What Affects the Cost of a Laboratory Fitout?

Key Takeaways

• A laboratory fitout budget becomes more accurate as the design, scope and construction program are confirmed.
• Price escalation allows for cost increases between the budget estimate and construction.
• Location and season can affect trade pricing, availability and the project program.
• Provisional sums cover specific work that cannot yet be priced accurately.
• Design contingency reduces as the design develops; construction contingency provides a buffer for potential costs during the build.

What Affects the Cost of a Laboratory Fitout?

Price Escalation, Indexation, Seasonal Impacts, Provisional Sums and Contingency Explained

In a previous article (Lab Construction Costs Demystified), we discussed square metre cost budgets and estimates for a laboratory fitout project, as well as the key cost drivers and allocation of that investment.

Price escalation, locality indexation, seasonal impacts, provisional sums and contingency are terms that are often misinterpreted. This can cause concern for clients trying to understand the cost of a project at different stages of design and construction.

The reality is that each term describes a different cost variable, shaped by market conditions, project requirements and timing. Below is a brief explanation of each.

Price Escalation

In simple terms, price escalation is an allowance for inflationary factors between the time of the budget estimate and construction. The key driver is time.

During periods of low inflation, this allowance is often relatively small. But during periods of disruption, such as global epidemics or oil shortages, it becomes a real variable that needs to be considered.

Locality Indexation

The price of trades in different locations can vary significantly. The most obvious example is the difference between a regional centre and a capital city. Often, this is driven by simple market factors such as supply and demand, or the additional cost of transporting materials to the location.

I have seen this factor be most severe in an industrial regional town where multiple large businesses had significant capital works running concurrently. In those circumstances, some trades can be 10% to 20% dearer than in other locations.

Locality variation also occurs between cities. The Amicus internal estimating team, as well as the external quantity surveyors we work with, often flag material variations in pricing between Sydney, Melbourne and Brisbane. Major infrastructure projects can also affect the availability and pricing of certain trades in a city.

Seasonal Impacts

Weather and seasonal demand can affect both the price and program of a laboratory fitout.

Many trades shut down just before Christmas for at least two weeks, with some operating with a smaller team until Australia Day. From their perspective, this is understandable: it can be difficult to take a significant break during the rest of the year. But if you need to complete a project over this period, labour can be expensive and difficult to secure.

At the same time, everyone is rushing to finish projects before Christmas. It is not unusual for joinery businesses to announce a hard cut-off date in November for new orders that need to be delivered before Christmas.

The key is good planning and early communication with subcontractors. If you don’t communicate your requirements and lock in trades over summer, it can push out the program, increasing site management costs. A shortage of suitably skilled labour can also increase costs.

Wet or cyclone seasons can materially affect project programs and site costs in some locations, particularly regional areas. For projects running longer than six months, this may be unavoidable. It is more about acknowledging that this is a real cost and allowing for it in the budget.

Provisional Sums

A provisional sum is an allowance included in a budget estimate or contract price when the scope, methodology or solution for a specific element of the build has not yet been finalised.

In the early stages of design, much of the pricing is provisional. For a laboratory fitout, most material provisional sums tend to relate to services. Until the services scope is understood and documented by engineers, it is impossible to finalise pricing.

In our experience, very few, if any, provisional sums remain at the time of signing the contract. Those that do tend to be for relatively minor elements where the client has yet to agree on what they want with internal stakeholders, such as finishes, signage or window coverings.

It is important to note that the majority of work done by Amicus Labline and the broader Amicus group is Design and Construct. Once drawings are finalised and we have gone to market, the cost presented for the agreed project scope is referred to as a Guaranteed Maximum Price (GMP). That means changes to the GMP should generally relate to client-driven changes after construction drawings are finalised, or latent conditions in the building that Amicus Labline could not reasonably have discovered before commencing on site. The treatment of any remaining provisional sums depends on the contract terms.

Contingency

Contingency is often split into two categories: design contingency and construction contingency. Unlike a provisional sum, which relates to an identified element of work, contingency is an allowance for potential costs that have not yet been resolved.

Design Contingency

Design contingency is an allocation during the budgeting process that represents possible increases in cost as unknowns that are addressed during design. This allocation decreases as the design develops.

It is often represented as a 30% allowance during concept design, falling to about 15% during design development and then to nil when construction drawings are finalised. These figures are guides and will depend on the project and the level of detail available at each stage.

This is a really important variable and a useful tool for addressing senior management queries about project budgets. When it isn’t explained properly, or worse, no allowance has been made for design contingency, increases in project costs as deliverables are finalised become more difficult to communicate to key stakeholders.

Construction Contingency

Construction contingency addresses potential costs identified during the build that sit outside the contracted scope of works.

For Design and Construct contracts with a GMP, these costs should not generally relate to gaps in the design documentation, as design risk sits with the builder. This is one of the major benefits of a Design and Construct approach. Construction contingency is more likely to relate to the finalisation of elements shown as provisional sums when the contract was signed, or additional variation works.

Depending on the project, this allowance is unlikely to be larger than 10% of the contract sum and often sits as low as 5%. It is more of a buffer in the client’s budget than something documented with the builder.

Understanding your Laboratory Fitout Budget

Understanding what each allowance covers makes it easier to review a laboratory fitout budget as the project develops. The figures become more certain as the design is documented, trades are priced and the construction program is confirmed.

The key is to identify these variables early, explain them clearly and allow for them in the budget.