The Swedish Problem
Sweden has the highest construction prices in EU, why is that? We believe that a previously unknown graph reveals the answer.
The dominance of turnkey contracts gives Sweden high construction prices and prevents digitization. For several years, there has been talk of the cost-saving opportunities that come with the digitalization of the construction industry and then especially Building Information Modeling (BIM).
Given that Sweden has the highest prices for housing construction in the EU and that in other industries it is at the forefront of digitalization, one would think that Swedish builders are ready for the benefits that come with BIM. But despite this, we rarely see BIM being implemented in construction projects. In this article, we give our view on what this is due to and how we see that developers in Sweden can both increase the quality and lower the prices of housing construction.
During the Swedish financial crisis in the early 1990s, an extensive structural transformation of the construction sector took place. The real estate companies then largely closed down their departments for construction and switched to becoming mainly management organizations. At the same time, new construction collapsed and many construction companies disappeared from the market. What remained were some large companies that had the strength to overcome the crisis. With this transformation, there was a change in the balance between the players in the sector. The result was a sharp shift in the balance of power between builders and contractors, where the knowledge largely lay with the contractors.
Since the 1980s, the turnkey contract has also taken over an increasing share of the construction projects. Unlike a shared contract and a construction contract, the construction company in a turnkey contract also takes responsibility for the design. That is, the construction company to a large extent decides how the building is to be constructed. As a form of contract, the turnkey contract is relatively simple for the client but instead relatively difficult for the contractor.
The combination thus resulted in reduced competence on the client side, the turnkey contract’s shift of responsibility from client to contractor and a few large companies that could take on larger projects. The result has been less competition in the market and that innovations must take place on the execution side. However, the reduced competition has, for natural reasons, also reduced the construction companies’ incentives for innovation. When we put contract form and price development on the construction of homes along a time axis, the connections are clear.
Nearly perfect correlation between rise in Design and Build contract popularity and soaring construction prices in Sweden.
In the 2000s, housing construction has increased again and a number of new players have been added. However, they work with the same model as existing players and, as can be seen from the diagram above, they have not contributed to pushing down prices. At the same time, turnkey contracts have largely closed the market to foreign competition. With the requirement for design, it becomes almost impossible for a foreign company to carry out housing projects in Sweden without a longer establishment period. When you do not receive instructions on how the building is to be erected, a great deal of knowledge of Swedish conditions is required to be able to count on the projects.
Other forms of procurement can increase digitalisation and bring down construction prices
The opportunity to influence the result of a construction project in relation to the costs is greatest at the beginning of the project and then decreases drastically during the project.
However, as turnkey contracts are procured early in the project, ie before the design, the price for the construction is set at a relatively early stage.
The possibility and incentive for the client to use BIM as an influencing factor in the project is therefore limited. Instead, the execution is on the contractor, who has already set the EU’s highest price to be able to recoup the contract and who usually orders a limited design work. It has been established that architects only spend 50% of their time on a project compared to 20 years ago. The amount of information contained in the documentation from the design has thus decreased, which can lead to ambiguities when the building is to be erected.
In order to be able to use BIM in the project, it should be introduced as early as possible. All optimizations, conflicts between different disciplines and coordination take place at the beginning of the project, where the opportunity to influence the cost is greatest. The work with BIM must continue throughout the design and preferably also during the execution phase. In order to have this continuity, we believe that the client should be responsible for the design. In this way, the optimization and cost savings that BIM enables can be performed during the period when the costs for them are at their lowest. Since it is estimated that 30% of the cost of a project can be due to errors and inefficiencies, there are large potential savings.
We therefore believe that it is time to settle the turnkey contract as a largely exclusive form of procurement. It is not realistic to go back in time with large client organizations, but with the expertise that is now available among consultants, the client can receive the support needed to better determine and define the building. With clear BOS basis in the procurement, both smaller swedish companies and foreign companies can feel secure in their tenders and we dare to say that this procedure would have a significant impact on construction prices in sweden.
What is usually emphasized as the advantage of the turnkey contract, in addition to simplicity, is the opportunity for innovation from the contractor. This objection is particularly relevant when opening up the market to smaller and foreign companies that have other systems and materials than the established ones. One way to counter this is to make procurements with competitive dialogue. This means that several companies are invited to be active during the design phase. In this way, they can propose their solutions and the most suitable proposals are worked into the documentation. Only then is the final procurement carried out, as a performance contract with BIM documentation.
Procure BOS as a REQUIREMENT for execution
In summary, we believe that something must be done about Sweden’s high construction prices. We believe that digitization in the form of BIM is a key in this process, but that the dominance of turnkey contracts in Sweden is putting the brakes on. We therefore hope that the builders will dare to try other forms of contracting and thereby open the way to increased digitalisation and competition.