Contracts Management

1. Contracts Management Lecture 5 Contracts by Method of Payment

2. Outline • Purpose of contracts • Client role • Types of contract procurement • Contract arrangements • Recent innovations • Objectives / Learning outcomes To understand the range and development of contract procurement strategies and the importance of the client

3. Contracts • Civil Engineering contracts are covered by English Law of Contract, the basis of a contract is an agreement i.e. an offer and an acceptance. • The offer must be distinguished from an attempt to negotiate or “an invitation to treat”. • The invitation to tender sent by employer to contractors is an offer to treat. It does not bind the employer to accept the lowest or any of the tenders. • If the contractor’s tender is definite and unambiguous it is an offerunless it contains phrases such as ‘subject to contract’. As there is no contract at this stage the cost of preparing the tender falls on the contractor.

4. Risk Apportionment • One objective of a contract is to identify who is responsible for the risks associated with construction of the project including • Finance • Health & safety • Environmental • Operational • Many of these are also covered by statute law, such as HSWA, CDM Regulations, EPA etc., but the type of construction contract can further define responsibility for identified risks.

5. Client Needs • Construction projects start and end with the Client. • Clients may be individuals or organisations Initiating a project is arguably the most important Client role. It starts with the establishment of the need for (and hence the nature of) the project. The needs of the client may include (but are not limited to) the following (Franks,1998), : • Provide value for money • Be pleasant to look at • Be free of defects on completion • Be completed on time • Be fit for the intended purpose • Be supported by worthwhile guarantees • Have reasonable running costs and • Be satisfactorily durable.

6. Procurement • The type of contract procurement method used can affect the Client’s perception of how well these needs are addressed and hence how successful the contract has been. Often there is a trade off between these needs. • A conventional BoQ contract, supported by drawings and specification is more likely to satisfy aesthetic and fitness criteria, but less likely to satisfy the need for a short design / construction period. • Competitive tendering may give best value for money but may not ensure quality requirements.

7. Construction Contracts • What do they do? • define what is to be done • define the standard of quality required • define how much it will cost • define how the money will be paid • define how long it will take • define which party is to carry which risk

8. Note the three ingredients: TIME, COST, QUALITY which are Interdependent

9. Standard Forms • The industry has produced standard forms of contract :-   e.g. ICE 6th Edition - Civil Engineering • FIDIC - International C.E. • JCT - (several) - Building • Because of - increased client sophistication - pressure on time - "fast track" construction new contract strategies have evolved which replace the "traditional" arrangements.

10. Problems identified with “Traditional” contracts • Frequent problems of poor design, inadequate supervision and insufficient choice of materials • Existing contracts cause delays, are inefficient, can substantially increase costs and sustain a confrontational attitude • The client carries inestimable risks • No effective responsibility is placed on anyone for cost control or buildability.

11. Areas of Concern re Traditional • Mistrust of industry by Clients • Too many parties involved • Poorly trained contact management staff and workforce • Clash of financial objectives between parties • Weak management by Client • Inefficient management of design • Increasing tortuous and contractual liability • Unsuitable forms of contract • Excessive claims and difficult claims resolution

12. Role of the client 2. Competitive tendering for all aspects of project 1. Client concern to ‘get best deal’ 4.Contractor / professional opportunistic behaviour directed at increasing profit 3.Reduction in expected profit for contractor / professionals

13. Role of the client 2. Competitive tendering for all aspects of project 1. Client concern to ‘get best deal’ 5.Increased surveillance and control systems 4.Contractor / professional opportunistic behaviour directed at increasing profit 3.Reduction in expected profit for contractor / professionals

14. Standard ICE Conditions of Contract - Relationships Engineer /designer Employer Main Contractor Main contractor’s labour Sub contractor Sub contractor’s labour

15. Standard ICE Conditions • Client is not normally involved in site operations and is therefore divorced from construction standard • Engineer / designer has no authority on site unless delegated by client • Note that this Form of Contract often leads to a confrontational attitude between the parties, particularly the Engineer / Contactor

16. Types of Contract

17. Fixed Price (?) Contracts • Bill of Quantities • Long time to prepare • Must be fully specified (client risk) • Contractor prices each item (contractor risk) • Variations easily priced • Expensive to tender (contractor risk) • Schedule of Rates • Used for maintenance wok, few items, unpredictable quantity (client risk) • Lump Sum • Single price for defined work (low client risk) • Quick start on site • Variations can be a problem ( client & contractor risk) • Expensive to tender (contractor risk)

18. Reimbursable Price Contracts • Cost plus % Fee • Contractor paid actual cost of plant labour materials plus % of these costs for o/heads and profit. (very low contractor risk) • Quick start on site. • Variations not applicable. ( client risk) • Cost plus fixed fee • as above but lump sum fee. • Cost plus fluctuating fee • lower the project cost, higher the fee.(contractor risk)

19. Target Price Contract –Fluctuating Fee • used when tendering required before detailed design finished. • Contractors cost calculated on estimated quantities - the target and target fee agreed. fee target

20. Other Forms of Contract • Turnkey or Design & Construct • Contractor prices against a specification only. ( client risk) • High tendering cost (contractor risk) • Management Contract • Organisation manages the site for a fee, does not use own labour but sub contracts all work. ( client risk.low contractor risk) • Organisation may also help with design for ease of construction. (CDM) • Direct Labour • Client uses own labour • local authorities • public utilities

21. Contract Arrangements

22. 1. Fixed Price Contracts • Designer • architect or consultant engineer • contract with client for design and supervision • acts independently in settling matters arising between client & contractor

23. 1. Fixed Price Contracts • No contract between designer & contractor • No contract between client & sub-contractor • Design should be essentially complete at tender stage Advantages • advice on design, contracts etc independent of construction • specialist designers available • construction contract placed after design problems sorted • contract price fixed by keen competition Disadvantages • contractor's expertise not available at design stage • long project time because of separation of design & build • possibility of blurring of responsibilities • architect's or engineer's role as an intermediary can bring about a conflict of interest and be a source of dispute. • The ICE standard form of contract envisages this set-up, and has been drawn up accordingly.

24. 2. Reimbursable Price Contracts • Arrangement usually as fixed price contract • Requires constant monitoring of contractors costs Advantages • advice on design, contracts etc independent of construction • specialist designers available • negotiation with limited number of contractors • no need for detailed BoQ, shortens pre construction period • changes easily included • low risk for contractor Disadvantages • contractors expertise not available at design stage • client uncertain of final cost • lack of incentive for contractor to be economical with cost plus % or fixed fee

25. Design & Build (Turnkey)

26. Design & Build (Turnkey) Advantages • One firm does design work and construction work and is therefore responsible for all aspects of the job. • Best used for ‘standard’ projects e.g. warehouses, supermarkets etc. where the firm has earned a reputation. • Strictly speaking no site supervision necessary on client’s behalf, although project management team will take an active interest. • Close interaction between design and construction has benefits in respect of time and buildability. • ‘Fast-tracking’ possible. Disadvantages • reduced number of suitable firms for client to choose from • early contractual & financial commitment by client • heavy reliance on competence and integrity of the D&B firm

27. Project Management Team CLIENT Management Contractor Designers Trades Contractors Management Contracts

28. Management Contracts The management contractor participates with the client’s team from very early in the project. He is on the client’s side. He also ‘manages’ the construction. He is usually a construction company. He is paid a fee. He appoints the trades contractors in work packages. The client pays them via the management contractor. He does not do any construction himself. Advantages A ‘construction’ man is on the client’s side. ‘Fast-tracking’ possible. He can be tough with the trades contractors. His reputation depends on meeting time and cost targets. Disadvantages client heavily reliant on management contractors skill. client carries more risk.

29. Construction Management Contract • This is a variant of the management contract, gaining popularity at present. • All construction contracts are made directly with the client. • The construction manager (or management contractor) merely manages the work. He has a contract only with the client

30. Design Management Contract • Maximum integration of functions. • Similar to Design and Build but Design & Manage Contractor represents Client’s interests more fully

31. Rethinking Construction The ‘Egon’ Report, 1998

32. The EGON Report • In October 1997 the Construction Task Force, chaired by Sir John Egan, was commissioned to improve the efficiency and quality of the UK construction industry's service and products and to make the industry more responsive to the needs of its customers. • The Task Force published their report, 'Rethinking Construction' in July 1998 and this outlined their ambition for improvement in the industry. They outlined five key drivers for change, four key integrated project processes and proposed seven targets for improvement. This became known as '5-4-7':

33. 5 Key Drivers for Change • Committed Leadership • Focus on the customer • Product Team Integration • Quality driven agenda • Commitment to people

34. 4 Project Process Improvements • Product development • E.g house, road, office • To suit Client expectations • Partnering the supply chain • Value cased sourcing • Supplier development • Project Implementation • Integration of whole team • Measuring performance, quality, waste • Production of Components • Develop and standardise • Just in time delivery

35. 7 Targets for Improvement (1998) • Capital Cost -10% • Construction time -10% • Predictability +20% • Defects -20% • Accidents -20% • Productivity +10% • Turnover and profits +10%

36. Accelerating Change In 2002 a further review of the industry was published under the title of 'Accelerating Change'. The vision of 'Accelerating Change' was for: '...the UK construction industry to realise maximum value for all clients, end users and stakeholders and exceed their expectations through the consistent delivery of world class products and services.

37. Accelerating Change (2002) Strategic targets were set: • by the end of 2004, 20% of construction projects by value should be undertaken by integrated teams and supply chains • by the end of 2007, 20% of client activity by value should embrace the principles of the Clients Charter, • by the end of 2006, to recruit and retain 300,000 qualified people, • by the end of 2007, to see a 50% increase in suitable applications to built environment higher and further education courses.

38. Accelerating Change (2002) A modified version of the Rethinking Construction Strategy Model has now been developed to reflect the themes of Respect for People Sustainability Client satisfaction

39. Revised targets for Improvement • Client satisfaction – product* • Client satisfaction – service* • Defects • Cost predictability • Time predictability • Profitability • Productivity • Safety - uprated • Cost • Time*

40. Key Performance Indicators (KPI’s)

41. Current procurement • Move towards choosing a quality contractor • KPI’s • Cost/Quality Weighting • Develop long term Client/Contractor/Supplier relationships • Partnering • Framework contracts • Pay contractor fair amount • Client involvement at all stages of project delivery

42. Typical Contractor Payment • Used in Partnership & Framework Contracts • Based on cost plus % • Shared (?) gain / pain • £21m target contact, 10% overhead allowance • 50/50 under target range, 75/25 over range

44. Conclusions • There is a need to define contractual responsibilities • There is a range of procurement strategies • Difference between many strategies now becoming blurred • Contractual arrangements effect procurement strategies • The need for Client satisfaction has become more defined