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Print articleConstruction Procurement in the UK - An Update
May, 2007 - Chris Arnold
Some things change, others never change. The choice of procurement route is still governed by three main factors:
· Time
· Cost
· Quality
It is hard, if not impossible to achieve the best of all these three but when choosing a procurement route consideration must be given to the list of priorities so that people's expectations are properly managed.
The most favoured route still appears to be design and build although over the last few years modifications to this have been developed, for example two-stage rather than single tender. Partnering concepts play a large part in getting projects designed and built to time and budget but this is more a product of good relations, both on and off site, rather than a specific contractual matrix.
Below sets out a summary of pro's and con's of each procurement route
Traditional Procurement (Developer engages design team and contractor direct)
Advantages
·Control over design process
·Direct reporting of design team to ensure quality control
·No built in contractor risk premium
Disadvantages
·No one person is responsible for the design and construction
·Design needs to be developed as fully as possible
·Time/cost more likely to escalate
Design & Build (Developer engages contractor who then employs designers)
Advantages
·Well established in construction industry
·Single point responsibility
·Early involvement of contractor
·Cost certainty
Disadvantages
·Less control over quality of specification/work
·Contractor will build in risk premium
·Complex legal issues over novation of design team
Management Contracting (Contractor performs role of managing works contractors who carry out the works)
Advantages
·Management Contractor has early involvement and manages works contractors
·Can appoint early
Disadvantages
·No single point responsibility for design and construction.
·Management Contractor only responsible for workmanship to the extent that works contractor is responsible/able to pay
Construction Management (Construction Manager employed to arrange trade contracts and monitor them)
Advantages
·Construction manager is qualified adviser to employer
·Construction manager can exercise cost and quality control
Disadvantages
·Construction manager has no direct contract with the trade contractors
·Difficult to control cost increases
Framework Agreements (template contract agreed for series of projects)
Advantages
·Only need to negotiate once for a series of projects
·Prospect of repeat business for consultant/contractors
Disadvantages
·May not always be best value for money
·Public procurement regulations may impact
Two Stage Tender (contractor selected for first stage on basis of limited scope eg preliminaries, overhead and profit. In second stage full price is negotiated through open book tendering of subcontracts)
Advantages
·Early involvement of contractor in design/build ability issues
·Can start on site earlier
Disadvantages
·Once contractor selected competition is lost and may impact on the pricing
·Difficult for developer to walk away
PFI/PPP (private sector designs, builds, operates and finances the asset for the public sector who pays an annual charge)
Advantages
·Risks transferred to private sector
·Specialist private sector manages construction and operation of asset
Disadvantages
·Loss of control by public sector
·Can be hard to show value for money
Overarching all these is the concept of partnering, which can apply to any of the procurement routes. In the partnering scenario negotiation rather than competitive tender is the key and experience has shown that in the long run this achieves better results for both contractor and employer, particularly as both parties go into the contract with their eyes open and hopefully no surprises will ensue.
In contrast to this the EU is doing its best to maintain competition in the public sector. The recent changes to the EU procurement regulations mean that in respect of 'particularly complex projects' public authorities have to conduct a Competitive Dialogue with a number of bidders in order to resolve any commercial issues before selecting a preferred contractor. It is too early to say what the effect of this will be but early signs are that it will result in a prolonged and potentially more expensive bid process.
Other factors which impact on the procurement process are health and safety, sustainability and environmental issues. The relevant requirements are mainly enshrined in statute, for example the CDM Regulations which are due to be replaced in April 2007, or in national guidance, eg that published by the UK Government at http://www.ogc.gov.uk/. In each project it must be decided how these risks are to be allocated as between developer, contractor and designers.
Chris Arnold is a partner in the Construction and Special Projects Group at Shepherd and Wedderburn LLP
· Time
· Cost
· Quality
It is hard, if not impossible to achieve the best of all these three but when choosing a procurement route consideration must be given to the list of priorities so that people's expectations are properly managed.
The most favoured route still appears to be design and build although over the last few years modifications to this have been developed, for example two-stage rather than single tender. Partnering concepts play a large part in getting projects designed and built to time and budget but this is more a product of good relations, both on and off site, rather than a specific contractual matrix.
Below sets out a summary of pro's and con's of each procurement route
Traditional Procurement (Developer engages design team and contractor direct)
Advantages
·Control over design process
·Direct reporting of design team to ensure quality control
·No built in contractor risk premium
Disadvantages
·No one person is responsible for the design and construction
·Design needs to be developed as fully as possible
·Time/cost more likely to escalate
Design & Build (Developer engages contractor who then employs designers)
Advantages
·Well established in construction industry
·Single point responsibility
·Early involvement of contractor
·Cost certainty
Disadvantages
·Less control over quality of specification/work
·Contractor will build in risk premium
·Complex legal issues over novation of design team
Management Contracting (Contractor performs role of managing works contractors who carry out the works)
Advantages
·Management Contractor has early involvement and manages works contractors
·Can appoint early
Disadvantages
·No single point responsibility for design and construction.
·Management Contractor only responsible for workmanship to the extent that works contractor is responsible/able to pay
Construction Management (Construction Manager employed to arrange trade contracts and monitor them)
Advantages
·Construction manager is qualified adviser to employer
·Construction manager can exercise cost and quality control
Disadvantages
·Construction manager has no direct contract with the trade contractors
·Difficult to control cost increases
Framework Agreements (template contract agreed for series of projects)
Advantages
·Only need to negotiate once for a series of projects
·Prospect of repeat business for consultant/contractors
Disadvantages
·May not always be best value for money
·Public procurement regulations may impact
Two Stage Tender (contractor selected for first stage on basis of limited scope eg preliminaries, overhead and profit. In second stage full price is negotiated through open book tendering of subcontracts)
Advantages
·Early involvement of contractor in design/build ability issues
·Can start on site earlier
Disadvantages
·Once contractor selected competition is lost and may impact on the pricing
·Difficult for developer to walk away
PFI/PPP (private sector designs, builds, operates and finances the asset for the public sector who pays an annual charge)
Advantages
·Risks transferred to private sector
·Specialist private sector manages construction and operation of asset
Disadvantages
·Loss of control by public sector
·Can be hard to show value for money
Overarching all these is the concept of partnering, which can apply to any of the procurement routes. In the partnering scenario negotiation rather than competitive tender is the key and experience has shown that in the long run this achieves better results for both contractor and employer, particularly as both parties go into the contract with their eyes open and hopefully no surprises will ensue.
In contrast to this the EU is doing its best to maintain competition in the public sector. The recent changes to the EU procurement regulations mean that in respect of 'particularly complex projects' public authorities have to conduct a Competitive Dialogue with a number of bidders in order to resolve any commercial issues before selecting a preferred contractor. It is too early to say what the effect of this will be but early signs are that it will result in a prolonged and potentially more expensive bid process.
Other factors which impact on the procurement process are health and safety, sustainability and environmental issues. The relevant requirements are mainly enshrined in statute, for example the CDM Regulations which are due to be replaced in April 2007, or in national guidance, eg that published by the UK Government at http://www.ogc.gov.uk/. In each project it must be decided how these risks are to be allocated as between developer, contractor and designers.
Chris Arnold is a partner in the Construction and Special Projects Group at Shepherd and Wedderburn LLP
