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Construction procurement

The different types of contract used in the construction industry are numerous and varied. This guide gives an overview of the available methods of construction procurement.

Methods of Construction Procurement

The term ‘construction contract’ now has a statutory definition, covering most but not all types of construction work, and including both building and engineering work.  However, the different types of contract used in the construction industry are numerous and varied.  At the root of all construction contracts lies the method of procurement: the contractual methods by which construction projects are to be set up and constructed.

There are four common methods of construction procurement used in the UK.  This is before taking into account the different financing options available (e.g. project finance), which will also impact on the procurement method selected (although the procurement will probably still be based on one of the methods below).  The contractual impact of the procurement method that is ultimately selected is most clearly seen in the main building contract and the appointments of the professional team, although it will also affect the form of sub-contract that is used.

Traditional Procurement This covers the situation where the employer employs the main contractor to undertake the construction of the works only, and does not require the main contractor to take responsibility for the design of those works.  The main contractor is contractually responsible for undertaking the whole of the construction but will typically appoint several sub-contractors to undertake individual works packages.  The design of the works is solely the responsibility of the professional team, who are also employed directly by the employer.  The employer will also appoint his own quantity surveyor, and the architect usually acts as the contract administrator and issues the interim certificates. This method allows careful planning of the design, the build and health and safety, and also allows the employer closer control of the works.  The risks are that it is unlikely to be the cheapest method of procurement, there are many points of responsibility and it may need long lead-in times. Design and Build (‘D&B’) This method of procurement does exactly what it says on the tin: the employer employs a main contractor who is responsible for not only the construction of the works but also the design of those works.  The professional team is either appointed directly by the main contractor or is initially appointed by the employer to put together the scheme and then the appointments are novated to the contractor.  ‘Novation’ is a process whereby the rights and obligations of the employer under the appointment are transferred to the contractor.  The appointment continues in full force and effect but the obligations on the professional team to perform the design services are owed to the contractor, who in turn is obliged to pay their fees.

Either way, the design consultants are ultimately answerable to the contractor and not the employer, with the contractor as the single point of responsibility in the event of a defect in the design or workmanship of the project.  Nevertheless, the employer will usually require collateral warranties from the design consultants as a second tier of contractual protection in the event that the employer has to bring a claim and the main contractor has ceased trading.  The works are not supervised by the architect but by an employer’s agent who issues the interim certificates.  The quantity surveying role is usually performed in-house by the contractor. The advantages of D&B are that there is one point of responsibility for the employer, and this method of procurement can be the cheapest option with the shortest lead-in times.  The major disadvantage is that the employer has less control over the works and so their quality can suffer.  The process whereby the appointments of the professional team are novated from the employer to the contractor can also cause problems from a project management perspective as this is where disputes over the allocation of the designers’ roles often occur.  Resolving this can be costly in terms of time and professional fees. As a very rough rule of thumb, if a project is worth around £1m or more then a D&B procurement method is likely to be more suitable than a traditional method, unless the design is very simple (e.g. an unsophisticated industrial warehouse). Management Contracting The contractual structure of management contracting appears similar to traditional procurement: the employer appoints a management contractor who appoints works contractors to carry out individual works packages, and the professional team is appointed by the employer.

The crucial difference is that the management contractor does not take any responsibility for undertaking the works.  Rather the works contractors undertake the entirety of the works, and the management contractor manages them in return for a fee.  He also issues the interim certificates. The management contractor undertakes no work himself and is liable to pay the employer damages for breach of contract only to the extent that he can recover those damages from a works contractor, unless the management contractor himself is in breach of contract (unlikely).

This artificial contract structure means that there are no real advantages to using this form of procurement.  The fact that it is now rarely used means that most people are unfamiliar with it, with a resultant increase in costs for anyone who selects it.

Construction Management Here the contractual structure is essentially similar to management contracting, but the management contractor is removed and the employer employs the works contractors directly.  The works are managed by a construction manager (the same company may offer both management contracting and construction management services) appointed by the employer.  Unlike a management contractor, the construction manager does not have any contractual link with the works contractors – they are responsible directly to the employer.  The construction manager issues the interim certificates.

This method of procurement can be highly flexible, efficient and cost effective.  However, unless the employer is very experienced, construction management can be a dangerous tool.  If the project is not managed well then cost and time overruns are virtually guaranteed, which raises the risk of multiple claims both by and against the employer.