Contractual Options for Procuring Major Projects in the UK

Contractual Options for Procuring Major Projects in the UK Thursday, 4 June 2015

Francis Ho, Head of Construction [email protected] | +44 20 7067 3505 | @fkyh

“INNOVATION, NEW TECHNOLOGY & PROCESSES IN CONSTRUCTION” A CONFERENCE PRESENTED BY:

THE CHARTERED INSTITUTE OF BUILDING | CONSTRUCTION MANAGER | OLSWANG

http://www.linkedin.com/in/francis

Where does the UK market stand?

• Market remains strong after buoyant 2014 despite recent

declines

• Private housing still strong, public housing performing well

• Industrial sector up 17% in output in 2014

• Commercial sector flat

• 21% of new contracts in April 2015 in London (25.9% by

value) - CPA Barbour ABI Index

• Skills shortage remains

www.constructiveblog.com Twitter: @fkyh

http://www.constructiveblog.com/

What’s next?

• Housing Market

• Housing Bill

• Starter Homes

• “Right to Buy” scheme

• Planning policies

• Cities and Local Government Devolution Bill

• Infrastructure projects/Northern Powerhouse/Crossrail 2

• EU Referendum



How are major projects funded?

• Project finance or other loans

• Equity/investment

• Sovereign wealth

• Forward funding

• PF2/concession arrangements www.constructiveblog.com Twitter: @fkyh


An overheated market

• Have a clear development masterplan and procurement strategy

• Be flexible in dealing with unexpected project issues

• How many tenderers will you get? Major contractors busy

• Key trades in short supply, e.g. cladding, curtain walling, vertical transport

• Precedent documents – construction contracts, sub-contracts, supply agreements and

appointments



An overheated market

• Consider realistic negotiating positions

• Consider overseas suppliers

• Framework agreements

• Two-stage tendering



Framework Agreements

• Umbrella agreement under which terms agreed in advance

for works and services

• Works/services instructed each time via “call-offs”

• Each call-off becomes a separate contract

• Typically in place for several years

• No need to negotiate terms or tender prices each time

• Requires more upfront work; saves time and cost in the long-

term

• No guarantee of work but economies of scale may reduce

suppliers’ costs



Framework Agreements


• Create long term relationships with suppliers

• Can measure performance for continuous improvement

• May allow clients to gain advice from construction experts without taking on staff,

e.g. project management, cost management, legal advice

• Multi-supplier framework allows mini-competitions between suppliers

• Mainly bespoke but some standard forms exist:


Two-Stage Tendering

• Construction market heating up, especially in London

• Position for contractors healthier than any time since 2007 but wariness

of risky projects

• Greater demand means return to two-stage tendering

• Single stage tendering = lowest cost (lump sum or prime cost)



Two-Stage Tendering

• Two stage tendering:

• First stage – select preferred Contractor

• Competitive tender with some information – preliminary costs,

programme, OHP, agree construction contract terms

• Collaborate with preferred Contractor on pre-construction services

on prime cost/lump sum basis

• Preferred Contractor tenders long-lead subcontracts, build up fixed

price, programme and cost plan

• Second stage – finalise contract terms, finalise fixed price

• Usually bespoke but some standard forms

• At what stage do you appoint on a pre-construction services agreement?



Two-Stage Tendering


Advantages Disadvantages

Can de-risk project by

second stage (advantages

for both Client and

Contractor) including on

cost

Longer, costlier tendering

process

Better collaboration -

Contractor inputs into

design and buildability

Can be time-

consuming/costly to replace

Contractor before second

stage

May achieve quicker

programme and more cost

and time certainty on more

complex projects

Needs a more sophisticated

client

Client can withdraw from

process before accepting

second stage bid

Client may achieve lower

cost on more

straightforward projects


Closing thoughts

• Frameworks and two-stage tendering are facts of life on major projects.

Use them sensibly

• Think ahead but also whether to hedge bets

• Employer can key sub-contractors early to deal with supply issues

• Remember that these arrangements are frequently complex and require

strong organisation



Questions?

Real Estate

Contractual Options for Procuring Major Projects in the UK