Procurement Level Construction
Procurement Level Construction
Procurement Handbook
Chapter 5
Contents:
Section Subject
1. Introduction
9. Management Contracting
Introduction
1.1 The Review of Scottish Public Sector Procurement in Construction noted that
a wide range of contract forms were being used by public sector clients for the
procurement of construction works. In some cases, a clear selection process had
been applied to the choice of contract which was appropriate for the nature of the
work, the procurement method and the risks lying within the project. However, in
other cases, it appeared that much less thought or planning had been given to the
form of contract used where there was a reliance on historic practice regardless of
whether the contract type was the best fit or approach for the project in question.
• Integrated
• Traditional
• Management
• Revenue Financed
2.2 Each has variants, and further options can be applied to some of the variants:
• Frameworks
2.3 In addition, there are a number of forms of construction contract which can
be used with each variant and/or option which reflect differences in risk allocation
between the contracting parties and differences in the mechanisms for payment, for
variations to the contract required by the client and for resolution of disputes.
2.4 The two forms of contract most commonly used for construction works in
Scotland are:
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy
• The Joint Contracts Tribunal (JCT) as amended for use in Scotland by the
Scottish Building Contract Committee Ltd.; and,
2.5 Two standard forms of contract which, historically, were widely used (The
Institution of Civil Engineers, ICE Contract and the Government Conditions of
Contract, GC Works) are no longer maintained by their publishers and were
withdrawn from sale in 2011. While some procuring authorities continue to use these
on a regular basis, those authorities not familiar with them may wish to consider
other, more contemporary forms of contract.
2.6 Other forms of contract such as the FIDIC suite published by the International
Federation of Consulting Engineers, and the ICC Conditions of Contract, published
by the Association of Consulting Engineers (ACE) and the Civil Engineering
Contractors Association (CECA), are available. However, these are not in common
use and are not considered in detail in this chapter.
Procurement
Integrated Traditional Design and Build Management Revenue Financed
Strategies
Early Design,
Hub Design Design and Management Construction
Variants Integrated Traditional Develop and Hub DBFM NPD
and Build Build Contracting Management
Team Construct
Option for Cost
Reimbursable
Target Cost
Option for Two
Stage
Tendering
Option for
Framework
Available forms SBCC Standard SBCC SBCC Design SBCC Design SBCC/JCT SBCC/JCT Standard hub Standard
of Contract Constructing hub Design, Various and Build and Build Management Management DBFM Model NPD Model
Excellence Build, NEC 3 NEC 3 – NEC 3 – Contract Contract Form Form
Developme Options A Various Various NEC 3 Option NEC 3 Option F
NEC 3 Option nt and B Options Options F
C with Agreement Combinations Combinations
Secondary
Partnering
Option X12
PPC 2000
The hub programme pricing mechanism is very similar to a 2-stage tendering approach.
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Expert client involvement needed The degree of expertise, low-high, needed by the client body
• Management Strategies
• Frameworks
4.1 The benefits of developing projects collaboratively between the various parties
to a project is well established – working together as a team, for the mutual benefit
for all, minimises wasteful activities. For example, the hub programme (further details
below) has been developed in Scotland on these principles. However, it is important
to note that the approach does not replace formal contracts of engagement between
parties or proper and appropriate management structures and procedures. It is a
pragmatic way of working together to find ways of delivering the project to the
required quality within budget and within programme. Three forms of standard
contract that have been developed to facilitate partnering approaches include:
4.2 The first two rely on a series of bilateral contracts between the client and each
supplier. PPC 2000 provides for a multilateral partnering agreement.
4.3 Although a number of operating models exist for partnering, most embody the
following principles:
• Care and diligence is needed to understand the final risk allocation and its
management in the construction contract.
Low High
Characteristics 1 2 3 4 5 6 7 8 9 10
1 Expert client involvement needed
2 Client control over design and specification solutions
3 Needs Client production of an output performance specification
4 Ease of implementing change during construction
5 Supports early appointment of an integrated team
6 Single point design and construction responsibility
7 Cost and time certainty after contract execution
8 Speed of development
9 Suitable for simple projects
10 Suitable for complex projects
11 Suitable for a target cost approach
12 Suitable for 2-stage tendering
Figure 3: Characteristics of Early Integrated Team/ Partnering
5.2 Public bodies wishing to participate (Participants) with their local hubCo are
required to sign a Territory Partnering Agreement (TPA). Having signed a TPA,
Participants with a project meeting the original procurement criteria – essentially a
project delivering community services – can issue a ‘New Project Request’ (NPR) to
the hubCo. This consists of a project brief and an associated budget which, if
accepted by the hubCo, means that an Integrated Team, consisting of a Tier 1
contractor, designers and other consultants as appropriate, is then selected from the
hubCo supply chain in consultation with the Participant. A proposal for delivering the
project, based on a scheme design, is then developed collaboratively over a period
of approximately three months.
5.3 Design development is a joint exercise between the Integrated Team and the
Participant. Risks are jointly identified, surveys and investigations carried out and
options considered. A project development fee is only payable by the Participant if
the proposal meets the project brief and budget criteria set out in the NPR (and can
also demonstrate value for money). All components of the project development fee
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are subject to percentage fee caps set at the time of the original, competitive PSDP
procurement.
5.4 Once the initial (“Stage 1”) proposal is accepted, the hubCo develops the
design and, via its Tier 1 contractor, competitively tenders a minimum of 80% of the
prime cost of the project on a transparent open book basis to establish a “Stage 2”
proposal. The Tier 1 contractor’s overheads, preliminaries and profit are subject,
again, to percentage caps of the prime cost. The “Stage 2” proposal is presented to
the Participant and if this is accepted, a development contract is entered in to
between the Participant and hubCo.
5.5 A “back-to-back” construction contract (where the contract between the hubCo
and the Tier 1 contractor mirrors the obligations of hubCo to the Participant), is let at
the same time between the hubCo and its Tier 1 contractor. The standard hub terms
are based on those of a design and build contract. Recognising the period during
which the Integrated Team has identified, mitigated and priced risks, the terms
include for the risks on ground conditions, weather, utilities and contamination (with
exceptions for areas not able to be surveyed) to be transferred to the hubCo and in
turn to its Tier 1 contractor.
5.6 Each hubCo has an initial 20-year term. The performance of each hubCo is
monitored by a Territory Partnering Board, with a representative from each
Participant, against both project Key Performance Indicators (KPIs) and continuous
improvement KPIs.
• Provides very good time and cost certainty in the absence of variations.
• Relies on clients being able to identify well defined project outcomes (a Brief)
and to have a good understanding of the likely outturn cost.
Strategy: Hub
Low High
Characteristics 1 2 3 4 5 6 7 8 9 10
1 Expert client involvement needed
2 Client control over design and specification solutions
3 Needs Client production of an output performance specification
4 Ease of implementing change during construction
5 Supports early appointment of an integrated team
6 Single point design and construction responsibility
7 Cost and time certainty after contract execution
8 Speed of development
9 Suitable for simple projects
10 Suitable for complex projects
11 Suitable for a target cost approach
12 Suitable for 2-stage tendering
Figure 4: Characteristics of Hub
6.1 With this type of contract, the design team are employed directly by the client
to fully develop the design prior to going out to tender. Suitable contractors are then
invited to submit a tender priced against the client’s requirements. Traditionally, this
can comprise a Bill of Quantities. However, it is becoming increasingly common for
contracts to be based on drawings and specifications, or activity schedules with
contractors needing to satisfy themselves as to the quantities of material required.
6.2 The construction contract is with a main contractor who has responsibility only
for the construction works. If the design has been fully thought out, developed and
frozen, this type of contract should provide a reasonable degree of cost certainty at
tender stage, subject only to client risk events, such as unforeseen ground
conditions. However, by their nature, Lump Sum Contracts may be less appropriate
where the timescales for delivery of the project may mean that a fully developed
design cannot be prepared in advance of tendering; in which case subsequent
design development changes will usually lead to cost and, possibly, time escalation.
Typically, this procurement strategy also uses forms of contract where the client
generally retains the risk of, for example, unexpected ground conditions, adverse
weather and utilities. The client should also ensure the project budget includes an
appropriate contingency allowance to cover such risks – for example, an allowance
of approximately 10% on cost and 10% for extensions of time is typical, but the
precise level will depend on the level of complexity and uncertainty of the project
• The client retains individual direct contractual relationships with the design
team, cost consultant and main contractor.
• Changes to the works can be simply instructed and then evaluated on the
basis of known prices obtained in competition without necessarily excessive
cost or time implications.
• The Client must have the resources and access to the expertise
necessary to administer the contracts of consultants as well as the main
contractor.
• Not all project risk is transferred to the contractor and some is retained by
the client. Claims for delay and disruption can arise if the design is not fully
detailed prior to agreeing the contract sum; if the Client varies the design
afterwards; if outstanding design information is late; or if the issued design
contains errors or omissions.
Strategy: Traditional
Low High
Characteristics 1 2 3 4 5 6 7 8 9 10
1 Expert client involvement needed
2 Client control over design and specification solutions
3 Needs Client production of an output performance specification
4 Ease of implementing change during construction
5 Supports early appointment of an integrated team
6 Single point design and construction responsibility
7 Cost and time certainty after contract execution
8 Speed of development
9 Suitable for simple projects
10 Suitable for complex projects
11 Suitable for a target cost approach
12 Suitable for 2-stage tendering
Figure 5: Characteristics of a Traditional Strategy
7.1 In a “Design and Build” contract, a single supplier is appointed by the client to
undertake both the design and construction of the facility. Typically, the client’s own
design team (either in-house or outsourced) develop a concept or scheme design to
RIBA Stage 2 along with an output performance specification. Together these form
the “Employer’s Requirements” or “Works Information” depending on the form of
contract chosen. The client then invites competitive tenders in accordance with the
guidance set out and relevant procurement legislation referred to in Chapter 7 of this
handbook, covering “Procurement Route 2”.
7.2 The contractor is likely to deliver the greatest performance benefits to the
client through innovation and standardisation, where appropriate output
specifications are produced by the client. Where an output specification is
insufficiently well developed, there is a risk that the quality, design and performance
of the completed facility may be compromised by a contractor pursuing the lowest
cost material specification or design solution. Careful attention to the output
specification is required to achieve the required outcome. Often the client retains the
services of the original design consultants to scrutinise the contractor’s developing
design and to confirm it is compliant with the Employers Requirements.
7.3 There may be some circumstances where it may be beneficial for the design
and build procurement option to be extended to cover maintenance and also
possibly operation of the facility for a substantial period known as Design, Build,
Finance & Maintain (DBFM) or Design, Build, Maintain & Operate (DBMO). By
including the maintenance and operation requirements within a design and
construction contract, the supplier has an increased opportunity for adopting
innovative solutions that provide greater value for money when considering whole life
costs.
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy
• Single point responsibility for design and cost risks, including design
errors and omissions.
• The client has little control over design once the contract is let, as the
building is specified on a performance basis with output specifications.
Low High
Characteristics 1 2 3 4 5 6 7 8 9 10
1 Expert client involvement needed
2 Client control over design and specification solutions
3 Needs Client production of an output performance specification
4 Ease of implementing change during construction
5 Supports early appointment of an integrated team
6 Single point design and construction responsibility
7 Cost and time certainty after contract execution
8 Speed of development
9 Suitable for simple projects
10 Suitable for complex projects
11 Suitable for a target cost approach
12 Suitable for 2-stage tendering
Figure 6: Characteristics of Design and Build
8.1 Just as in a design and build contract, a single supplier is responsible for both
the design and construction of the facility. However, in the case of Design Develop
and Construct, the client’s own design team (either in-house or outsourced) develop
the design to a much greater level of detail than in a simple Design and Build
strategy. Typically, this will be to RIBA Stage 3 and will include both fully designed
input specifications as well as output specifications for those elements of design
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being left to the successful contractor to complete. Together these form the
“Employers Requirements” or “Works Information” depending on the form of contract
chosen. Commonly, Planning Consent is secured by the client in advance of the
tender, leaving the contractor to comply with any Planning Conditions and to secure
Building Warrants and other statutory approvals. The client then invites competitive
tenders in accordance with the guidance set out in Chapter 7 of this handbook,
covering “Procurement Route 2”.
8.2 The successful contractor will either employ their own design team or, more
commonly, have the client’s team novated to them. The contractor is then required to
complete the outstanding design – often integrating many specialist contractor
elements such as cladding, steelwork, building services – all of which must comply
with the relevant output specifications contained in the Employers Requirements.
8.4 There may be some circumstances where it may be beneficial for the design
and build procurement option to be extended to cover maintenance and also
possibly operation of the facility for a substantial period. By including the
maintenance and operation requirements within a design and construction contract,
the supplier has increased opportunity for adopting innovative solutions that provide
greater value for money when considering whole life costs.
• Single point responsibility for design and cost risks, including design
errors and omissions.
• The client has little control over the outstanding design and quality
standards once the contract is let, other than to issue variations to their
Employers Requirements.
Low High
Characteristics 1 2 3 4 5 6 7 8 9 10
1 Expert client involvement needed
2 Client control over design and specification solutions
3 Needs Client production of an output performance specification
4 Ease of implementing change during construction
5 Supports early appointment of an integrated team
6 Single point design and construction responsibility
7 Cost and time certainty after contract execution
8 Speed of development
9 Suitable for simple projects
10 Suitable for complex projects
11 Suitable for a target cost approach
12 Suitable for 2-stage tendering
Figure 7: Characteristics of Design, Develop and Construct
Management Contracting
9.1 This is a ‘fast track’ strategy which overlaps the design and construction
stages and enables contracts for early work packages, for example groundworks and
steelwork, to be placed before the overall design is complete.
9.3 The contracts for the various works packages are between the management
contractor and the individual trade contractors. Costs are controlled by the
development of a cost plan in which estimates of the costs of works packages are
initially used for budgeting purposes prior to being replaced with actual costs
obtained in open book competitive tenders. The projected final cost (still subject to
risk events) will only be known once the final works package has been awarded and
hence management of the cost plan focussing on risks and contingencies is
extremely important.
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• While the client maintains direct control over the design team, the
management and trade contractors can contribute to design development and
improve the management and buildability of the construction process.
• The final price and timescale are not fixed at the commencement of the
works and do not become so until the last work package has been let, and
even then, are subject to the risks that lay with the client under the form of
contract chosen.
• The client must have the resources and access to the necessary expertise
to deal with separate design consultants and the management contractor and
the scrutiny of each of the works package tenders.
Low High
Characteristics 1 2 3 4 5 6 7 8 9 10
1 Expert client involvement needed
2 Client control over design and specification solutions
3 Needs Client production of an output performance specification
4 Ease of implementing change during construction
5 Supports early appointment of an integrated team
6 Single point design and construction responsibility
7 Cost and time certainty after contract execution
8 Speed of development
9 Suitable for simple projects
10 Suitable for complex projects
11 Suitable for a target cost approach
12 Suitable for 2-stage tendering
Figure 8: Characteristics of Management Contracting
Construction Management
10.1 This is also a ‘fast track’ strategy where works packages are let before the
design of later packages has been completed. A construction manager is appointed
by the client to manage the overall contract in return for a management fee and, as
with management contracting, the project can benefit from the early involvement of
the contractor. The main, and very significant, difference from management
contracting is that the contracts for the works packages are placed directly between
the client and the trade contractors. As with management contracting the projected
final cost (still subject to risk events) will only be known once the final works package
has been awarded. Costs are controlled by the development of a cost plan in which
estimates of the costs of works packages are initially used for budgeting purposes
prior to being replaced with actual costs obtained from open book competitive
tenders. The management of the cost plan focussing on risks and contingencies is,
therefore, extremely important.
10.2 Construction management was largely devised for use in the commercial
development market and, where there are examples of public sector projects being
successfully procured via this route, this approach is generally unlikely to represent
an appropriate option for public sector procurers other than in exceptional
circumstances and where the client has the necessary resources and experience.
While the use of construction management is not ruled out entirely, it should only be
adopted following full consideration of the risks and benefits and an assessment of
the management team’s level of resource and expertise. Finally, in the case of
clients subject to the requirements of the Scottish Public Finance Manual, the choice
of this route must be approved by the responsible Minister.
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• The client controls the design and changes can be accommodated in let
and unlet packages provided there is little or no impact on the overall project
timetable.
• The client contracts directly with trade contractors, which could result in
lower prices and allows poor performance to be dealt with directly.
• The final design, price and timescale are not fixed at the commencement
of the works and do not become so until the last work package has been let,
and even then, are subject to the risks that lay with the client under the form of
contract chosen.
• The client bears most of the total risk including delays, disruption, design
and its coordination with construction; there must be a robust process for
instructing and approving changes.
• The construction manager commonly does not assume any risk other than
negligence, is not contractually responsible for achieving programme and
cannot instruct third parties.
• The design team must envisage both the totality and detail of the design
at the outset, accommodating uncertainty, procuring long lead-time items
early and avoiding retrospective change.
• The construction manager can build better team relationships with trade
contractors and hence potentially resolve disputes swiftly in the absence of a
direct commercial relationship.
Low High
Characteristics 1 2 3 4 5 6 7 8 9 10
1 Expert client involvement needed
2 Client control over design and specification solutions
3 Needs Client production of an output performance specification
4 Ease of implementing change during construction
5 Supports early appointment of an integrated team
6 Single point design and construction responsibility
7 Cost and time certainty after contract execution
8 Speed of development
9 Suitable for simple projects
10 Suitable for complex projects
11 Suitable for a target cost approach
12 Suitable for 2-stage tendering
Figure 9: Characteristics of Construction Management
Revenue Financed
11.1 Revenue financed solutions, are created for the provision of services and not
specifically for the exclusive provision of capital assets such as buildings. For this
reason, it is preferable to investigate revenue financed solutions as soon as possible
after a user need has been identified rather than leaving it until a conventional
construction project has been selected as the solution. It is possible that a revenue
financed solution using such a model may result in a provision of services to meet
the user need that does not require a construction project.
11.3 Use of a revenue funding model requires that the private sector assumes the
risk and responsibility for both performance and availability of the contracted
services – which may include the delivery of the building. The public sector sets out
its service requirements in the form of an output specification which prescribes the
level and quality of service required. This is normally done through a long-term
contract and the standard of delivery is monitored by the public sector throughout the
contract period, with deductions made from the monthly service payment where the
specified outputs and standards are not delivered. Value for Money is achieved
through private sector innovation, effective use of the competitive process,
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• The process leading up to contract completion for the project can take a
long time and needs an extensive and fully refined brief at the outset.
• There is a significant cost to bidders in tendering which may limit the level
of interest in a project.
Low High
Characteristics 1 2 3 4 5 6 7 8 9 10
1 Expert client involvement needed
2 Client control over design and specification solutions
3 Needs Client production of an output performance specification
4 Ease of implementing change during construction
5 Supports early appointment of an integrated team
6 Single point design and construction responsibility
7 Cost and time certainty after contract execution
8 Speed of development
9 Suitable for simple projects
10 Suitable for complex projects
11 Suitable for a target cost approach
12 Suitable for 2-stage tendering
Figure 10: Characteristics of Revenue Financed Procurement Strategies
12.2 In the first stage, a limited appointment is agreed allowing the contractor to
begin work and in the second stage a fixed price is negotiated for the contract. It can
be used to appoint the main contractor early or more commonly as a mechanism for
early appointment of a specialist contractor such as a cladding contractor. A two-
stage tender process may also be adopted on a design and build project where the
employer's requirements are not sufficiently well developed for the contractor to be
able to calculate a realistic price. In this case, the contractor will tender a fee for
designing the building along with a schedule of rates that can be used to establish
the construction price for the second stage tender.
12.3 The basis of the appointment for the first stage may include:
• Method statements.
12.6 The pre-construction services carried out by the contractor in the first phase
might include:
12.7 In theory, this early involvement of the contractor should improve the
buildability and cost-certainty of the design as well as creating a better integrated
project team and reducing the likelihood of disputes.
12.9 Two-stage tendering enables the client to transfer design risk to the
contractor, however the client inevitably loses leverage as the contractor becomes
embedded in the team and competition is less of a threat. However, whilst tender
prices for two-stage contracts may initially be higher than single-stage tenders, which
are subject to full competition, the final account tends to include fewer variations and
fewer claims. A longer period of familiarity with the project creates better
relationships as well as a reduction in learning curves and programme performance.
12.10 It is in the client's interests to try to include some packages in the first phase,
and to ensure that they have some means of securing an alternative bid if
negotiations with the preferred contractor fail, albeit this is likely to result in delays
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy
and difficulties regarding design liability. However, the client may find that alternative
contractors lose interest once they find out that another contractor has been
awarded the first stage tender.
• The cost of second stage tenders may be higher than predicted at Stage 1
leaving the client with difficult decisions on how to deliver within budget.
• Increased input from client and consultants during the second stage
tender;
this route may offer some advantages – for example, where a contract must be let
before design development is sufficiently advanced to permit a lump sum price to be
fixed – employers need to be aware that they are sharing a greater degree of risk in
respect of a contractor’s performance under a target cost contract than they would
under a fixed price contract. Therefore, it is important that employers considering
using target cost contract approach have full regard to Scottish Procurement
Construction Policy Note CPN 5/2017 – “Guidance on the operation of target cost
contracts and pain share/gain share mechanisms”. This guidance provides an
overview of the operation of target cost contracts and identifies a range of issues that
need to be considered if such a strategy is to be adopted.
13.2 The basic principle underpinning this approach is that a “target cost” for the
works is agreed between the employer and contractor, with the contractor then paid
for the work undertaken on a cost reimbursable basis. The payments to the
contractor are made on the basis of the contractor’s accounts and records, provided
to the employer for inspection on an “open book” basis.
13.3 At the end of the project, the final target cost – which is the original target cost
plus the effect of any changes and risk events the contracting authority is
responsible for – is compared to the actual cost expended by the contractor. If the
actual cost is lower than the target cost, a saving has been made, and this is shared
between the parties on a pre-agreed percentage basis – referred to as “gain-share”.
Conversely, if the actual cost is higher than the target cost there is an over-spend,
again shared between the parties on a pre-agreed percentage split – referred to as
“pain-share”.
13.4 The principal benefit of target cost arrangements is their ability to align the
objectives of the parties, which helps to create a partnering environment. The
contractor and contracting authority are both encouraged to work together to control
costs, sharing the risk of over or under spend through the gain-share/pain-share
mechanism. The open book approach helps to build trust between the parties,
through the sharing of sensitive information by the contractor and the visibility to the
contracting authority of the true cost of the project to the contractor.
13.5 However, one issue that often occurs is that target cost arrangements are
entered into without fully understanding how the process works – in particular the
additional risk that the contracting authority takes compared to a fixed price contract.
It is vital that this risk is effectively managed. Too frequently there is insufficient
control of the target cost value, so the contract becomes little more than a cost
reimbursable arrangement with limited incentive for the parties to perform efficiently.
13.6 There are many examples where the actual cost has far exceeded the target
cost, yet it appears there are few examples of contractors suffering from pain share.
In most cases the gain-share/pain-share calculation results in a neutral or positive
gain share.
13.7 Value for money will only be secured if the contract is let with a well-defined
target cost and is thereafter very actively managed. Therefore, when considering a
target contract, it is important the contracting authority recognises that it is carrying a
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy
larger degree of risk than a fixed price contract and therefore requires a greater
resource to manage it.
13.8 Care is also needed when reporting likely outturn costs. It is not uncommon
for a contractor, due to poor cost management of their supply chain, to under-
estimate their final costs during the construction period only for a large amount of
“actual cost” to come to light at the end of the project as sub-contractors present final
account information. This can result in the contracting authority needing to secure
approval for additional funding beyond the budget to cover the incurred costs.
13.9 In summary, target cost contracts will only deliver value for money when:
• The target cost is set at a level which requires the contractor and the
contracting authority to work together to create efficiencies beyond those
normally expected
• The contracting authority and contractor must share “gain” and “pain” if
the full benefits are to be secured. This exposes the employer to greater risk.
• Complex target price, gain/pain-share and change controls may not easily
be understood by all parties.
• The separation of target and actual costs before completion creates the
potential for loss of control in predicting the final cost to the employer.
Variant: Frameworks
14.1 Framework agreements provide an option for contracting authorities which are
procuring construction works on a regular basis and want to reduce procurement
timescales, learning curves and other risks; in addition, a further benefit is the ability
to build stronger long term working relationships between the client and contractor.
Using a framework agreement allows the contracting authority to invite tenders from
contractors and/or consultants over a period of time on a “call-off” basis as and when
required.
14.2 The framework contract documents should define the scope and possible
locations for the works or services likely to be required during the defined time
period. They should describe the contract conditions that will be used for pre-
construction services (such as design) and/or the contract conditions that will be
used to execute the works. In addition, the contract documents should also identify
the organisations permitted to use the framework.
14.3 Depending on the size and complexity of the anticipated projects, the supplier
might provide a pricing mechanism or risk adjustment mechanism for different types
of contract that might be used, for example, but not limited to, a minor works
contract, a cost reimbursable contract or a design and build contract.
• A description of how the project will be managed in its various stages and
the basis of remuneration.
• Any other criteria required from tenderers in order that the client can
properly assess their suitability.
14.5 Following a competitive tendering process, one or more suppliers are then
selected and appointed to the framework. When specific projects arise, the
contracting authority is then able to simply select a suitable framework supplier and
instruct them to start work.
14.6 Where there is more than one suitable supplier available, the contracting
authority may introduce a secondary selection process to assess which supplier is
likely to offer best value for a specific project. The advantage to the contracting
authority of this process is that they are able instigate a selection procedure for
individual projects without having to undertake a time-consuming pre-qualification
process. This should also reduce tender costs.
14.7 The advantage to the supplier is that the likelihood of them being awarded a
project when they are already on a framework contract should be higher than it
would be under an open procurement process. Some suppliers, however, complain
that having already been appointed on a framework agreement, they may still have
to bid for individual projects, with a result that the potential efficiency gains of this
process are lost.
No Yes
Figure 11: A Suggested Approach for selecting a Procurement Strategy and Form of Contract
16.1 Some procurement strategies are only suitable for certain types of project,
and for contracting authorities with expert and experienced construction procurement
resource availability. It is therefore important that contracting authorities undertake a
project specific analysis of the relative characteristics (as described previously in this
chapter) of the various procurement strategies to help inform their decision on which
strategy they should adopt for the project in question.
16.2 As a first step in this analysis, it is suggested that an initial short list of
possible procurement strategies is drawn up by testing 6 of the characteristics listed
in Figure 12 against a simple pass/fail process. The criteria recommended for this
process are:
• Is the strategy suitable for low value, simple projects? (No 3 on Figure 12)
• If required, does the strategy support a two-stage tender approach for the
main contractor? (No 6 on Figure 12)
16.3 Two worked examples are shown below to demonstrate the process
To assist, Figure 12 sets out how each of the various procurement strategies meet
the pass/fail criteria listed in paragraph 16.2 above.
Procurement Strategies
Early
Pass/Fail Design Design Develop Construction Management Revenue
Integrated Traditional hub
Criteria & Build & Construct Management Contracting Financed
Team
1. Expert
contracting
authority Yes No No No No Yes Yes Yes
involvement
needed
Single
2. Supports the
Stage –
early
No
appointment of Yes No No Yes Yes Yes No
Two
an integrated
Stage -
team
Yes
3. Suitable for
Yes Yes Yes Yes Yes No No No
simple projects
4. Suitable for
complex Yes Yes No Yes Yes Yes Yes Yes
projects
5. Suitable for a
target cost Yes Yes Yes Yes Yes No No No
approach
6. Suitable for
2-stage Yes Yes Yes No Consider 1 No No No
tendering
7. The
contracting
authority is not Not
Yes Yes Yes Yes No Yes Yes
a hub Applicable
participant or
shareholder
1 *
The hub programme contains many of the characteristics of 2-stage tendering.
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy
Example One
17.1 A simple project for a contracting authority not possessing expert construction
procurement professionals. Only three strategies are considered suitable non-expert
contracting authorities, which are:
• Traditional;
17.2 A weighted, project specific scoring analysis of the options will help the client
to select the most appropriate strategy for the project in question. Where the
contracting authority has signed a Territory Partnership Agreement with its local
hubCo, the further option of a hub procurement strategy is available to it.
17.3 Finally, if the contracting authority has some expertise in this area, it may also
wish to consider using a target cost approach or a 2-stage tendering approach.
Example Two
• Management Contracting.
18.2 Once again, a weighted, project specific scoring analysis of the options will
help the client to select the most appropriate strategy for the project in question.
19.1 Earlier in this chapter, each procurement strategy description ends with a
matrix of 12 characteristics, scored as a range from 1 (low) to 10 (high). This matrix
can be used as a tool to help inform a contracting authority’s decision making
process as to which procurement strategy might be appropriate for its particular
needs as follows:
• Six of these characteristics have been used for the pass/fail criteria in
order to develop a strategy short list. The other six can now be used as part of
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy
a weighted scoring system to select the best fit strategy for the particular
project.
19.2 To illustrate the process, a suggested weighting split for each for each of the 6
characteristics of three generic project types is shown in Figure 13. However, the
contracting authority should select their own weightings based on the specific
circumstances of the project. Finally, template for the weighted scoring exercise is
shown at Figure 14.
19.3 Once a procurement strategy has been selected, the contracting authority
should then give consideration to whether it is eligible to use an existing appropriate
framework which uses the same strategy. If it does not, a new contractor
procurement exercise must be undertaken.
Procurement Strategies
Early Design
Construction Management Revenue
Integrated Traditional Design & Build Develop & hub
Management Contracting Financed
Team Construct
Weighted
Weighted
Weighted
Weighted
Weighted
Weighted
Weighted
Weighted
Score
Score
Score
Score
Score
Score
Score
Score
score
score
score
score
score
score
score
score
Characteristic Weighting
100
Ranking 1. 2. 3.
Signature:
Figure 14: Example weighted scoring. Note: Only those procurement strategies remaining after the pass/fail test should be scored.
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy
20.2 If risks do materialise, and they have not been adequately priced, this can
result in undesirable behaviours between the contracting parties and a breakdown in
the partnering relationship. In a more extreme situation, especially where risks have
been forced down the supply chain, this could result in insolvencies, the impact of
which could create a significant disruption to the planned programme.
Risk Apportionment
21.1 The following diagram Figure 15 illustrates the principles of risk apportionment
between client and contractor. Note that the primary purpose of the form of
construction contract is to define risk apportionment.
Overall Budget
R
E
Interim project reporting should be based on overall cost and time parameters
P
indicating how much of the respective cost and time risk allowances remain, together
O with an assessment of outstanding client retained risks
R
T
Risk Management
risk. The more successful each mitigation strategy has been, the lower the price
should be.
22.5 Dialogue with all of the tendering contractors, or prior to tender with the
market more generally, will inform contracting authorities on how best to present
tender information such that risks are priced as economically as possible.
22.6 Contracting authorities should take appropriate legal advice to ensure such
pre-tender dialogue with contractors complies with the relevant procurement
regulators.
22.7 On more complex projects, contracting authorities may wish to make the
process of risk apportionment a negotiation with each tendering contractor prior to
submission of their final offer. The OJEU Competitive Procedure with Negotiation or,
exceptionally, the Competitive Dialogue procedure can be used in these
circumstances.
23.2 The Review noted that amendment of contracts presents two further main
risks. Firstly, that additional clauses may be incompatible with the remainder of the
contract. This may lead to contractual disputes, or to clients being liable for costs
which they thought they had passed to the contractor. Secondly, as the complexity of
the contract increases, parties to it face increasing legal costs. The additional of
inappropriate or unnecessary amendments simply exacerbates this problem.
amendments are required. This will help contractors by significantly reducing the
amount of time and additional cost they will incur in considering the effect of the
amendments.
23.5 A contracting authority must be mindful that the greater the number of
amendments made, the greater the risk of disputes arising. This is due either to
differences in interpretation or to the amendments being incompatible with the
remainder of the contract. There is also a danger that the personnel administering
the contract, for both parties, are not intuitively aware of, or understand, the effect of
the amendments.
23.6 Figure 17, below, provides examples of the type of amendments which should
not normally be considered as appropriate along with reasons not to amend the
standard form of contract.
Different or more onerous payment or The payment terms in standard contracts are fair
retention arrangements and comply with the requirements of the
Procurement Reform Act. Authorities must
recognise their responsibilities for maintaining a
sustainable industry and understand the importance
of cash flow to contractors and sub-contractors. The
Procurement Reform Act also requires authorities to
introduce measures to ensure maximum 30-day
payments throughout the supply chain.
Different or more onerous periods for the The periods in standard contracts are fair and are
issue of contract notices familiar to contractors and sub-contractors.
Amendments present the particular risk that tier 2
and 3 contractors may miss notice dates and
become unfairly and disproportionately penalised.
Different or more onerous dispute Any amendments which extend periods for dispute
resolution procedures resolution, or present barriers to its access, are
disproportionately unfair to small businesses -
particularly in securing payments.
Responsibility for the consequences of Such an amendment presents a risk that cannot be
changes in law or statutory regulations either understood or priced at the time of tender.
after a contract is executed. The consequences will likely be stepped down the
supply chain to businesses that are not equipped to
take such risks.
Figure 17. Examples of contract amendments for risk transfer which should not
normally be considered.
25.1 There are many different standard form construction contracts available for
use in the UK market. This guidance note only considers those most often used.
These are contracts published by:
• The Joint Contracts Tribunal (JCT), one of whose members is the Scottish
Building Contract Committee (SBCC) which produces equivalent, very similar,
contracts for use in Scotland.
• The Association for Consultancy and Engineering (ACE) and the Civil
Engineering Contractors’ Association (CECA) which jointly publishes the
Infrastructure Conditions of Contract (ICC). These are effectively re-prints of
the now abandoned ICE Conditions of Contract.
Other Contracts
• The Chartered Institute of Building has launched a contract for use with
Complex Projects – CPC 2013.
29.1 The JCT provides a wide range of different forms depending on the
procurement route – traditional contracting, design and build, management
contracting, etc. – and the size and complexity of the project. The NEC starts from
the reverse position: there is a single common form of main contract and flexibility is
obtained by selecting one of the main pricing ‘Options’ (lump sum, target cost, etc.)
and then from an extensive range of secondary clauses dealing with matters such as
delay damages, sectional completion, limitation of liability and key performance
indicators.
30.1 With the JCT form, management is the responsibility of the leader of the
Design Team, which is normally the Architect, whilst in the NEC form the
management is carried out by the Project Manager (PM) and is more onerous than
those required by the JCT form. Therefore, the costs to manage an NEC project will
be more than those required for a JCT contract of similar size and complexity. The
overriding logic is that by increasing resources during construction, problems and
issues can be dealt with as and when they occur at a time when the outcome can
still be influenced. This should assist in completing the project on time and within
budget and should reduce uncertainty for all parties. Compliance with the contractual
procedures should also create an excellent set of records of project activities.
Therefore, if claims or disputes are raised later, both parties will have access to
these records and enable agreement of any dispute.
31.1 The NEC Contracts promote the compilation of a ‘risk register’ and risk
reduction meetings to manage the consequences. There is a strict eight-week cut-off
period for the contractor to notify that a compensation event has occurred, after
which the right to compensation is lost.
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy
31.2 Even shorter timescales are fixed for the contractor to submit quotations to
deal with the event. A failure by the PM to respond to a notification or quotation
within equally short periods will lead to its deemed acceptance, binding the employer
and potentially exposing the PM to a claim by the employer. The quid-pro-quo for the
NEC’s pro-active approach is that it requires a heavy resource commitment from all
sides to administer the project.
31.3 In contrast, the JCT standard forms give the parties greater freedom to put
contractual claim issues to one side before completion and focus on delivering the
project. The downside of this, which the NEC strives to avoid, is the greater
possibility that claim issues will then fester over time, ultimately to the detriment of
the project and the parties’ relationships. Before opting for either suite, it is important
that adequate resources are available to meet all the relevant contractual
obligations.
Design Responsibility
32.1 The JCT forms provide for partial design by the contractor through the use of
a ‘design portion supplement’ and for full design, via a range of ‘design and build’
forms. NEC approaches the issue in a rather more flexible way: the amount of any
contractor’s design is set out as part of the ‘works information’, a schedule to the
contract containing technical information relating to the scope of work. Under the
JCT design and build forms, the standard design warranty expressly restricts the
level of duty owed by the contractor to one of reasonable skill and care. In contrast,
under NEC the parties must expressly agree a secondary option clause (X15) to
have this effect. Without such an agreement, a fitness for purpose obligation will
normally be implied by law as part of the design and build contractor’s
responsibilities. It is interesting to note that under this clause, where a defect arises
in the works due to the design, the contractor has the burden of proving they used
reasonable skill and care.
Insurance Arrangements
33.1 Whereas the JCT forms require insurance of the works to be maintained until
practical completion is certified, under the NEC the contractor’s obligation to arrange
insurance extends to issue of the defects certificate.
Dispute Resolution
34.1 JCT and NEC forms provide an automatic right to adjudication as provided for
by the Construction Act. Under NEC there is a further opportunity to challenge the
decision of an adjudicator by arbitration or through the courts. The dissatisfied party
must give notice to the other side within four weeks of that decision. After that, the
decision becomes final and binding on the parties. Both forms of contract will provide
the client with the protection that they require albeit in different ways. As noted
above, all Design Teams and Contractors are familiar with the JCT Contracts and
possibly less so with the NEC contracts. However, the pros and cons of each form of
contract should be considered in relation to the procurement strategy to make the
best decision for the delivery of the Project.
Construction Procurement Handbook: Chapter 5, Contract Selection and Procurement Strategy