The Need for CM/PM Companies
In recent years, the need for transparency and accountability in terms of cost, construction period and quality has become a strong issue in construction projects in Japan, and there has been a rapid increase in the number of projects in which management companies and consulting companies specializing in construction management (CM) and project management (PM) services are providing these services on behalf of the client from a standpoint completely independent of the designers and builders.
Specifically, in the past, the need for management services such as CM and PM by a third party was mostly for large-scale construction projects exceeding 5 billion yen or 10 billion yen. However, in recent years, the use of these management companies is rapidly increasing, even for projects of less than 500 million yen or 1 billion yen.
This indicates that we are entering an era in which the use of construction management companies, regardless of the size of the project, will be based on the client’s structure, project status, and objectives, and the need to use such companies will continue to grow.
Therefore, in this article, we will introduce why the use of construction management consulting companies is necessary, from the following perspectives, focusing on the background of the increasing need for the use of CM companies in Japan.
- The reversed relationship between client and contractor
- Diversifying construction order methods
- Changing attitudes toward the use of CM companies
- Impact of work style reform
1. The reversed relationship between client and contractor
One of the key factors behind the increased need for CM companies in Japan is the reversal of the relationship between the client and the construction company (the orderer).
The balance of power in the relationship between the client and the construction company is usually in favor of the client who pays for the goods and services. Until now, in the construction industry, the client has been in a dominant position over the construction company (general contractor).
However, since 2011, the market has been experiencing construction demand that far exceeds the amount of construction work that construction companies can handle, including reconstruction projects related to the Great East Japan Earthquake, resulting in a permanent labor shortage. This shortage of labor led to a gradual reversal in the relationship between the two parties, and from around 2014, construction companies have been in a dominant position over clients.
This balance of power between the client and the construction company is called a buyer’s market when the client is in a superior position to the construction company, and a seller’s market when the construction company is in a superior position to the client. Since the collapse of the bubble economy, the construction market, which had been a buyer’s market for over 20 years, has changed to a seller’s market.
Seller’s market conditions
・Selective order taking by construction companies
⇨ Selection of projects with high profit margins/profits
⇨ Profitability of construction companies is at an all-time high
・Construction companies are not aggressive in bidding and quoting
⇨ Aggressive if construction orders are assumed
⇨ Decline to quote for competitive projects
In other words, in the past, there was competition among construction companies to win projects, but nowadays, it is difficult to create a competitive environment, which tends to result in higher construction costs and longer construction periods.
As a result, there has been a rapid increase in the number of cases in which the orderer is confronted with problems such as the estimated cost exceeding the budget significantly, the proposed construction period being much longer than expected, and the appropriateness of the estimated cost being difficult to judge and explain within the company.
2. Diversifying construction order methods
Another factor that has increased the need to use CM companies is the diversification of construction order methods.
In the past, a combination of the design-bid-build, in which the contractor is selected after the design is completed, and the total value contract, in which the total value of the construction work is agreed upon, were widely used as typical ordering methods.
However, in recent years, the design-build (DB) method has been adopted to shorten the project period and to reflect the technical capabilities of the construction company in the design. In addition, the open book method is used for cost transparency, and the CM method makes full use of construction management companies.
As a result, it has become necessary for the client to compare and examine ordering methods that were never used in the past, such as what ordering method options are available for the project, how to select the most appropriate method, and how to specifically proceed with the project using each ordering method.
3. Changing attitudes toward the use of CM companies
Another reason for the dramatic increase in the need to use CM companies is that the awareness and understanding of clients regarding the use of CM companies has changed significantly over the past few years. The following are the four major points where the awareness of clients has changed.
(1) Awareness of the need for work and specialized skills
First, clients now have a better understanding of the necessity of CM work and specialized skills, such as CM becoming necessary to manage construction projects from the perspective of cost, construction schedule, and quality, and leading the project to success and the fact that CM work requires specialized skills.
In the past, construction projects were carried out by the client’s internal departments, such as the Procurement Department, Purchasing Department, and General Affairs Department. And, as mentioned earlier, since the collapse of the bubble economy, a buyer’s market had continued for more than 20 years, so even if the client did not have specialized skills, it was able to function by proceeding with the project from a position of superiority.
However, this situation has changed to a seller’s market where construction companies have the upper hand, and this situation is no longer functioning as before. As a result, the necessity of CM work and professional skills is now understood by clients.
(2) Awareness of desired results
Next, the awareness of the results required from the client’s perspective has changed. Specifically, in the past, most of the clients considered the cost of CM work as an investment and the degree of return as the outcome. In other words, the cost-benefit perspective, such as the extent to which costs can be reduced by hiring a CM company, was an important point in determining whether or not to hire a CM company.
For this reason, CM companies were often considered but rejected for relatively small-scale projects where cost benefits were difficult to obtain considering the cost of operations, and as a result, the use of CM companies was limited to large-scale projects.
However, as mentioned above, clients have become more aware of the fact that CM is a necessary part of construction projects, and they have shifted their focus to the role of supporting CM by supplementing the client’s system and skills that are insufficient to carry out CM work. In addition to the cost benefits, there are many other advantages to using a CM company, and in recent years, the need to use a CM company has been increasing rapidly, regardless of the scale of the project.
(3) Awareness of issues
As the client understands that CM is a necessary part of their business, their awareness of the problems that occur in construction projects has also changed. Specifically, in the past, CM companies were used as a countermeasure when problems like the estimate exceeding the budget occurred, leading to consultations with CM companies to reduce the cost.
However, in recent years, there has been a shift in awareness that problems will occur if the systems and skills required for CM implementation are insufficient. In the past, the CM company was consulted only after a problem occurred.
(4) Awareness of management service fee
Here, we would like to mention the change in awareness of CM service fee. In the past, the number of CM companies itself was small and the recognition of CM work was low, so it was sometimes difficult for clients to understand and be transparent about the work cost required when they requested work.
However, in recent years, as the need for CM services has increased, there has been more and more information about the fees and market prices required for the services, as described in “How much is the Fee for Construction Management Services in Japan?” In addition, as the number of CM companies has increased significantly, it is now possible to obtain business proposals from multiple CM companies.
Furthermore, it is now possible to request only those tasks that are necessary to support the roles and skills that are lacking in the client’s system according to the objectives and circumstances of the project. This is one of the reasons why the need to use CM companies has increased.
4. Impact of work style reform
Finally, we would like to discuss the impact of the reform of work styles in Japan, as we believe that the need to use CM companies will increase in the future.
First, the following is a summary of the impact of the work style reform on the construction industry.
The impact of work style reform on the construction industry
・Increase in wages ⇨ Increase in labor costs
・Construction sites closed from 4 weeks to 8 weeks ⇨ Construction period extended ⇨ Temporary construction costs increase
This indicates that construction costs are likely to increase and the construction period is likely to become longer in the future. In addition, the government and construction industry organizations have already started working on the reform in earnest, even though the regulations related to the reform of the work style in the construction industry are scheduled to be applied from April 2024.
Specifically, the Ministry of Land, Infrastructure, Transport and Tourism (MLIT) has called on public contractors to increase the unit price of labor and site expenses based on the number of days the office is closed per four-week period, and some private companies have set their construction schedules to be closed six days or more per four-week period. This trend is expected to accelerate in the future.
The construction industry is aiming to secure a workforce and eventually solve the labor shortage by reviewing labor wages and other aspects of the work style reform. However, since the work style reform will be introduced in other industries, there may be a limit to the effect of securing labor through higher wages.
On the other hand, there is a concern that the longer construction periods will lead to a decrease in the amount of construction work that the construction industry as a whole can handle, which will further accelerate the labor shortage situation, resulting in a stronger seller’s market.
Clients are already facing critical problems such as the principle of competition not functioning, failing to fit projects within budgets, and being unable to meet construction deadlines.
Therefore, the need for the use of CM companies in construction projects will increase, and they will be used in even more projects in the future.
This article introduced why the use of construction management consulting companies is necessary, focusing on the background of the increasing need for the use of CM companies in Japan.
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