By: David Mosey,
Publisher: John Wiley and Sons Ltd
Imprint: Wiley-Blackwell
ISBN: 9781405196451
Format: Hardback
Pagination: 328 pages, illustrations
Dimensions: 254 x 182 mm, 872 grams
Pub Date: 03/07/2009
Can contractors and specialists add value to a project by their early involvement in design, pricing, risk management and programming? How can this be structured and what role do contracts have to play? What is the impact on procurement and project management?
Commentators from Banwell to Egan have recommended earlier contractor appointments, and this has also been linked to successful project partnering. How are the two related? Early Contractor Involvement in Building Procurement considers the case for a two stage procurement approach based on a system of agreed project processes during the preconstruction phase. It examines the ways in which a contract can describe and support this model throughout its procurement, partnering and project management, and is illustrated with case studies taken from projects and programmes across the construction and engineering industry.
The roles of the various parties involved, the obstacles they encounter and the benefits they can achieve are examined in detail. There is practical guidance on how to improve speed, economy, sustainability, change control, dispute avoidance, and client satisfaction. This book bridges the gap between contract law, partnering and project management and will be essential reading for middle and senior management at construction contractors, consultants and clients in both the public and private sectors.
£64.95
Chapter One
EARLY CONTRACTOR INVOLVEMENT - AN OVERVIEW
1.1 Early contractor involvement - why bother?
The majority of published standard form building contracts provide for the appointment of the main contractor and its subcontractors and suppliers at the point when construction is due to commence. They are generally preceded by a single-stage procurement exercise to select a suitable contractor who has offered a price based on designs developed by other parties. But does this approach always reflect the wishes and needs of the industry and its clients, or does it instead reflect a long-established status quo in a complex and fragmented sector? Arguably, it is often the latter.
If there are benefits to be gained from earlier contractor involvement, is a contract necessary or even desirable to achieve this? Should a conditional building contract govern early project processes, particularly where design processes overlap with the procurement processes by which prices for those designs are agreed? Yet if contracts do not enter this territory, project teams will lack necessary guidance as to the nature and extent of a contractor's early involvement, and its attendant rights, obligations and risks.
Government reports as early as Emmerson in 1962 identified the separation of the design phase from the construction phase of the project as a problem, and observed that 'In no other important industry is the responsibility for the design so far removed from the responsibility for production'. The Banwell Report in 1964 picked up this theme and stated that 'those who continue to regard design and construction as separate fields of endeavour are mistaken'. Nearly 30 years later, Sir Michael Latham observed that many of the problems identified by Banwell had not been solved and that among these 'the traditional separation of design and construction has long been a source of controversy'.
The client draws no distinction between design and construction when occupying the completed project, and is interested only in obtaining the benefit of a project completed efficiently without claims or disputes. Without a clear preconstruction contractual model there is a greater likelihood of decisions being delayed or sidestepped, thereby deferring main contractor and specialist appointments and perpetuating the problems of separating the design of a project from its construction.
It has long been recognised that design contributions should be made not only by consultants but also by contractors and specialist suppliers and fabricators to achieve a complete and functional design. For example, in respect of electrical systems and heating, ventilation and air conditioning ('HVAC'), Smith et al. found that the split of HVAC responsibility under traditional procurement methods was often unrealistic and arbitrary. They suggested that in fact HVAC design is made up as follows:
'The overall design ... may be the responsibility of a design consultant, the co-ordination of M&E services may be the responsibility of the main contractor, while the detailed design of the HVAC installation may be the responsibility of a specialist supplier. The structural engineer meanwhile is responsible for the design of the building frame, although detailing may be the responsibility of the fabricator'.
Commentators have recognised that a procurement model which omits contractor and specialist design contributions can increase risk and can result in poor communications between team members, unnecessary delays to progress of the project and the creation of incorrect information that leads to claims and disputes. I will argue that the most effective way to add value and to challenge the risks of excluding contractor contributions is for clients, consultants and contractors to form a full team at an early stage in the project, establishing the roles of all parties under integrated conditional preconstruction phase agreements.
The central propositions in this book are:
(1) That a significant number of construction projects suffer from inefficiencies, claims and disputes for reasons that can be traced to the late appointment of the main contractor and key subcontractors and suppliers, and to the consequent inadequacy of preparatory and planning activities that need to be undertaken during the pre-construction phase;
(2) That neglected preparatory and planning activities include insufficient involvement of the main contractor (and to some extent its subcontractors and suppliers) in joint working alongside the client and its consultants on design development, the finalisation of works and supply packages and their costs, the analysis and management of project risks and their costs, and the agreement of a construction phase programme;
(3) That conditional preconstruction phase agreements (whether bespoke or forming part of a standard form building contract) have a greater role to play in governing these preparatory and planning activities, and that such agreements, by setting out these activities as a series of interlinked processes, can operate as a valuable tool for project managers, particularly if they are subject to agreed pre-construction phase programmes and to the systems of open communication and collaboration known as 'partnering'.
1.2 Early contractor involvement and project pricing
One commercial issue that needs to be addressed from the outset is the fact that an early contractor appointment to participate in design development, risk management and construction phase programming is unlikely to be on the basis of a fixed price. If the contractor is appointed to work alongside the client and its consultants in developing additional information in these areas and in finalising an acceptable price prior to start on site, then logically there will be insufficient information available for detailed or accurate pricing to be undertaken prior to commencement of such work. It is therefore relevant to consider the implications of this in terms of criteria for early contractor selection and the means by which preconstruction phase processes involving the contractor can lead the parties to achieve the required level of cost certainty after early conditional contractor appointment, but prior to unconditional contractor appointment.
I will consider whether there are weaknesses in the system of single-stage fixed price tendering in a marketplace where main contractors obtain many of their specialist skills and supplies from subcontractors and suppliers. In order to provide an accurate price in a single-stage tender, each bidding main contractor would in theory need to present the client's proposed requirements to each of its subcontractors and suppliers so as to obtain subdivided fixed price quotes prior to each main contract bidder, then submitting its own fixed price quote to the client. The time and cost of conducting such procedures in a structured and thorough manner in preparation for every tender are prohibitive for most main contractors, subcontractors and suppliers on most projects.
This is due in part to time constraints set by the client for the main contract tender process and in part to the cost and difficulty for the main contractor of subdividing the client's tender documentation so as to obtain separate quotes from each subcontractor and supplier. This practical challenge is exacerbated by the large number of tenders sent out by clients to prospective main contractors and the even greater number of subdivided subcontract tenders that would have to be sent out by each tendering main contractor to a range of prospective subcontractors and suppliers. The resources required for subcontract tenderers to compile their bids with accuracy, even if the main contract tender period was sufficiently long, would give rise to considerable costs. Hence, main contractors and their subcontractors and suppliers are likely to make judgements as to the level of detail and accuracy required in their enquiry documents and responses, according to the importance of each project element, and to allow additional amounts to cover the risk of inaccurate pricing.
It has been recognised that any contractor will be at risk if it is obliged to provide a fixed price quotation to a client based only on budget estimates received from its subcontractors when those subcontractors are not in a position themselves to give a fixed quotation, for example because suitably detailed drawings are not made available. In single-stage fixed price tendering, bidding contractors may not be allowed the opportunity to comment on whether the designs forming part of the invitation to tender are sufficiently detailed for them to obtain fixed price quotations from their subcontractors and suppliers sufficient to compile an accurate total price. Although many clients and consultants remain uncomfortable with the appointment of a main contractor in advance of agreeing a fixed price, I will challenge whether a fixed price quote obtained at arm's length is likely to be accurate or reliable except in limited circumstances. I will also explore the means by which a conditional preconstruction phase agreement can offer the client ways to achieve better control over costs, for example through open-book agreement of profit, through joint evaluation and approval of supply chain prices and other cost components, and through incentives for contractor and consultants to bring costs down at all stages of the project.
1.3 Early contractor involvement and risk transfer
Another commercial issue that needs to be tackled is the fact that, as additional information is built up following an early contractor appointment, it will not be possible for the client to transfer risks that emerge later in the preconstruction phase of the project if the contractor is not willing to accept them.
Risk management is not an orderly sequential process comparable to other preconstruction activities and it is not possible to guarantee in advance that joint risk management involving the contractor will lead to a risk and cost position acceptable to all parties. However, for the client and its advisers to seek fixed prices from a main contractor without recognising the scope for it to contribute to early risk management is to draw a veil over important commercial factors. Specifically, under a traditional single-stage contractor appointment, if risks arise during construction which the main contractor has not foreseen at the time of its tender or if a risk contingency allowed by the main contractor proves to be insufficient, it is unlikely that the main contractor will allow a profitable job to become loss-making simply because it accepted those risks within its fixed price. Instead, this situation is likely to give rise to manoeuvring and claims by the main contractor to try to recoup any loss deriving from its miscalculation. This in turn can be prejudicial to the quality of the project, for example if the main contractor looks for ways of cutting costs that may not be in the interests of the client and may not be declared to the client.
In one case study of successful risk management, it was noted that the risks allocated to the contractor were those that it was able to manage. Such risks should not be allocated on the basis of expediency, which can be the result of a priced-based single-stage tender. In the long run it is better value for a client to pay for risks that actually occur during the construction phase of a project rather than to agree a price based on what a contractor thinks might occur. In the latter case, risk is transferred arbitrarily and both the client and the contractor are gambling on whether that risk has been accurately costed.
Where contracts continue to focus only on the transfer of risk and not on its management, it has been observed that this will usually give rise to a risk premium charged by the party accepting the transferred risk. It is possible that the risk premium charged by the contractor (or by a subcontractor or supplier) is insufficient to cover the cost of the required remedial action if and when that risk materialises. In those circumstances, it is likely that the contractor, subcontractor or supplier will be unwilling to incur the additional costs necessary to cover the risk as this will erode its profit. As a result, the project will suffer from the claims and counter-claims that arise as the client seeks to impose the risk transfer provision and as the contractor, subcontractor or supplier seeks to resist incurring costs that make the project unprofitable. In these circumstances, the client and its project are likely to suffer more adverse consequences than the cost of the client retaining the risk or agreeing a joint strategy with the contractor for managing it. I will therefore consider whether the early appointment of a contractor, so that it participates in joint risk management with the client and consultants, can give rise to tangible benefits. For example joint risk management may avoid or reduce contractor risk premiums normally invisible to the client, but nevertheless payable under single-stage construction phase contracts that have no such facility.
1.4 Early contractor involvement and payment
A third commercial issue that is fundamental to early contractor appointment is money. How should the contractor be remunerated for the activities that it undertakes during the preconstruction phase?
If clients hope to obtain contractor contributions at no cost, they risk first, the contractor not applying sufficient resources to the required tasks, and second, a loss of contractor objectivity and professionalism. A 1975 National Economic Development Office (NEDO) Report contained a county borough housing case study that recognised cause for concern where early client/main contractor collaborative working can tempt the client to seek design enhancements without recognising their cost consequences. It found that involvement of the main contractor at the design stage 'led to numerous small disputes on detail where the client wanted more expensive solutions to the specification' and where the resultant increased costs 'fall entirely on the contractor's profit margin if the price is already fixed'. It is interesting that in this case study it was assumed that early contractor involvement in design could somehow be achieved after a fixed price had already been established, inferring that the contractor would make a price commitment on limited design information and would then be expected to take the cost risk of client enhancements that emerged in later detailed design development. This seems commercially unrealistic and unlikely to generate successful joint working. It also fails to recognise the benefits identified by Banwell of appointing the contractor to work as part of the team, not only in finalising the details of the project but also in establishing its cost.
If the main contractor will only be paid if the project goes ahead, then surely commercial logic dictates that its first priority is likely to be ensuring that the project goes ahead whatever the cost to the client. Also, where construction phase profit and consultant fees are calculated as a percentage of cost, a cynic might suggest that contractor's interests and those of the consultants are best served by persuading the client to build its project on the largest possible scale, particularly if they can expect no other reward for offering the client cheaper options through value management or value engineering that would have the effect of reducing their percentage take.
A 1998 report by the Construction Industry Research and Information Association (CIRIA) stated that 'contractors must be appropriately rewarded for contributions made to the project', and also that project contracts should be structured so as to 'recognise all the contributions being made, and the related risks, responsibilities and rewards, particularly during project development'. The Housing Forum (2000) report How to Survive Partnering - It Won't Bite recorded in its survey findings the suggestion from client/consultant/contractor respondents 'that the contractor should be paid as a consultant during the lead-in period before the contract is signed' (i.e. during the pre-construction phase). A 2005 National Audit Office (NAO) report pointed to case studies that include a Milton Keynes Treatment Centre where 'For three months, the principal supply chain partner worked on a fee basis, developing options for the hospital to consider'.
In order for the client to obtain added value from a contractor's preconstruction phase contributions, is it not preferable for the contractor to join the consultants as part of the professional team and to provide its early services for an appropriate reward? I will argue that this is more likely to secure value for the client than an extended period of speculative endeavour where any contractor reward is entirely contingent on the construction phase of the project proceeding.
(Continues...)
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