Front-loaded costs
The term ‘front-loaded’ refers to costs that are applied disproportionately to elements of the work that take place early on during a project or part of a project.
Suppliers may front-load costs (or prices in bids) in order to maximise their revenue early in a project by assigning overstated values to the preliminary elements of the work. For example, a contractor might front-load costs for preliminary construction work such as services diversions, demolition, setting out, groundworks, piling, and so on.
Front-loading costs can help reduce a supplier's risk on a project, by improving their cash flow and ensuring that maximum payments are received on projects that might not proceed to completion. However, making payments in excess of the value of work completed puts the client under greater financial pressure early in the project and also at greater risk if the project does not proceed, or if a supplier becomes insolvent or has to be replaced. It can also act as a disincentive for suppliers to keep to time schedules, as they may have already completed the most profitable parts of the works.
Front loading can be avoided by detailed cost planning and cash flow projection during the design development and tender stages of a project, giving the client a clear idea of how much they should be expected to pay at different stages. Tender assessment should then allow comparisons to be made between competing bids to determine whether individual tenderers have submitted excessive prices for certain aspects or stages of the works. During the construction phase, there should be careful assessment of applications for payment to ensure that the amounts paid do not exceed the value of the works completed.
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