Building Strong Foundations: Construction Procurement Issues
Blog 2 of 7 | Procurement
In the first blog in this series we outlined six main areas to consider before starting a Construction project, starting with procurement and moving onto construction methods, site considerations, approvals and design, funding and getting started on site. Procurement is the first area to consider, and in the below blog we discuss four common procurement methods and the roles of the professional team who will be involved in a typical construction project.
Across all levels of construction, from a small residential extension to the construction of a large housing development, there will always be an employer and a contractor (or contractors) entering into a contractual relationship. What will vary, however, is the nature of this relationship and the organisational structure of the employer and the various members of the professional team.
The Design & Build form of procurement is widely used across many industry sectors, but other forms of procurement such as Construction Management, Management Contracting and Traditional Procurement (or standard procurement) are also available and have standard form contracts published to aid their use.
Regardless of the method of procurement, the complexities of construction mean that almost every project will need a set of experts and professionals advising on it. An architect will consult with the employer and produce a design which will at the least set out how the building will look, but will likely include functional details such as layout, window locations, materials to be used and functional requirements of the building. Most construction projects will have a structural/civil engineer whose expertise will ensure a building’s foundations and structure work as intended, a mechanical and electrical engineer who designs wiring, lighting and utilities, and a surveyor who will assist with pricing the cost of the project and potentially act as the Employer’s representative on site.
On larger projects, the list of consultants will be considerably longer, with consultants providing advice on drainage, traffic routes and systems, sustainability, lifts, fire suppression and so on. A greater amount of consultants and contractors invariably involves more legal work to ensure the employer and any subsequent purchasers are protected against the risk of negligent design or negligent building work.
The nature of these teams and the details of their contractual responsibilities will depend on the structures set up at procurement, and responsibility for the professional team will be one of the factors an employer needs to consider when choosing a procurement method.
Under this structure the contractor takes responsibility for both design and construction to the employer’s brief.
The contract wording specifies that the employer will provide the contractor with their specifications (for example, a 400 square metre sports hall), and the contractor will respond with a more complete design which will then be agreed, priced and used as the design for the works. The employer will deal with the same contractor from start to finish, as well as the professional team. The contractor will appoint a number of other contractors and consultants, who will act as sub-contractors, with the main contractor assuming the risk from their work. An employer can appoint an ‘employer’s agent’ to manage construction and the contract for them, and this is of particular benefit to an employer with less awareness of the minutiae of the works and the intricacies of the contract terms.
Design and build procurement is more likely to provide certainty to an employer over the total costs for a project, as the design is decided upfront and the contractor is required to commit to a final price which can only be increased for certain specified reasons. This method works well for an employer who is not familiar with the construction process, as they are able to make use of the main contractor’s expertise in both designing and building the works. The main contractor has liability for both the design and construction of the build, and gives a warranty for both of these aspects. The employer will often also get the benefit of warranties from each consultant and sub-contractor, but if those parties are insolvent then the ultimate responsibility lies with the main contractor.
In theory the design and build process is less appealing to employers with more technical construction knowledge, as they will have more limited involvement in the project day-to-day. However, many projects work with an amended contract where the employer produces a full design with their trusted team of advisors, and the contractor agrees to adopt this design as the design to be used and then employs the employer’s team of advisors as their professional team.
Under this structure the employer contracts directly with the professional team for the design. They also contract directly with separate trade contractors who carry out the construction work. The construction manager (an appointed consultant) manages the trade contractors for the employer. The construction manager’s fee is likely to be a fixed fee and the terms of their appointment will likely be similar to those for any other consultant.
This structure allows the employer to work with the design team and trade contractors throughout the construction process, but without having to manage the work on site day-to-day.
If the employer wishes to proceed with preparatory works whilst design takes place in parallel then this is possible and will speed up the programme. It will also be possible for the employer to be more involved in the specification of the project throughout the programme. However, the employer has far less certainty on price and timing, and liability for the works will be spread between various parties who may seek to blame each other if things go wrong with the project.
Under this structure the employer contracts directly with the professional team for the design. A management contractor is paid a fee to manage the construction work, likely to be a percentage of the build cost. The construction manager does not carry out any of the work directly, they let sub-contracts to works contractors.
The structure is similar to construction management, but with the distinction that the works contracts are placed by the Management Contractor, not the employer. The management contractor’s liability is likely to be limited to negligence in carrying out their own duties or losses which the management contractor is able to recover from the works contractors.
Under this structure the employer prepares or commissions the design of the project and a separate contract is awarded for construction.
An employer will first seek to define the construction work which will be carried out, and will commission a professional team to draw up plans, before tendering the work to potential contractor builders (‘contractors’). Employers will usually look to secure a fixed price for their project, but this can vary depending on the project, where various costing methods can apply. In this method of procurement, an employer will tend to appoint the professional team of consultants, the size of which will depend on the size and complexity of the project. The employer will have a greater say throughout the project as they will be coordinating the professional team and the contractor themselves.
The obvious and most apparent benefit of this method is the employer knows what they are getting upfront; they can oversee the drafting of plans, and can select contractor(s) based on their bids. In terms of risk and team management, this method involves risk being spread among the various parties involved, i.e. the architect, engineer, and contractor, and the employer has no one contact who is responsible for all aspects of the project. This method allows for an employer to take a more proactive role throughout the project, particularly in respect of design input.
The Design and Build structure is one of the most popular ways to procure projects of almost all sizes, and gives the employer some certainty as to the cost of the project, the timing of the build and the specification of the end result. Employers of all sizes and with all levels of expertise use the design and build structure for this reason, and those certainties make the structure particularly appealing for parties who seldom carry out building projects.
Other procurement structures will give the client more control over the choice of contractor, professional team, sub-contractors and final product in exchange for an element of uncertainty over timing and total cost. These structures will work well for employers who wish to be more involved with the project, who have more technical knowledge and are comfortable with a slightly more flexible contract structure.
This blog article focuses on private sector procurement – public sector building contracts will need to cover the same details as a private sector contract, but the procurement process is very prescriptive once the contract sum exceeds a threshold sum. Under the cabinet office procurement policy note for 2020, this threshold sum was £4,733,252 for works contracts and £884,720 for small lot works contracts.
A private employer is entitled to grant contracts to whomever they want. Detailed regulations rightfully apply to the spending of public money. Public employers have to follow the Public Contracts Regulations 2015. This involves a specified process of publicly posting that the work will have to be done, selecting bidders for procurement, and then through lengthy processes such as ‘competitive dialogue’, discussing the requirements of the contract and written bids, to choose the ‘most economically advantageous tender’.
The search for efficient provision of services and infrastructure by the public sector has also given rise to contracts involving private sector companies which can include onward operation of the project once complete. These Design, Build and Operate contracts can cover projects as varied as leisure centres, prisons and roads.
If you require legal advice or would like to further discuss any of the issues raised in this blog, please contact the Construction team.
George Dale is an Associate in the Real Estate & Construction. George specialises in construction law and his practice focuses on a variety of transactional construction work. George has worked for a range of clients including developers, landlords, tenants and contractors, ranging in size from individuals and SME’s to large national retailers.
Rory O'Donovan is a trainee solicitor in Kingsley Napley’s Real Estate and Construction team, where he assists the team in residential and commercial property and construction matters. Before coming to Kingsley Napley, Rory worked as a paralegal in a contentious public law firm, where he assisted the parents of children with special educational needs and disabilities in disputes with Local Authorities in both tribunal and judicial review matters.
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