Management fees for CM/PM services
In recent years, the need for transparency and accountability in terms of cost, construction period and quality has become a strong concern in construction projects in Japan. The number of projects in which management companies and consulting firms specializing in construction managemenet (CM) and project management (PM) work on behalf of clients from a standpoint completely independent of designers and constructors is rapidly increasing.
In this article, we will discuss the costs of hiring a management company or consulting firm for a construction project from the following perspectives, using a case where a construction management company is hired to provide CM/PM services.
- Points to grasp for appropriate CM service fee
- Methods on obtaining approximate estimates of CM service fee
- Determining the fee for CM services
1. Points to grasp for appropriate CM service fee
First of all, since most of the CM service fee consists of the personnel cost of the construction management company, it varies greatly depending on the period of work, content of work, and implementation policy and system, even for the same project.
For example, the scope of work of construction management varies widely, as described in “What is CM (Construction Management) in Japan?”
The amount of work required by the CM company varies depending on the stage in which the CM company participates and the content of the work to be performed at each stage. Another important point is that the amount of work required varies depending on the implementation policy of the work even if the content of the work is the same. Specifically, when examining the contents of a contractor’s quote, the amount of work varies greatly between examining only the unit price and cost level in the quotation and examining the quantity of materials and construction work in addition to the unit price and cost level.
Furthermore, the amount of work required will also vary depending on the work implementation system and the way of involvement in the work, such as how many people will be working during the project period and whether or not there is a need for a resident.
Therefore, it is important to clarify the scope of work, implementation system, and other aspects of the work to be requested to the CM company in order to properly grasp the CM work cost.
2. Methods on obtaining approximate estimates of CM service fee
Here, we will introduce how to estimate the fee for CM services when hiring a CM company to provide construction management services for a construction project.
There are two main methods for estimating the cost of CM services, as shown below, both of which are used to get a rough idea of the level of the service cost.
1) Method of estimating CM service fee as a percentage of the construction cost
In this method, the CM service fee is estimated as a percentage of the estimated construction cost based on conditions such as the use, scale, and planned location of the project.
The feature of this method is that it is excellent in that it is easy to grasp the approximate cost of the work without much effort, but the accuracy of the rough estimate obtained is rough. Specifically, it is calculated in the following way.
Formula for calculating approximate CM work cost
Construction cost (yen) x CM cost rate (%) = Estimated CM cost (yen)
For example, if the construction cost is estimated to be around 1 billion yen based on the project conditions, the estimated CM service cost is as follows
Example of Estimated CM Cost Calculation
1 billion yen × 3.1% = 31 million yen
In general, the CM cost rate used here will vary based on the size of the construction cost. For example, the figure below shows the relationship between the construction cost and the CM cost ratio, and we can see that the larger the construction cost is, the lower the CM cost ratio becomes.
When estimating the CM service fee for a specific phase of a project or for a specific task, the CM fee is calculated by dividing the estimated CM fee obtained by the above method proportionally according to the ratio of the requested work period to the overall project period.
2) Method of estimating CM service fee based on the work period and the number of persons in charge
Next, we will introduce a method for estimating the fee for CM work based on the “work period (months)” and the “number of persons in charge (persons)” for a project.
This method requires some time and effort to calculate because it is a rough estimate based on the CM work required for the project, assuming the work period and the number of persons in charge. However, this method is superior to the aforementioned method of estimating based on the construction cost and CM work cost ratio, because it is expected to be more accurate and the preconditions for calculating the estimated CM work cost are clear. Specifically, it is calculated in the following way.
Formula for calculating the estimated CM work cost
Work period (months) x Number of persons in charge (persons) x Unit price (yen/person・month) = Estimated CM work cost (yen)
For example, if the work period is 24 months and two persons are assigned to be in charge of the work, the estimated CM work cost is as follows.
24 months x 2 persons x 1.25 million yen per person per month = 60 million yen
The unit cost used here generally ranges from 1 million yen to 2.5 million yen. This range varies depending on the CM company, but it is also affected by factors such as the work experience and skill level of the person in charge.
As will be explained later, considering that the overall cost of CM work is 2 to 2.5 times the direct labor cost, it is possible to make a rough estimate by adopting a unit cost that takes into account the work experience and skills of the person in charge.
Since the amount of work required for CM work is not constant throughout the work period, it should be noted that the number of persons in charge used in this method is the number of persons who will be involved evenly throughout the work period. This is because, for example, there are some work situations that require a lot of manpower to be handled by five persons at the same time, while there are other situations that can be covered by one person.
On the other hand, if three persons are required to be stationed throughout the work period, the number of persons in charge will be estimated as three.
3. Determining the fee for CM services
Finally, the following are the typical methods to determine the CM service fee between the client and the CM company.
1) Accumulation of man-hours
This method determines the service cost by adding the direct labor cost based on the number of man-hours required to perform the CM work to the overhead and other expenses consisting of the CM company’s administrative costs and profits.
The characteristics of this method are that it is a typical method for determining the CM work cost, and that the contents of the operation cost are clear and easy to understand because the overhead and others are calculated as a percentage of the direct labor cost. Specifically, it is calculated in the following way.
Formula for calculating CM service fee
Direct labor cost (yen) + Other expenses (yen) + Other (yen) = CM service fee (yen)
Direct labor cost (yen) = man-hours (man-hours) x unit price (yen/man-hours)
Direct labor cost (yen) = Direct labor cost (yen) x unit price (yen/man)
Other (yen) = Actual expenses for transportation, business trip, subcontracting, etc. necessary to perform the work.
Specifically, direct labor costs are obtained by adding up the number of man-hours for each job and each job type/level of engineers, and multiplying them by the unit price for each job type. In general, the CM company will provide a breakdown of the man-hours and unit cost.
As for the overhead ratio, which is the base for calculating the overhead, etc. from the direct labor cost, a range of 100% to 150% is adopted, so the CM fee is generally 2 to 2.5 times the direct labor cost.
Although the details of the composition and expression of the service cost introduced above differ among CM companies, the general idea is the same, and this is based on the “Concept of Cost Estimation Method for CM Services” provided by the Ministry of Land, Infrastructure, Transport and Tourism.
2) Performance-based compensation method
This method determines the final CM service fee to be paid by the client based on the basic service fee and the performance-based compensation (incentive).
This method is characterized by the fact that the cost of CM services is linked to the results of the work (mainly cost-related work), and thus the client can expect cost reduction effects. Specifically, it is calculated in the following way.
Formula for calculating the fee for CM services
Basic service fee (yen) + Performance fee (yen) = CM service fee (yen)
First, the basic cost is determined based on the aforementioned method of accumulating man-hours. On the other hand, the performance-based fee is generally determined as a percentage of cost savings for cost-related work, although there are various cases depending on the arrangement.
For example, design VE and scrutiny of contractor’s quotations and price negotiation are examples of services that are subject to performance-based remuneration, and a certain percentage of the cost saved by these services is earned as performance-based remuneration or incentive by sharing the cost with the client.
However, as mentioned above, it is important to discuss with the CM company in advance before deciding whether to adopt this method, because the following points need to be agreed upon in advance.
Examples of items to be decided when adopting performance-based compensation
- What is the scope of work to be covered?
- Define cost savings
- Base cost minus agreed cost
- Amount reduced by VE proposal
- Base Cost Definition⇨Design Budget/Contractor’s Estimate/Target Cost/GMP
- Definition of Agreed Cost⇨ Contract Amount, Final Settlement Amount (including additions and changes after contract)
- Agreements for changes in design, specifications, requirements, etc. from base cost calculation conditions
- How to share the saved costs⇨ With whom (client, contractor, designer, CMr, other related parties) and in what proportions
As mentioned above, in this CM Operations Series, we introduced the operational costs required when hiring a management or consulting firm for a construction project, using the example of hiring a construction management firm to provide CM services.
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