Risk adjustments are a critical component of the unit rate build-up process. When developing unit rates, it’s not enough to simply calculate known costs for labour, materials, and plant.
If a fluctuations clause isn’t accepted, contractors must also account for uncertainties. These uncertainties could impact project costs and timelines. They’re why risk adjustments are important.
By embedding risk allowances, either into unit rates or accounting for risk in the preliminary and general costings. Estimators strive to ensure that their pricing remains robust against fluctuations. Fluctuations like material price volatility and labour availability issues. Any unforeseen site or scope changes.
This proactive approach strengthens tender submissions and supports sustainable project delivery.
When building up unit rates or risk accountancy adjustments typically focus on three key areas:
Material Price Volatility
Material costs are commonly subject to fluctuations. Market forces, supply chain disruptions, and inflationary pressures can increase costs. None of which the team have control over.
To manage this risk, estimators may include allowances for potential or expected price increases.
Early procurement strategies and supplier agreements can also help mitigate exposure. However, a cautious allowance in the unit rates provides much-needed financial protection.
Labour Availability
Labour shortages, particularly for specialised trades, can significantly impact both cost and programme.
Unless fluctuation adjustments are allowed. A QS will need to adjust labour rates or apply higher hourly rates in the unit rates. This reflects regional shortages, anticipated delays, or increased competition for skilled workers.
If these risks are accounted for. It ensures the unit rates are realistic. It ensures they represent the true cost of labour under project-specific conditions.
Contingencies
Unless specifically required by the tender documentation. Contingency allowances can provide a financial buffer for unforeseen circumstances.
Adverse weather, unexpected ground conditions, or late design changes. These are all very common. A QS is very mindful of the contract provisions which cater for extremes or normalcy departures. They will also build in site geography or known yet normal circumstances.
In a unit rate build-up, contingencies are often expressed as a percentage uplift on base rates. Or sometimes as specific allowances within certain work sections. The size of the contingency should be proportionate to the project’s complexity. The level of uncertainty should also be identified during risk analysis.
Practical Application in Unit Rate Build-Ups
When risk adjustments are added directly into the unit rate build-up, it ensures that tenders are not only competitive but also financially resilient.
There is, however, a fine line – A balance must be maintained between accurately forecasting the cost of a project (the goal of Estimating), and Unnecessarily inflating costs.
If you add to the dollar amounts, it would wrongly remove those commercial risk-taking decisions from the company. These should instead be considered during the normal pre-submission management tender adjudication meeting.
Each risk factor—whether material, labour, or contingency-related. Must be carefully assessed and quantified as part of the rate and tender construction process.
If we take the pricing of a concrete slab for example. The material rate might include an additional allowance to account for possible cement price increases. While the labour component could be adjusted to reflect reduced productivity due to a tight labour market.
A contingency amount may also be applied to cover unexpected ground conditions. These would be identified during preliminary investigations.
Alternatively, those compounded additions could be accounted for in a contingency sum and then added to the preliminary and general costs. This leaves the rates clean and present.
When contractors embed these risk adjustments at the unit rate level. It improves their ability to deliver the project within budget, even if adverse conditions arise. They might also benefit by using those enhanced rates in any variation order pricing.
This approach provides greater confidence. A greater confidence for both contractors and clients. It helps to avoid disputes and cost overruns later in the project lifecycle.
