C32 Methods of Procurement of Construction

C32 Methods of Procurement of ConstructionQuestionsDiscuss the need for a contract in civil engineering works. Comment on a form of contract you have used and evaluate its strengths and weaknesses for the signatories.

What are the advantages and disadvantages of design and construct contracts by comparison with other procurement methods? Discuss, giving examples from your own experience.

Discuss how cost risks are identified and managed in the feasibility, design, tender and construction stage of a project. How does consideration of cost risk affect the choice of method procurement?

Compare the various forms of contract available to a civil engineer and discuss which you would use under what circumstances. Explain how each of the forms relate to Egan principles.

Discuss the factors that a civil engineer should take into account when advising a client as to which method of procurement would be appropriate for a particular project.

1. Introduction

A Contract is an agreement between two or more parties. Contracts have a number of functions. In the case of Civil Engineering Construction Projects the Contract sets out the following details.

Specifies the work to be carried out by the Contractor (inc. quality, programme constraints)

Defines the payment schedule (inc. when payments are to be made and additional/reduced fees)

Defines which parties are responsible for events affecting the works that occur outside the direct control of the parties (such events may include bad weather, unforeseen ground conditions, local authority restrictions etc.)

Defines the responsibilities of each party (inc. making decisions, giving instructions, administration duties, disputes, claims adjudication, arbitration etc.)

Contract law and relevant legislation also apply to such contracts.

Time, Cost, Quality Pick 2. Egan ReportThe selection is linked to Risk Management 3 Methods of Procurement Traditional

Design and Build

Management

All are forms of JCT 2.0Traditional

Design work is separated from construction

Consultants carry out the design, cost control and site supervision

A Contractor is chosen to build the project, usually by competitive tenderingA complete set of drawings should be prepared before tendering which has a time implication.

Contractor has no design input other than Temporary Works

The client must be sufficiently experienced / knowledgeable to control costs of design and quality. Price basis is either Lump Sum or Measurement (Remeasurement)Lump Sum The price is fixed and agreed upon before the Agreement is signed. A fixed sum of money for a fixed amount of work. Measurement The work is substantially design prior to signing the agreement but work on site is measured and the contractor paid accordingly. A variation of measurement is Cost Plus fee The amount of work is undetermined prior to signing the agreement. The contractor is paid for the materials, labour and plant based on rates plus a percentage / fixed fee.

2.1JCT Traditionallarge lump sum building works with price certainty.

There are 6 forms of this contract with quantities, without quantities or with approximate quantities each available to the public and private sector.

The With Quantities version should only be used where the Employer through professional consultants has provided at Tender a full set of Construction Drawings and Specifications priced to SMM7 (Standard Method of Measurement 7th edition) by the Quantity Surveyor.

The Without Quantities version also has a full set of Construction Drawings and Specifications at Tender but the competing Contractors are required to provide a Cost Sum Analysis in order to give the Employer a degree of cost certainty. The accuracy of this certainty is defined by the Employer at Tender stage.

JCT 98 requires a Contract Administrator who is usually the Architect and as such the Architects duties are defined within the Contract.

With regard to Time and Delay the Contractor is required to start and finish on or before dates set out in the Contract.Failure by the Principal Contractor to complete the Works within the defined period constitutes grounds for the payment of Liquid Ascertained Damages to the Employer set at a rate predetermined at the date of commencement of the contract. Notice is required from the Employer in advance of this event.

The Architect will issue a Final Certificate to notify the Employer that Practical Completion has been achieved and the Employer has a duty to make the Final Payment within an amount of time defined within the Contract.

Under this form of Contract the Engineer is employed by the Architect as a Sub Consultant and as such the responsibility for the Engineers decisions lies with the Architect.

3.0Design and Build

The Contractor is responsible for design as well as construction.

The benefits to the Client are that time and cost is saved but at the expense of quality.

The risk of the project is given almost entirely to the Contractor. There is in theory one organisation to blame if things go wrong.

The Client produces a performance specification called the Employers Requirements which the Contractor must satisfy.

The Contractor will demonstrate how this will be achieved by producing his Contractors Proposals. This may include value engineering the Employers Requirements to satisfy the Clients budget. The Contractor will price the works from Scheme drawings and specifications.

This brings benefit to the Client in cost as an experienced contractor is the specialist in the best way to achieve the finished article. Once the contract is signed the Contractor has to build the works to the contract documents. The interpretation may lead to a difference in quality to the expectations of the Client.

The Client produces the Employers Requirements by appointing consultants for services. Once the contract is entered into the Consultants are novated to the Contractor.

Detailed design can run in parallel with construction and savings to time are given as compared to the normal route. 3.1JCT With Contractors Design (D&B)The Employer will invite usually 3-5 Principal Contractors to go through a competitive tendering process and select one winning bidder.

Upon completion of this process an agreement can be entered into between the Employer and Principal Contractor and the contract is formed.

The Contract Documents specify what the Principal Contractor and Employer have entered into. WCD 98 cl. 2.1 defines the Contract Documents as the ERs, CPs and Contract Sum Analysis together with the articles of agreement, conditions and appendices. The ERs and CPs are comprised of drawings and specifications and the Contract Sum analysis is essentially a bill of quantities.

No architect is specified within the contract, Instructions are given by the Employer. The architect is a member of the Principal Contractors team and therefore no reference is required.

4.0Management Contract

The Client appoints a Management Contractor on a fee basis.The Client appoints consultants for design services.The Management Contractor does not build anything but manages other contractors to carry out the works.Suitable for large, complex projects where several packages of work are to be completed.

The Management Contractor will be appointed at a stage early enough to contribute to the work of the professional team for which a fee will be received.The main contract between the Employer and the Management Contractor covers both the pre-construction period and the period of actual construction work.

Design work can proceed at the same time as construction.The work cannot be priced at the start and is usually based on an estimate putting the risk of cost on the client.The appointment of the management contractor is not based upon price but on experience, relationship and trust. As the project proceeds to the construction period the Management Contractor is responsible for the appointment of Works Contractors to carry out the Works Packages. The works contractors will normally be appointed on the basis of competitive tendering.

The Management Contractor starts with a Contract Cost Plan and programme dates and will be responsible for the coordination, supervision and provision of site facilities.

The responsibility of monitoring the Cost plan is that of the Management Contractor despite the appointment of an independent Quantity Surveyor to the professional team.

This form of Contract places most of the Risk upon the Employer as the design, specification and contract administration are placed in the hands of an independent professional team.

Factors to consider

Many factors to be taken into account:

Cost & finance of project

Risk

Time

Flexibility

Client role

Cost

Client may have fixed budget and want maximum cost guarantee before tender

How will project be financed? Project sector works DBFO/BOOT?

Cash flow of client?

Future running costs an issue? Client will require control over design and specification

Lump sum tightest cost control for client, but contractor may price high as a result

Admeasurement client risks the costs of the unexpected

Target cost incentives are provided to both client and contractor to reduce costs (e.g. if contractor overspends, he pays 60% of costs, if he underspends he receives 50% of savings)

Cost reimbursement client can control contractors profit with open book policy, but obliged to pay contractor at cost for all work, hence highest risk for client

Quality

Generally, easier to negotiate contracts with emphasis on quality where risk is higher to the client, i.e. cost reimbursable and target cost contracts. A management contracting approach is possible with focus on qualityLump sum and admeasurement contracts benefits of efficiencies gained by contractor tend to stay with contractor hence risk of quality suffering as contractor looks for savings (needs a good specification)

Time

Early start on site required?

Completion by a specific date eg school or university

Minimal construction period to avoid high interest costs on invested capital, or to get returns as early as possible eg developer

Risk

Risks include:

Defining project

Investing in it

Obtaining necessary approvals

Specifying performance

Design risks

Ground conditions

Selecting of sub-contractors

Site productivity

Mistakes and accidents

Client will need to decide which risks he can bear and which he wants to allocate to someone else

Generally the more risk borne by the contractor the higher the cost

Can risks be managed more effectively elsewhere?

One party may accept higher risk with prospect of higher returns.

Lump sum contracts least risk for client

Admeasurement contracts client risks the unexpected, but contractor generally picks up tab for poor decisions

Target cost shared risks

Cost reimbursement contractor paid for all costs incurred, hence all risk with client however, may be suitable for emergency works, or work where a rapid start is needed

Flexibility

Client may require flexibility to change brief, but should be aware that decisions made late in the day cost more money!

Client role

What expertise does the client have in-house

How involved does he want to be?

Critical aspects require more involvement

New directions

Partnering development of target cost contracts (NEC), with long-term relationships and supply chain management.

PFI contracts contractors service extends beyond construction to operation, maintenance etc., over a given period of time an incentive not to compromise on quality?

Conclusions

The most important factor in choosing the form of contract to be used for a construction project is the allocation of risks (between the client and contractor)There are tradeoffs to be made between time, cost and qualityThe best contracts are likely to offer shared incentives for both clients and contractors to meet performance targets

7.2NEC (ECC)

The New Engineering Contract (or Engineering and Construction Contract) is an attempt to clarify and simplify building contracts and to be used in a variety of different scenarios, eg Traditional, D&B, Management.It is intended to provide a modern method for employers, designers, contractors and project managers to work collaboratively.

The 2 principles on which the ECC is based and which impact upon the objective of stimulating good management are

foresight applied collaboratively mitigates problems and shrinks risks

clear division of function and responsibility helps accountability and motivates people to play their part.

A Project Manager is employed to act as the central figure of the contract. The Project Managers duties are to manage the Procurement of the Works for the Employer, issue Instructions, monitor progress and certify payments when due.

There are a number of Core Clauses, and Optional and Secondary Option Clauses that can be introduced to tailor the Contract however desired.

Claims are called Compensation Events. A principle of the ECC is that the Project Manager should be presented with options for dealing with problems from which he can choose.

The Contractor should be unaffected by the choice made and so the Project Manager will select the option that will serve the best interests of the Employer. In some cases the lowest cost, in others the least delay.

7.3ICE 7th Edition

On this type of contract the Engineer is the central figure. It is not suitable for building work or lump sum as it is designed to facilitate the unexpected nature of civil engineering works that produce uncertainties through work in the ground.

It is in the Contactors duties to construct and complete the Works as inferred in the Contract and to the satisfaction of the Engineer.

The Engineers duties are to carry out the design and produce specifications and inspect the site prior to commencement of the Works. During the construction phase the Engineer is to regularly inspect the Works to ensure that the Contractor is working to the correct mode, manner and speed. Any Instructions required shall be issued by the Engineer and any re-submissions of the Programme by the Contractor shall require approval by the Engineer.

Any applications for Extensions of Time must be submitted by the Contractor to the Engineer within 28 days of the event leading to the delay and must include particulars of the event. Any award is reviewed after the completion of the Contract.

Where the Engineer believes that the progress of the Works is too slow the Engineer will give notice of this in writing to the Contractor to be resolved at cost to him.

Upon completion the Engineer will issue a Certificate of Completion when the whole of the Works have been substantially completed and any tests required by the contract have been passed.

FIDIC

4.0Sub Contractors

Domestic

A domestic sub-contractor is one appointed by the Principal Contractor, usually from a list of preferred sub-contractors that have been used before.

Nominated A nominated Sub-Contractor is one appointed by the Principal Contractor under Instruction of the Architect. For example a drawing may read Windposts by Ancon. As such the Architect is liable. If the drawing were to read Windposts by Ancon or other approved however, then this puts the liability on the Contractor to appoint a competent sub-contractor.

Named A named sub-contractor is one appointed by the Employer and as such under JCT 98 the risk of the Sub Contractor performance is with the Employer. Under WCD 98 all risk is transferred to the Principal Contractor and so in effect becomes Nominated.

5.0Claims

It is for the Contractor to prove a link between an event and a period of delay. It is not sufficient for the Contractor to show a delay and point to an event, in effect saying that it must have been that.

Under JCT 98 and WCD 98, clause 25.2 states that The Principal Contractor must submit a notice in writing as soon as he thinks he is being delayed, or that he is likely to be delayed and must do this whether the delay is his own fault or the fault of another party. The purpose of this provision is to enable the Architect (under JCT 98) or Employer (under WCD 98) to take whatever action is necessary at the earliest possible opportunity to mitigate the effect of the delays. The Contractor is in breach of Contract if he fails to do so. Furthermore the notice must include which of the relevant events listed in Clause 25.4 has given rise to the delay. As soon as possible after this notification, the Contractor must submit in writing an estimate of the length of time beyond the original date of completion the project will finish.

If the Principal Contractor has made any reference to any Sub Contractor within this notification then they must receive a copy and any associated documents.

One of the reasons listed under Clause 25.4 is the Failure of the Architect to comply with the Information Release Schedule or if not provided, to provide information at the right time.

Under JCT 98, if an IRS has been provided a failure of the architect is sufficient to trigger the event.

Under WCD 98 there is no IRS as all the relevant information is to be provided by the Principal Contractor. The Contractor is to receive decisions or information for which he has specifically applied for in writing neither too early or too late by submitting and keeping up to date a programme marked with the information required in effect, a design programme.

6.0Dispute Resolution

6.1Adjudication

The Housing Grants, Construction and Regeneration Act 1996 section 108 gives the right to any party to a construction contract to submit disputes to an independent adjudicator.

The act provides that the contract must:

enable a party to give notice of adjudication at any time;

provide a timetable to secure an appointment and referral to the adjudicator within seven days of the initial notice;

require the adjudicator to make a decision within 28 days of referral;

allow the adjudicator to extend the period as agreed by both parties for 14 days if just the party who started the procedure agrees;

impose a duty on the adjudicator to act impartially;

enable the adjudicator to investigate the facts and relevant law without being requested to do so.

As and when the referral to adjudication is made, both it and any accompanying documents that are sent with it to the adjudicator must be simultaneously copied to the other party.

The adjudicator has immunity from liability with the exception of acting under bad faith where it can be proved that he has done so.

6.2Arbitration

Arbitration is governed by the Arbitration Act 1996 and the principles are as follows;

the object is to obtain the fair resolution of disputes by an impartial tribunal without unnecessary delay or expense;

the parties should be free to agree how their disputes are resolved subject only to the public interest;

the courts should not intervene except as provided for by the Act.

Arbitration is similar to adjudication in that two parties who are in dispute agree to allow a third party to settle the matter between them and agree to abide by the decision.

Arbitration can involve solicitors, barristers and expert witnesses and is therefore more cumbersome, time consuming and costly than adjudication. It is therefore more suited to cases involving substantial sums of money.

It does allow for in smaller cases and where both parties agree, the use of documented evidence only and the omission of legal advisors to provide a relatively quick solution.

Under JCT 98 and WCD 98 the dispute must be between the Employer and The Principal Contractor. The consultants are not party to the contract and as such cannot be a party to the arbitration process although they can be a witness.

Consultant Appointment

7.4ACE Conditions of Engagement

The Association of Consulting Engineers Conditions of Engagement - forms the contractual link between the Consulting Engineers and their client. There are variants of the Terms and Conditions as listed below.

A the Contract is between the Employer and Consultant who acts as Lead Consultant

B the Contract is between the Employer and Consultant who acts as non lead consultant.

C the Contract is between the Contractor and Consultant, as would be the case under a Design and Build contract.

Where the letter above is followed by a (1) this indicates that the Consultant is a Civil or Structural Engineer (or both.)

Where the letter above is followed by a (2) this indicates that the Consultant is a Mechanical or Electrical Engineer (or both.)

For example, a B (1) Appointment would be for a Civil or Structural Engineer working as a non lead consultant.

The document for standard conditions of engagement consists of the following sections;

Introduction

Fee proposal stating project value, fee basis and amount, fee for each RIBA Stage, programme, contract procurement.

Scope of service what services will be provided to the client by the consultant Level of service the degree of service provided to the client.

Description of deliverables for each RIBA Stage

standard terms of agreement consist of;

the agreement, consultant obligations, client obligations, payment, insurance, liability, procedures for notices and disputes and governing law.

7.5Target Cost Contracts Introduction

With cost reimbursement contracts there are no incentives for the contractor to minimise costs. Application of Targets in three areas, time, cost and quality will affect the contractors profit giving them the incentive to consider these areas carefully.

What are Target Cost Contracts?

Target cost contracts first have a target fee to cover overheads and profit, then have target costs and a share proportion for any under/over actual costs know as the share formula. The fee can be lump sum or actual costs.

The share formula can be distributed 50/50 to client/contractor or if it is known that there will be a lot of changes and increase in cost 90/10.

There can be a guaranteed fixed price in case the actual costs go over too much. The prices are lump sum prices for each activity.

There are other forms like Time targets which are used on many contracts as a liquidation damages clause. Time targets can cause contention when the work has been subject to variations. Used when time is of importance and the contractor is given a bonus for early completion.

Can also be used with the Engineer/Client relationship therefore incurring savings in case of over design.

Normal for target to be adjusted during the course of the contract to allow for variations, delays and cost escalation.

When to use Target Cost Contracts

When additional flexibility is required

Scope of works is well defined but the risk is unquantifiable OR

Scope of works is undefined at time of tender and the tender costs must be developed as the works proceeds

Reduction in or risk/claims is required

Client is concerned about the engineer over designing/contractor not considering costs

Advantages of Target Cost Contracts

Flexibility to change/variations

Fairer distribution of risk

Potential saving of time and cost of tendering

Reduces claims and the final account is generally settled quickly

Client can monitor the costs of the contract and have more involvement

Good involvement/relationship between designers/contractors/client if all under target cost contract as all aiming at the same targets.

Disadvantages of Target Cost Contracts

Difficult to predict final cost of project

Need to set a realist target and keep the incentive for the contractor, therefore need a lot of information at an early stage.

Concerns with the quality of the work to cut costs issue quality targets too.

Conclusions

Tenders are usually awarded on lowest estimate rather than most accurate. This causes problems in budget and completing project on time Target costs are an accurate way of minimising costs