at. While it can be good to utilize the general contractor’s expertise, an audit of the general contractor’s estimate and final bid/price by a cost consultant is crucial to ensure the owner is receiving value for money. The auditing process is a mandatory procedure with many public organizations and something many organizations, particularly in the private sector, do not do and should consider as part of their due diligence.

Building Information Modeling (BIM)

The technological evolution in the construction industry continues with Building Information Modeling (BIM). BIM offers a faster design process utilizing computer programs that generate information quickly. This extends to being able to produce quantities for building components in an effective manner. The danger with BIM is that parties such as owners may think they do not need a cost consultant at all to prepare estimates. While there is no doubt that BIM speeds up the preconstruction process, a cost consultant is the only qualified professional with a full appreciation of the variables of pricing in relation to the project.

Contract Selection

Many projects fail because of the selection of non-standard industry contracts for the agreement between the owner and the general contractor. These contracts are widely interpreted as unfair due to the intent of an owner to transfer the risk to the general contractor, which can lead to costly disputes. An owner’s contract can also attract a cost premium in the general contractor bids meaning the owner is, in reality, paying for this

risk. Therefore, it is recommended the owner selects a standard industry contract containing clauses which clearly deal with every eventuality and has alternative mechanisms to handle disputes in a timely and cost effective manner. From a legal standpoint, a standard industry contract is more likely to have set precedence that is familiar to the legal profession. It is also important the general contract selected is thoroughly reviewed before implementation. The owner’s trusted advisors can work with a legal expert in regards to this, to ensure the owner’s position is protected. The cost consultant can review the contract has the mechanisms to deal with all aspects of cost management.

Contract Documents Review

Many projects get into financial difficulty because the contract documents are not vetted for buildability, errors and omissions before going to bid. Failure to do this can expose the owner to greater risk and result in a greater number of claims being received from the general contractor during the construction phase.There is also an increased risk to the owner of disputes or litigation. Also worth noting, if the construction bid documents are poorly assembled or unclear, the owner may well pay a premium up front when the general contractors’ bids are received. The cost consultant can assist the owner’s team in vetting through these documents to ensure this risk is minimized. It is also recommended that the owner’s trusted advisors work with an independent review team during the design process, with a final review of contract documents before going out to bid.

Construction Phase

It is standard practice in the United States to utilize the services of a cost consultant at the preconstruction phase of projects. However it is less common to utilize a cost consultant during the construction phase. This role generally lies with the project manager who is not a cost expert. It is recommended the owner utilizes the project manager to administer the contract but allows the cost consultant to continue the cost management role. The cost consultant will ensure that mechanisms implemented in the contract to control costs are continued and will handle processing of the general contractor pay applications, claims, change orders and final account.

Conclusion

There are many financial risks to the owner in developing a project. The owner can guard against these risks by ensuring his team of trusted advisors includes a cost consultant. It will pay dividends. •

Martin Grace, MRICS

Resident Manager Rider Levett Bucknall Ltd.

Original article published in the AACE International Cost Engineering Journal, February 2010.

29

Ethics


Ethics in U.S. Business and the Commercial Real Estate MarketStan Mullin, FRICS, argues for a higher standard than compliance with the law.

What comes to mind when you hear mention of Ivan Boesky, Mike Milken, Long Term Capital Management,

Allen Sanford and Goldman Sachs?

At one end of the spectrum is a view of amoral greed resulting in economic decimation for millions of people around the globe. And there are many who think these people and firms are a group of smart folks who, at a bare minimum, may have complied with the letter of the law but

But now, what we in business are willing to do to make a profit has had an integral and public impact on individual wealth, corporate earnings and public sentiment. Ivan Boesky and Mike Milken served time in prison — as Allen Sanford will — and LTCM failed in 1998 and was liquidated in 2000, nearly taking the world banking system with it.

With roughly eight percent of the U.S. population expected to lose their homes permanently during the current deleveraging of the U.S. debt markets, many Americans blame a lack of disclosure and transparency, un-regulated markets and a lack of concern for the customer.

To put it simply, many Americans view business leaders as moral eunuchs.

Warren Buffett and Charlie Munger, two of the most successful investors of the last few decades, have never been reluctant to voice their disdain for the greed they see as prevalent in the financial markets, where compensation is common even if the investment is not profitable..

Other than for those taking positions for their own account, on Wall Street the typical path to wealth is to sell products

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certainly did not conform to the values of right and wrong commonly understood by most.

The subject of morality in business typically evokes either boredom or relativistic debate.

The incentive is to make the trade or sale, rather than seek growth in the value of the investment.

Ethics


of varied types — and the earnings you and your firm earn, for the most-part, are paid up front, not at the reversion of the investment. The incentive is to make the trade or sale, rather than seek growth in the value of the investment.

One of the values delineated in the RICS Rules of Conduct is integrity: “Members shall at all times act with integrity and avoid conflicts of interest and any actions or situations that are inconsistent with their professional obligations.”

The U.S. National Association of Realtors “Code of Ethics and Standards of Practice” is a 7,470 word document that outlines the critical importance of: disclosure of material facts and any conflicts-of-interest, protecting and advancing the client’s interest, honesty, cooperation with others in the real estate industry, compliance with the law, accurate representation of the facts, among other topics.

Do we as members of the commercial real estate industry have a moral obligation to operate our businesses in a way that meets or exceeds the ethical standards set out by our industry trade associations?

We do.

Absent treating others in business as we would like to be treated ourselves, the result would be a fractured, contentious business environment that would detract from the time we should be spending working with our clients to protect their interests.

What are some of the ethical dilemmas we may find ourselves in? Here are some scenarios and questions to consider:

a) Have you been offered money or gifts in exchange for business? If so, did you accept them? Did you ask for your client’s approval before making your decision? Did you disclose the offer and your agreement to provide that business to that third party service provider? Did you document the disclosure to and consent from your client in writing? Even with the disclosure and consent, was the choice to use the third party service provider in the best interests of that project and all concerned? Would any party involved in that project have merit to make a claim against you or your firm?

b) Have you ever done anything that would impede the judgment of your client or anyone involved in your assignment? Going out for drinks in a business setting is a common practice but would that impact the risk, economic result or reputation of you, your client or your firm?

c) Is there any nepotism or favoritism involved in your decision-making? I was talking to a CMBS special servicer recently and he had run into several occasions where he had nominated a receiver to the court with jurisdiction over a commercial property, only to find that the presiding judge substituted someone of the judge’s personal preference — but not any more qualified to do the work. A judge no less!

d) Are you taking on assignments for which you are not an expert but purport to be? I was a defendant in a dual agency trial about fifteen years ago. The lawyer who represented my firm and each of the named agents was a transaction lawyer with little trial experience. As you may expect, we lost the case. I know of many cases where financial advisors have given tax or legal advice to their clients instead of directing them to accountants and lawyers. The advisors likely fear that if they introduce their clients to experts in other fields then they risk losing those clients.

e) Do you disclose that when you are providing professional advice that you may be receiving economic gain, other than the compensation your client knows about, if your client takes your advice? I know of cases where a broker recommended that a client should acquire property in which the broker was a partner, and did not make that disclosure. Nor did he obtain the client’s written consent. In many states, if a wronged party in a case like this one sues, he can win a return of actual damages (the price paid for the property), which is typically covered in an errors and omissions policy, and punitive damages, which are typically many times higher than the actual damage award and which are typically not covered by E&O insurance because the act was fraudulent.

f) Does your client know what he is buying, whether real property, equities, bonds or other assets? I know of a case with a Tenant-In-Common purchase, where though the title company insured the $800,000 purchase price, they only reported $700,000 to the county as the actual property value. The sales agent involved said that, as with all property sales, the seller paid commissions. What the sales agent did not disclose was that $100,000 of the purchase price was fees, made up of transaction commission and fees paid to the TIC sponsor and to the broker-dealers who found the buyer and raised the capital for the sponsor. The real estate agent also did not disclose that the TIC sponsor successfully appealed to the title company to have the basis price of the property listed as the price, net of any fees, which reduced the future property tax payments by the investor. I wonder about the ethics of a title insurance company that would do this.

Integrity in our work can and usually does have a direct positive economic impact on our clients — and on us. Reputation is priceless and should be the focus for all of the work that we perform. •

Stan Mullin, FRICS, SIOR, CRE, CCIM Senior Partner

California Real Estate Receiverships

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