Procurement of construction work is the method by which construction projects are to be set up, financed and constructed. All forms of procurement require contracts to define parties’ risks and obligations enabling the process to be managed effectively, principally addressing time, cost and quality.
The choice of procurement option can impact enormously on these principle needs and achieving a higher degree of certainty in one or two may be at the expense of another. There are numerous procurement options, but the two most common are “traditional” and “design and build”.
In the traditional approach (often referred to as general contracting) the design is separated from the construction. Consultants are appointed for the design, cost control and administration of the project, whilst a contractor is appointed to physically execute the works. The contractor has no input in relation to the design and will usually be selected by competitive tender, unless there are particular reasons to negotiate. The result is that the contractor has no responsibility for any design element.
This approach supposes sufficient time is allowed to produce a full set of documents prior to tenders being invited. The contractor is heavily reliant on the provision of information by others.
Although there is some certainty of cost, any lump sum price may need to be adjusted through the construction process. Also, valuation and payment becomes the responsibility of the owner’s consultants.
There is a high level of price certainty with the choice of low tender price. This method also accommodates design changes easily with low tender preparation costs and high tender quality. However, there is a lengthy period from inception to commencement on site. If there is a design error the risk remains with the owner. Bear in mind, post-contract design changes are common and the by-product are additional costs, delays and disputes. Although there is price certainty there is also a greater chance of additional cost using this method of procurement.
2. Design and Build
Design and build is a phrase that can be often found referring to a range of different types of procurement, from turnkey to system building. Whatever it’s called, it brings together both design and construction to be amalgamated within a single organisation. Examples include developers selling land and house packages or residential builders that provide a set home design to fit your plot. The owner turns directly to the contractor who accepts the risk for both designing and constructing the work; a single point of responsibility.
Contractor’s will usually accept a design standard of reasonable skill and care as opposed to an absolute standard of fitness for purpose. This is reflected in most standard forms, unless stated otherwise. It also has the effect of reduced project duration given the overlap of the design/construction process. There’s an improved degree of buildability given the contractor’s influence in the design process.
Risks in design & build
The contract sum is a price for the whole of the contractor’s responsibilities. The contractor must do whatever is necessary to achieve the owner’s requirements. This means that the owner’s financial commitment is very clear and there is not much risk for the owner. The risk of the cost exceeding the price lies entirely with the contractor. Of course, any changes in the owner’s requirements or any hindrance by the owner will result in the owner being liable for additional costs. Of all the procurement procedures design and build offers the highest confidence in the contract sum.
Also, the owner is entitled to expect the building to be completed on time. Failure to achieve this will render the contractor liable to pay liquidated damages. In addition to liquidated damages, an owner should ensure that the contractor and all sub-contractors in the process are backed up by financial guarantees and bonds, otherwise liquidated damages provisions may not be worth the paper they are written on.
It’s sensible to make sure that the price allowed by the contractor is realistic otherwise you face the possibility that the contractor might become insolvent or bankrupt. There has to be enough profit for the contractor to make it feasible to proceed.
Default by the contractor
All work must comply with the contract documents. Any fault in the finished building will be the liability of the contractor. The owner does not have to show the type of fault, i.e. design, manufacturing or assembly fault. The contractor is liable for the performance of the building. This is why single point responsibility is so appealing to clients of construction.
An essential feature is to predict time for completion with some degree of reliability. Certain types of delay are permitted, provided that the specific event(s) are identified in the contract which entitles the contractor to an extension of time.
Typically, contractors often prefer to claim for events other than exceptionally adverse weather but owner’s agents try to include a disproportionately large portion of any extension of time under this heading. This enables them to deal with the claim without committing the owner to additional cost.
The relationships between claims for time and claims for money become very important. Granting of an extension of time does not automatically entitle the contractor to more money and why time and money claims must be dealt with separately.
The issue of quality is very important. Design and build form of procurement has been getting an undeserved reputation for delivering very poor buildings. It is not the procurement process itself that causes good quality, but rather the people within that process.
The only reliable way to encourage quality in a building is to obtain a clear statement about what constitutes high quality for a particular client, and to have that statement embodied within the owner’s requirements.
The contents of this article is intended to provide a general guide to the subject matter and does not constitute legal advice. Ferrer Lawyers always recommend that you obtain legal advice prior to selecting your procurement route or entering into any contract.