07 February 2018

By Matt Crossley

Two-stage tendering

Over the last few years I have been involved with a number of developments, both in London and elsewhere in the UK. Irrespective of their end-use, and their labels ("refurbishments”, “redevelopments”, or outright new buildings), in the majority of cases there was one constant when it came to procurement. In order to attract the ‘big’ contractors in the current hot market, two-stage tendering was always on the table.

There are benefits for both sides; the contractor is able to de-risk certain aspects of the development during the pre-construction phase, and the developer should achieve a more accurate lump sum price for the works.

However, we often see projects where it has proven difficult to reach a lump sum price that both parties are happy with, despite the early contractor involvement. As a result, having set off down the route of design and build, developers now have to revisit their principles. If they can't achieve single point responsibility at a premium they can swallow, something has to give.

Construction Management

This is music to the ears of the Construction Management (CM) faithful, but could they be on to something? First off, let’s look at two of the key downsides of CM:

  • There is no single point responsibility. Whether it is a defects claim, or looking to levy LADs, the employer may well end up having to bring multiple claims against consultants and trade contractors.
  • There is little price certainty before the employer has to embark on its construction journey (or certainly not without creative solutions that stretch the CM philosophy). The more trade contract packages that there are, the more scope for the overall contract price to creep upwards.

What are the advantages of CM?

Now for some key advantages:

  • If programme is the key concern, CM allows the progression of the design alongside the commencement of certain works packages.
  • If flexibility is required, CM allows trade contract packages to be adjusted right up until they are let – and even then, any future changes are perhaps easier to make without significant knock on effects.
  • Although cost certainty itself isn’t achievable from the outset, not having to pay the design and build premium can result in an overall cheaper construction cost.
  • It can be possible to deliver higher quality, by breaking down the specification in a granular way that can sometimes be lost with a 'turnkey' solution.

For many developers – especially those with risk-averse partners, stakeholders or funders in the wings – the advantages of CM simply cannot outweigh the jewels in the crown of design and build.

However, CM seems to be a procurement fashion. Talked about when the market conditions are amenable (and especially when the next big superstar is seen endorsing it), and abandoned to the back of the wardrobe when the sharp looks of design and build are back in. It appears to be CM's time again, so should developers be looking to the back of their wardrobe and dusting off those trusty flares?

In my opinion, no. Or at least, not blindly. I do not wish to stretch the analogy, but in the same way that certain fashions do not suit everyone, so it is that CM does not suit all developers. Only experienced, sophisticated developers should take it on. Even then, they need to surround themselves with a great team of advisers – the construction manager needs to be very carefully chosen and the supply chain (both consultants and trade contractors) needs to be meticulously managed.

And what about those developers who could ‘qualify’ for CM, but who for their own corporate policy simply struggle with accepting CM. How can they be converted? Is there a way of reducing the downsides of CM, while maintaining the upsides?

A new approach

If we are willing to look beyond the usual approaches to procurement, I think we can find some interesting, creative solutions. After all, innovation tends to come from outside.

One example may be to look to the procurement methods used in the renewables sector. Most offshore renewable energy projects are procured through multiple contract packages, rather than a single EPC/turnkey basis. There is no single point responsibility, but the end result is successful because it reduces risk premiums, ensures that each package is delivered by a specialist, and can attract a good quality supply chain.

How does this approach differ from 'standard' CM?

There are fewer 'packages' than you would perhaps see on a traditional CM development. The packages are broader, and cover a variety of activities that fall within the same remit.

Translating this to a typical commercial development example, rather than having three different M&E trade contractors to deal with AV, IT, and the air conditioning, there would be one 'main' M&E contractor who would pull it all together (taking a full turnkey responsibility for that package). As a result, the developer does in fact have a single point of responsibility, but just in respect of a small number of specific – key – packages.

What about the security for partners, stakeholders and funders?

We are in a time where low margins and high construction costs means that the perceived covenant strength of the ‘big’ name contractors is at best under threat, and at worst illusory. That being the case, a developer may have a better chance of full recovery against a small number of robust and high-performing specialist contractors (albeit by way of multiple claims).

And so, if developers find themselves priced out of the luxury of a robust design and build solution, it seems to me that an open mind to CM and a little creativity could offer some good quality, bottom-line-improving, solutions.

Key contact

Steven James

Steven James Partner

  • Construction and Engineering 
  • Energy and Utilities
  • Construction Disputes

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