Some realities to observe in a building project: Cost, Risk and Value creation

Some realities to observe in a building project: Cost, Risk and Value creation

Written by Raymond Smith
APRIL 2023

An architectural project can be divided into two main phases. The first is the design phase with architect/designer appointed as principal consultant. The second phase is the project coordination or construction phase with the architect, or other, appointed as principal agent. Each of these phases have their challenges and risks which requires mitigation.

Impact ability vs Cost of changes

The below graph Fig.1 shows the 6 work stages. Stages 1 to 4.1 being the design phase up to authority approval. What is important to note here is that the architect’s ability to make changes and impact the project is maximised during the first 3 stages up to design development. From this point on, such ability decreases exponentially as indicated by the black line running from the top left to the bottom right. At the same time the cost of changes during construction increases exponentially as indicated by the rising red line.

Figure 1: Mc Leamy curve
This graph illustrates with the black line how the design team’s ability to influence impacts on the project reduces during construction stages of the project.
(source: Composite of Mc Leamy curve & interventions by author)

The important aspect to note is to be mindful of spending quality time on the design phase as later amendments during the construction phase, referred to as variation orders, add unnecessary cost and delays to the project.

Risk trajectory and mitigation

The following graph Fig.2 illustrates the risk factor for the four main role players during the construction phase of the project. The employer or asset owner’s risk (traced with yellow line) is at its highest at the beginning of the construction process which decreases from the 50% completion mark to medium risk and to low risk during the closing out phases which follows practical completion. The contractor’s risk (traced with blue line) is almost the opposite to that of the owner’s, starting at no risk at the beginning and slowly increases towards 50% completion. From here it continues to increase towards high risk as the project approaches practical completion stage. The architect/ principal agent and engineer’s risk remains the same throughout the project life cycle. For this they mitigate their risk by means of professional indemnity insurance. The employer’s risk is partially mitigated by means of the retention money which is subtracted with every draw up to 8% of contract value if the JBCC is used. This is held back for the ninety- day retention period and released in stages or lump sum after final completion certificate has been issued.

Figure 2: This graph illustrating the risk of employer (yellow), architect/principal agent (green), engineer (red) and contractor (blue), during the construction phases of the project. This example is based on a low complexity small scale project.
(source: Composite of JBCC & author interventions)

The contractor mitigates their risk mainly in two ways. First by means of the Lien 1 held over the property and secondly by means of an all works risk insurance which can be taken out by either the owner or contractor. It has become popular practice for these two entities to take out a joint risk insurance policy for the duration of the construction project. The asset owner(s) must ensure that their property insurance is activated at least a month prior to the lapse of the all- works- risk insurance to be certain that cover is in place.

Value creation and fees

With reference to the below graph, it is interesting to note that only the estate agent earns more than value added to a project when comparing their fee with that of the architect, engineer and contractor. What is more surprising is that they only earn between 2 to 4 percent less than the architect who not only adds more value than anyone else (when comparing the relation between input and fees) on the project, while assuming most risk as well as driving the process from inception to completion.

Figure 3: Graph showing the approximate value creation on a project of the estate agent, architect, building contractor and engineer on the left versus fees on a project on the right.
(source: author, based on past experience)

As can be seen in the graph on the right, the estate agent received between 6 to 8 % for selling a property. The architect as principal consultant and principal agent who renders a full 6 stage architectural service, receives between 8 to 12% of project cost (dependent on project complexity: low, medium or high). The principal contractor receives around 30% of project cost, dependent on level of service required, percentage of client direct sub-contractors and of course whether it is a new build or additions & alterations. The latter normally being at a higher rate than new build.

In conclusion, the building cost itself must be considered from the outset. If the figures do not make sense at inception, it will only get worse as the project proceeds during the various work stages. With material and labour cost what it is presently, you should be prepared to invest about
R 18 000 per square meters for a standard quality building. For luxury finishes this figure increases to R 22 000 or more dependent on final specifications, level of self-sufficiency required in terms of energy use and smart technologies to be employed. A super luxury structure starts around R 25 000 per square meter with almost no limit to level of high end specifications possible.


1 Construction LienA construction lien is a claim made against a property by a contractor or subcontractor who has not been paid for work done on that property. Construction liens are designed to protect professionals from the risk of not being paid for services rendered.