Guide to Construction Procurement Strategies

Cutting Through the Complexities of Construction Law

Sarah’s Guide to

PROCUREMENT STRATEGIES

Sarah Fox, 2014

Page 2 © Enjoy Legal Learning, 2014

Procurement Strategy A guide to help you understand which procurement strategies suit which projects

Procurement means the framework in which development projects are designed, financed, constructed, used, transferred and residual disputes resolved. The three main procurement strategies1 (in order of use) are traditional, design-build and management-based.

Each procurement route has some of these elements, like layers in these circles:

Detailed documentation setting out the requirements of the key stakeholders; A variety of competing definitions of success, both for the project and for the varied members

of the project team; Competitive selective tendering for contractors, and sometimes consultants; Significant number of parties;2 Risk management activities;3 Numerous agreements setting out the respective roles and responsibilities of the project

team members; A variety of paymasters from whom cash must flow efficiently; Balancing of time, cost and quality aspects, though possibly not as consciously as the

employer might like; Transfers of risk for certain elements of the project from the employer-developer to those

best able to minimise or manage the risk events; Provision of design services; Control and monitoring by stakeholders, related to their interests; Creation of project teams, comprising multi-disciplinary, flexible and temporary workforces; Management of the varied processes, communication, changes and events arising; Commissioning of facilities to be built, owned, operated and/or transferred; Maintenance of the facility.

Traditional: involves the contractor undertaking to build in accordance with designs provided by the employer (and his design team).4

Design and build: the contractor both designs (completes the design) and builds according to the employer’s brief and specification.5 This allows the contractor to use its experience to reduce the cost of the construction, without affecting the value to the client. This is sometimes referred to as ‘turnkey’ when the contractor also purchases the site and/or operates the facility.

Management based: instead of a contractor, there is a manager6 who offers co-ordination and management skills; the actual work of construction is carried out by subcontractors and specialists.

“Which procurement method is likely to prove the most appropriate in a given situation will depend upon the nature and scope of the work proposed, how the risks are to be apportioned, how and where responsibility for design is to be placed, how the work is to be coordinated, and on what price basis the contract is to be awarded.”7


TRADITIONAL PROCUREMENT

Traditional procurement, according to the NBS Survey 2012 (and confirmed in the 2013 Survey), still dominates the industry, with roughly 70% of projects being undertaken traditionally.8

In this approach, the client directly appoints and manages consultants who carry out services relating to design, cost control and contract administration. The client also directly appoints the main contract who is responsible for carrying out the works, and all workmanship and materials (whether or not the contractor subcontracts elements of the works to others).

In this procurement strategy:

a full set of documents setting out the works to be completed must be prepared before the invitations to tender (ITT) are sent out;

design is carried out by the consultants although some elements of design can fall on the contractor (e.g. using a Designed Portion in JCT 2011 SBC);

the client retains direct control over the design, and by so doing the standards for quality; where the contractor was provided with full design information in the ITT, there is

considerable cost certainty for the employer, subject to changes after commencement; the provision of information and instructions between the employer and his team and the

contractor is critical to avoid allegations of delay.

DESIGN AND BUILD

Design and build is used on roughly 25% of projects, according to the NBS Survey (2012)9 so it is significantly below the use of a traditional procurement strategy, but nearly ten times more common than any one of the alternative management-based procurement strategies.10

Design and build comes in many different guises. The extent of the ‘design’ carried out by the employer’s team determines the level of design responsibility which the contractor will undertake:

“Design has been defined as devising an arrangement, then specifying the components needed to realise that arrangement, and lastly detailing a method of joining or erecting those components. Design can mean the overall concept or form of the building, it can relate to the component parts including specialist installations, or can be the result of meeting specified criteria for durability, performance etc.”11

A design and build contractor can proceed from outline plans, concept design or detailed specifications. So the contractor may tender on the basis of complete design and construction responsibilities12 or for developing the information provided in the ITT by the client’s design team. This can (and should) affect the contractor’s design obligations in the main contract – although not the standard of care. In this procurement strategy:

the contractor’s liability for design may be limited by the terms of the contract, thus negating or diminishing the concept of the contractor being the single point of liability for design and construction;

the client lacks direct control over detailed aspects of the design, and so quality; the client takes the benefit of the contractor’s expertise in buildability; the contractor takes more responsibility for completion to time; the client requires an independent contract administrator to protect his interests during the

carrying out of the works, has no cost consultant to assist with valuation.


A Potted History of Design and Build “What has become known as the traditional method of constructing building projects requires the separation of the works of the designer from those of the constructor. They each do their work in isolation from each other and have separate legal responsibilities towards the client. During the latter half of the last century numerous attempts have been made to find alternative procurement solutions, which to many is a failure of the traditional method of project development…Design and build is not a modern-day concept. In centuries past it was the only procurement arrangement that was available. Its roots originate in the ancient master builder concept, where responsibility for both design and construction resided in a single individual. Design and build can be traced to ancient Mesopotamia, where the Code of Hammurabi (1800BC) fixed absolute accountability upon master builders for both the design and construction of projects. In classical Greece, great temples, public buildings and civil works were designed and built by master builders… [e.g.] the Parthenon and the Theatre of Dionysus… During the Renaissance, architecture and construction evolved as separate professions and the presence of master builders disappeared…project complexity, in both design capability and in construction methods, increased during this time as the need arose for specialists in design and specialists in construction.”13 Design and build became popular again in the 1970s and in 1981 JCT published the first standard form construction contract to adopt this ‘new’ procurement strategy.

MANAGEMENT-BASED PROCUREMENT

In the 1980s,14 new procurement strategies were trialled with the objective of overcoming specific risk transfer issues, better reflecting the increasing fragmentation of the industry (contractors no longer employed their own workforce), and speeding up the project procurement and construction processes.

There are three forms of management-based procurement: construction management, management contracting and prime contracting.15 The common feature of these procurement strategies is that the manager is chosen specifically because of its experience or reputation for being able to manage the construction process, rather than (simply) for its construction experience. The manager normally does not undertake any of the design or construction work.

One of the drawbacks to the effective use of management-based procurement, is that clients and their advisers tend to amend the provisions of the standard form contracts in order to represent a risk balance similar to, say, traditional contracting. Peter Hibberd, JCT, considers that “…a substantial majority [of clients are] seeking to place full onus for the specialist's work

on the general contractor. Perhaps this… is one of the reasons why management contracting and construction management have never taken much share of the market, despite having some obvious attractions.”16

This totally misses the point17 and is one reason for the paucity18 of projects being completed using management-based procurement strategies, despite some clear benefits. The very public use of management contracting on the British Library project, and the use of construction management on Holyrood, both of which were massively over budget and years late, may have also sealed their fate!


Summary

A quantitative and/or qualitative evaluation of different procurement strategies is incredibly difficult and highly complex “because there are both successful and unsuccessful projects that have used identical means and methods of construction procurement.”19 A good example is the comparison between the Wembley and Arsenal football stadia, both of which adopted a JCT DB contract but with vastly different results! The NBS Survey (2012), cited above, noted that:

“It’s interesting that almost none of the respondents mentions the type of contracts used or the process of contract administration as a cause for the perceived increase in disputes… Respondents see disputes increasingly resulting from how people behave towards one another in the current environment.”20

In order to decide what procurement strategy is appropriate, you need to consider your client’s objectives, the payment routes intended, how design and construction obligations are to be allocated and which party is accepting specific risks such as time, cost and quality: “The construction industry is rarely concerned with providing off-the-shelf products; most projects involve unique designs, with purpose-written specifications to be finished in a time which is often difficult to predict. Construction clients must balance the importance of cost, quality and time because it is rare for all three to be satisfied.”21

The best way of evaluating alternative procurement strategies is to have a good working knowledge of their key differences (as well as reading the related standard forms from one publisher so you understand how they are intended to operate in practice). The comparison overleaf is adapted from ‘Which Contract?’ by Cox, Clamp and Lupton.

For the purposes of the table, there are three distinct project phases:22

Pre-procurement

1. Commit to Invest

the point at which the client decides in principle to invest in a project, sets out the requirements in business terms and authorises the project team to proceed with conceptual design

Tender process and contract award

2. Commit to Construct23

the point at which the client authorises the project team to start the construction of the project

Contract and supplier management

3. Available for Use

the point at which the project is available for substantial occupation/use, which may be in advance of completion

Occupation and defects rectification

Disposal

This guide is provided by Sarah Fox of Enjoy Legal Learning, a professional speaker, innovator and trainer who cuts through the complexities of construction law. She is also author of the 500-Word Contract™. To find out how your technical training can be transformed, contact Sarah by email: [email protected] or her mobile: 07767 342747.

mailto:[email protected]


Comparison of Procurement Strategies24

Traditional Design and Build Management-based

Most suitable employers/ developers

Client wants control over design and quality; able to provide time to make decisions, manage change, provide instructions; wants independent advisers

Experienced client able to evaluate tenders on design, buildability & quality (lack of independent advice). Client needs single-point responsibility & minimal involvement

Experienced client with existing teams of advisers and good processes for decision-making

Most suitable projects

Full tender documentation available before contract

Tender requirements clear (changes afterwards expensive)

Complex, large-scale projects requiring additional management expertise & good planning

Time for design & construction phases

Total project time longest time - complete design required before contract award. Time certainty by commitment to construct

Reduced time period over traditional as design & construction proceed in parallel. Longer pre-tender phase

Shortest total project team as early start on site, multiple elements proceed in parallel. Contractor flexibility during works

Scope for competition on cost

Separate competitions for design services & works. Detailed brief enables effective evaluation of construction tenders

Competition for post-award services & works. Tender evaluation on price & product. No direct client benefit from subcontract competition

Most effective competition for design, works & subcontract packages. Value engineering key element. Direct benefits to client

Management & control of quality standards

Designers set & monitor quality & functionality for client. Contractor responsible for achievement. Low levels of buildability as no contractor input to design

Higher levels of buildability as contractor completes design. Client has no direct control over quality & functionality (and may not have own supervisor)

Highest levels of buildability as contractor involved before commitment to invest. Increased specialisation of supply chain (i.e. higher quality?)

Flexibility to change specification

Client retains flexibility for design changes after commitment to construct

Contractor flexibility in developing details & proposing solutions during tender & construction

Client retains flexibility for design changes at any time until works packages completed

Certainty of price

No cost certainty during design phase. Cost certainty after commitment to construct. Cost monitoring at all stages

Best for price certainty, but higher overall cost if transfer of design risk to contractor (single-point responsibility). Cost of changes can be high

No firm price at commitment to construct. Contractor not responsible for managing cost of works

Clarity of remedies for design

Design team responsible for design & monitoring, contractor for workmanship

Contractor responsible for design and workmanship. Client may have independent monitoring

Complicated contractual framework with limited remedies

Separation of design and management

Clear lines of accountability. Clear division of design (consultants) & management (contractor)

Integration of design and management. Largely self-policed by contractor. Efficient?

Clear separation of design and management. Systems conducive to ‘buck-passing’

Degree of client involvement

Low as delegated to contract administrator/ architect

Medium as CA (employer’s Agent) has lesser role

Variable but high preferable as more risk taken by client & needs hands-on control

Summary Better for cost and quality Better for time and cost Better for time and quality


Further Resources For a better understanding of the trends in the construction industry and the use of construction contracts you should obtain and read these reports which together provide an excellent overview of the state of the construction industry, as well procurement issues from an industry perspective: The Latham report25 The Egan reports26 The RICS Contracts in Use Survey27 The Worstenholme report28 The Equal Partners report29 Construction Statistics Annual Report 201230 Government Construction Strategy 2011.

1 Procurement also refers to strategies, methods, contracts. Route is the preferred term for these notes.

2 It has been estimated that, even on smaller projects, up to 200 people may be involved in different roles.

3 Although few of the standard form construction contracts require the parties to deal with risks proactively and before the

commitment to construct. See further ‘the Abrahamson Principles’ on risk management. 4 Although the actual demarcation between design and workmanship is far from clear: Rotherham MBC v Haslam Milan & Co

Ltd (1996) 78 Build LR 1 (CA). 5 A document prepared by an architect or engineer to provide technical information on the quality of materials and

workmanship required. 6 Known as a management contractor, prime contractor or construction manager.

7 Cox, Clamp & Lupton (2007 Which Contract? Choosing the appropriate building contract, RIBA Publishing, London, page 32.

8 Of the 1000 respondents, 70% were consultants, 20% contractors and 10% clients. These respondents provided differing

information on the use of traditional procurement: ranging from 49% contractors, 59% clients and 72% consultants. 9 Consultants say 22%; clients say 26% and contractors 38%.

10 The Survey showed that 8% of projects used either PPC2000 or JCT Constructing Excellence forms of contract, but not the

percentage of projects adopting partnering as a procurement strategy. 11

Cox, Clamp and Lupton (2007), page 31. 12

This can make tender evaluation very complex. 13

Ashworth (2001), cited above, pages 137-8. 14

In 1987, the JCT issued the Standard Form of Management Contract (MC87 now MC 2011) together with related documents necessary for management contracting; and, in 2002, the JCT published a Standard Form Construction Management Documentation (CM02 now CM/A 2011).

15 According to the Defence Estates' (now DIDO) definition, prime contracting is: 'A single company assuming responsibility for

the delivery of the contracted requirement on time, within budget (defined over the lifetime of the project) and fit for the purpose for which it was intended: and that includes demonstrating the contracted operating cost parameters can be met.'

16 Agreements promote risk reduction (2010) 21 6 Cons Law 14.

17 You should always be wary of trying to shoe-horn any other standard form contract into the (near ubiquitous) JCT SBC risk

structure. 18

The RICS (2009) Contracts in Use Survey confirmed that construction management represents less than 10% of contracts by value (and only 15 instances out of 1400). Management contracting, on the other hand, was found by the Survey to be being ‘used sparingly’. The NBS Survey (2012) showed these strategies to have been used on between 2-6% of projects.

19 Ashworth (2001), chapter 9. The quote continues: “It is now believed that personal factors of all those involved have a

major influence on the possible outcomes.” 20

Page 7. If the procurement strategy can define the way the parties behave to one another then the strategy can make a real difference.

21 Brook, M (2008) Estimating and Tendering for Construction Work (4

th edition). Butterworth-Heinemann. Oxford. Pages 85-6.

22 According to various government publications - the definitions are taken from Chapter 16 Key Performance Indicators and

Benchmarking of the 2009 DTI Annual Statistics. See also the OGC Guide ‘Introduction to Public Procurement’. 23

PPC2000 requires the all the project team members to confirm that ‘to the best of [their] knowledge the project is ready to start on site’ before the parties sign the commencement agreement and commit to construct the project.

24 Adapted from Cox, Clamp & Lupton (2007).

25 Latham, Sir Michael (1994), Constructing The Team: Final Report of the Government/Industry Review of Procurement and

Contractual Arrangements in the UK Construction Industry, London: HMSO 26

Department Of Trade and Industry (1998) Rethinking Construction: The Report of The Construction Task Force London: Hmso; Strategic Forum For Construction (2002) Accelerating Change (Chairman: Sir John Egan), London: Rethinking Construction C/O The Construction Industry Council.

27 RICS (2012) Contracts In Use, A Survey Of Building Contracts In Use During 2010.

28 Constructing Excellence (October 2009) Never Waste A Good Crisis A Review Of Progress Since Rethinking Construction And

Thoughts For Our Future. This report contains a summary of the major reports into the construction industry since 1994 (Appendix A).

29 Construction Clients’ Group (2009) Equal Partners: Customer and Supplier Alignment in Private Sector Construction.

London: Business Vantage available from Constructing Excellence 30

Available via the Office For National Statistics website.

constructingexcellence.org.uk/%20sectorforums/constructionclientsgroup/%20reports/ep5.pdf

http://www.ons.gov.uk/ons/