New trends in construction procurement


Author: Hollie Docherty


Hollie Docherty, Senior Associate, Fladgate LLP (hdocherty@fladgate.com)


 

Parties carrying out construction work often assume that either standard (or traditional) procurement or design and build procurement should be used to procure their projects, particularly when third party development funding is being obtained.  However we are seeing a clear trend towards parties selecting other procurement routes to suit their particular projects and lenders being willing to fund such projects.

Most parties who regularly procure construction works will be familiar with standard (or traditional) procurement and design and build procurement.

With standard (or traditional) procurement there is a clear separation between the design, which is carried out by the design team appointed by the client, and the construction work which is carried out by the contractor.  This procurement route is used where the client wants to retain close control over the design and where client input into the design is required throughout the project.

With design and build procurement the contractor takes responsibility for both the design (including any design prepared by the client as detailed in the employer’s requirements forming part of the building contract) and construction of the works. The client’s design consultants are normally transferred to the contractor on the contractor entering into the building contract. Design and build contractors usually add a premium to the contract sum for being the single point of responsibility for both the design and construction. This, along with contractors being less willing to enter into design and build contracts, particularly where single stage tendering is used, is one reason why clients are considering other procurement routes.

We are seeing an increase in the use of management contracting and construction management procurement routes. Both procurement options tend to benefit parties with previous construction experience and at least some in-house construction expertise. The balance of this article considers these two alternative procurement routes.


Management contracting

Under management contracting procurement the client appoints both the management contractor and the design and consultant team.

The management contractor is a specialist contractor who manages the construction process but does not carry out any design or works itself. The management contractor appoints a series of trade contractors to carry out the works in packages, for example, piling, windows and doors and electrical.  Different works contractors are appointed as the works progress so that not all works packages need to be tendered from commencement of the works.

As there is not a direct contract between the client and the works contractors, each works contractor provides a collateral warranty to the client in respect of its works package.


Construction management

With construction management the client appoints a construction manager and the design and consultant team.  Construction managers are specialist consultants and it important to use those with the requisite experience and expertise.

The construction manager arranges the appointment of the trade contractors for the various packages of works, but it is the client who enters into the trade contracts with the individual trade contractors. The construction manager will administer and manage the trade contracts on behalf of the client, but the construction manager is not responsible for the design of the construction of the works.


Both procurement routes allow early works or trade packages to commence on site before the whole of the works are tendered.  Also designs can be finalised whilst work starts on site, which can result in an earlier completion date than would be achieved with standard or design and build procurement where all of the design tends to be completed before entering into the building contract.

The disadvantages of these procurement routes are the lack of cost and programme certainty, as the client will often not have a full tendered cost estimate and timescale for the works before they commence. Although the client will avoid the risk premium cost associated with design and build contractors, this must be set against the fee charged by the management contractor or construction manager.  Unlike design and build procurement, where there is a single point of responsibility for both the design and construction of the works sitting with the contractor, the client may be faced with bringing claims against multiple parties in respect of design and workmanship issues.

Although lenders will tend to prefer design and build procurement as it is seen as a neat option, we are seeing an increasing willingness for lenders to provide funding for works using management contracting and construction management. Lenders will carry out a more detailed due diligence of the procurement structure and construction documents, as well as requiring ongoing approval of key works contracts/trade contracts throughout the course of the works.  This may result in a more costly facility, but ultimately for some clients and projects this can be balanced by the lower procurement costs.

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