Procurement methods for construction projects

Today I will introduce you to the four main methods of procurement used in a construction context including the key features of each method, when they might be used and the pros and cons of each.

So what is procurement in a construction context? Broadly, it is the legal framework which sets out how the design services and the construction works on a construction project will be delivered. In this webinar we are going to look at four of the most commonly used methods of procurement – that is traditional, design and build, construction management and management contracting.

So how does an employer choose which method of procurement is right for their project. Well key to this decision is the allocation of risk. Different methods of procurement determine which party assumes the responsibility and therefore the risk for the design and/or the construction of the project. So what do we mean by risk? Well essentially it is which party bears the burden and therefore the cost of something going wrong. So that could be defective or inadequate design, poor workmanship, delay to the project and consequential claims, for example, for extension of time, loss and expense and liquidated damages or the insolvency of a party involved in the project and we are going to see how risk is allocated differently in the different procurement methods later on.

So other factors which are likely to inform which method of procurement is used. There are three main ones – time, money and quality. So in terms of time, the choice of procurement method can affect the time taken between deciding to build the project and when the project is completed. Money – both in terms of the final cost of the project and the cost certainty from the outset, so essentially the certainty of the total cost of the project from an early stage. And thirdly quality – so this can include both finishes but also how long the building is designed to last for. Some procurement routes work well for projects which need to be completed quickly, although this may mean that the project costs more overall and/or the quality of the project may not be of a high standard. Other procurement routes may enable an employer to achieve a high level of quality although this may mean the project will be more extensive and take longer to complete.

So moving onto our first method – traditional. This method is known as the traditional route because it was the only way in which projects used to be procured. The main feature of the traditional route is that the design and the construction of the project are kept separate, so the employer engages a professional team of design consultants to design the works and I am going to refer to that as the design team and a contractor to execute the design and the contractor will often sub-contract some or all of the construction work to specialist sub-contractors and/or suppliers. The employer usually appoints a design team first to design the project. Tender documentation will then be produced such as drawings, work schedules and bills of quantity. Contractors are then invited to submit tenders based on that design. Often the employer will retain the design team during the construction phase so that they can prepare any additional design information, review any designs prepared by the contractor and inspect the works. The design team will also administer the building contract on behalf of the employer and often the architect is required to fulfil the role of project manager. Broadly, the project manager is responsible for ensuring all time, cost and quality of requirements of the project are achieved. So as you can see with the traditional route there is a clear division of risk between the design team and the contractor. The design team is responsible for the design and the contractor is responsible for the construction. Now you might have come across the phrase ‘contractor’s design portion’ and wonder where this fits in to a traditional procurement context where there is a clear delineation between construction and design. Or the employer might ask the contractor to design discrete elements of the project such as, for example, a specialist roofing system. And when this occurs the contractor is allocated a distinct part of the design of works and this is why it is known as the contractor’s design portion.  

So when might the traditional route be used? Well, if the employer already has the design prepared. If cost certainty from the beginning is important and is also suited to luxury projects because as the contractor has limited or no input into the design the contractor does not have the discretion to institute design changes nor to save on costs.

So moving onto the advantages and disadvantages. The advantages are firstly, certainty of design – all the detailing will be worked out by the design team prior to the contractor pricing the works. Secondly, the employer retains control of the design but note the employer will also bear the risk of errors and omissions in the tender information. Thirdly, it is easy for the employer to minimise time and cost overruns as the contractor will be building to a complete design. Disadvantages – well there is less flexibility for the employer to institute design variations once construction has begun. If design variations are instigated after entering the contract the employer will bear the cost and the time risk of those changes or variations. Secondly, the design risk lies with the employer and the professional team of design consultants. It can sometimes be difficult to determine whether a defect in construction projects arises because of the design or a construction issue. With the traditional approach the employer, depending on the type of defect, may have to bring multiple claims against multiple parties to ensure that the ultimate party responsible is pursued. And finally, there is little incentive for the contractor to point out any problems or missing information or add value to the project prior to the signing of the contract. And this is because the contractor is likely to be able to claim additional fees at an extension of time in respect of any variations.

So moving onto our second method – design and build. In design and build the contractor is responsible for both the design and the construction of the project, so you can think of it in sort of two key steps. Step number one – the employer or the employer’s design team will set out their requirements for the design of the project and these are known as the employer’s requirements and then in response the contractor will prepare the contractor’s proposals which set out how the contractor will build the project to meet the employer’s requirements. Often the contractor is made responsible for all the design and the construction of the project which is referred to as single point responsibility. However, in order to do this the contract must make it clear that the contractor accepts responsibility for the design and the employer’s requirements. It is important to note that the extent of any single point of responsibility will depend on the terms of the building contract. For example, the JCT Design and Build Contract 2016 Edition does not create single point design responsibility and this is because under the form of contract the contractor is not liable for the contents of the employer’s requirements. Therefore, if there are inadequacies or discrepancies in the employer’s requirements including in the design, the employer may have to pay the contractor to remedy these. Therefore, if an employer wants the contractor to be liable for absolutely all design and construction and it is using the JCT Design and Build form of contract it will need to amend its standard form.

So you might be wondering why in a design and build contract we sometimes talk about novation and collateral warranties. Well, strictly speaking a contractor is engaged to complete the design of the project and is free to appoint whichever designers or consultants it choses in order to do so. The risk to the employer in this situation is that the employer will have appointed a design team to work up the initial designs but risks losing a certain degree of control as to whom the contractor appoints to finish the design. The way to ensure that the same consultants who started the design also finish the design and to maintain the contractor as the single party responsible for both the design and construction is to oblige the contractor to novate the original design team and this is often know as hybrid design and build. As the design team’s appointments are novated the liability of the consultants is therefore transferred from the employer to the contractor. In order to protect against the risk of the contractor becoming insolvent, in which case the employer would be unlikely to be able to recover much, if any, of the losses it may have suffered, the employer will still want to be able to bring a claim against a consultant if their design proves to be defective. Because novation breaks that direct contractual link between the employer and the consultant therefore, the employer will require the consultant to provide a collateral warranty in the employer’s favour so that a direct contractual link is re-established. Similarly, the employer is likely to want the sub-contractors who are appointed directly by the contractor to provide collateral warranties in the employer’s favour.

So advantages and disadvantages of this method. Advantages – well single point design and responsibility is a key one. For example, in terms of liability for defects, the employer does not need to establish who is responsible for the defect or whether or not the defect stems from defective design or construction. The contractor is liable for both design and construction defects and it is therefore a relatively low risk process for the employer, subject to the type of building contract used. It is also popular with funders for this reason. Single point design responsibility is one of the main reasons that design and build and variations of design and build contracts have become the most common form of procurement, both within the UK and projects globally. It is also generally quicker than the traditional route. Design and build imposes a discipline, not least on the employer, to define the brief fully at an early stage. So what type of projects is design and build good for. Well, firstly, standard building types, for example, industrial warehouse use and particularly where early return on capital investment outweighs considerations of design excellence and capital cost. It is also good for buildings using proprietary systems where the manufacturer of the system might well become the main contractor, for example, repetitive housing or lower cost hotels based on the assembly of factory pods. It is also good for building types in which some contractors have become specialist, for example, highly serviced laboratory buildings. However, it is not suitable for projects where architectural quality is of overriding importance. If there are complex planning or environmental issues or if the employer requires a building tailored to their specific requirements. So what are the disadvantages of design and build? Well it is a rigid system. Generally it does not allow the employer the benefit of developing requirements and ideas once construction has become. There is also the opportunity for the contractor to value engineer the associated risk with regards to the quality of work. So if the original route was not sufficiently precise and the specification offered by the contractor is also vague there is the temptation for the contractor to reduce standards as the contractor is incentivised to construct the works as cheaply as possible. If the design team’s appointments are novated, this may also give rise to a conflict of interest as the employer as no direct input for checking or improving the quality of the work. It also tends to be more expensive, the more risk for the contractor means that the contractor is likely to charge a premium before accepting that design risk.

You might also have heard mention of two stage design and build – what is this? Well in two stage design and build the contractor is initially appointed on what is called a ‘pre-construction services agreement’ often shortened to a PCSA to assist with the preparation of the employer’s design and the main contract is then retendered. The benefit of this is that the contractor’s design skills and construction experience can be brought to the project at an early stage to assist with any particularly complicated construction issues and to develop their tender. However, a two stage design and build may be more costly the employer because the contactor will be paid a fee for the first stage and then will be paid the contract sum under the construction contract.

So, moving on to our third method – construction management. In construction management the works are divided up into a number of packages. The employer will engage trade contractors directly to carry out each package and the construction manager is appointed to manage the trade contractors. The employer will also usually appoint a professional and design team of design consultants. So the construction manager essentially acts as a consultant to co-ordinate the works of the trade contractors, supervise the construction process and co-ordinate the design team. The construction manager does not usually carry out any design itself and therefore is unlikely to accept any design responsibility or responsibility for delay to the project caused by the professional team of design consultants. A construction manager is simply there to manage on behalf of the employer. The liability, and therefore the risk, rests with the individual trade contractors with the employer shouldering the liability for the interfaces between trade contractors. This is generally only used on projects where there is a shortage of time as appointing a construction manager enables some trade packages to be tendered earlier than others and sometimes even before the complete design for the project is finalised. It is also only appropriate for experienced employers as the employer will place and administer the trace contracts itself.

So what are the advantages of this method? Well, project durations are reduced by overlapping design and construction and prices may also be lower due to direct contracts with trade contractors. Disadvantages – well price certainty is not achieved until the last trade package is let. Changes to later trade packages may also negatively impact packages already let which can also increase costs.

So moving onto our fourth and final method – management contracting. In management contracting the employer will appoint a management contractor who in turn will appoint works contractors. The management contractor does not carry out the work itself but manages the construction of the project and the works contractors and it is those works contractors who carry out the work and any specialist design. The employer will also usually appoint a separate team of design consultants. The management contractor is not directly responsible for the default by the works contractors. Instead the employer and the works contractors usually enter into works contractor agreements under which the works contractors will warrant the employer that they will carry out the works properly. Alternatively, the works contractors might provide collateral warranties in the employer’s favour. A management contract structure is therefore similar to a traditional contract but this can potentially be a more expensive procurement method choice than construction management. So the advantages of this method, well, the employer only has one contract to administer. It is also flexible, the design team will focus first on the design of the early packages so that those packages may be let and the work executed whilst the design for later packages is progressed. This means an early start on site date. Disadvantages – well it is high risk for the employer. The risk of the interaction between the packages and the design risk lies with the employer. The employer also bears ultimate risk of insolvency or default by the works contractors. And there is also less cost and program certainty. The final price will not be known until the final account of the last trade contract is finalised.

So that is a very short introduction into the four main types of procurement methods used in a construction context.