In a report published last year, Reading University considered the modern forms of building procurement — management contracting and construction management — and concluded that, of the two, construction management was preferable. The reasons were that it provides the more logical method of practice and more accurately reflects the actual relationships between the parties to the project. These relationships were, the report concluded, essentially similar for both methods, although they were dealt with in different ways.
This article examines the risks for the client inherent in construction management to enable a potential client to make an informed decision as to whether this form of procurement is appropriate for his project and his company.
Construction management
What exactly is “construction management”. To date, no clear industry-wide consensus on the precise definition has emerged. Notwithstanding this lack of agreement certain key elements can be identified. The construction manager is engaged:
- To provide professional management services for the project.
- To act as a member of the client’s professional team for the project, owing a duty of care analogous to the other professionals, ie to use reasonable skill and care in the performance of duties.
The duties of the construction manager will generally include providing “buildability” advice (ie advice on the practicality of the design, bearing in mind the site conditions) during the design phase of the project; preparing the programmes for the project and monitoring progress; preparing documentation in relation to all the trades contracts bid packages; acting as supervising officer under these contracts; providing quality assurance services in respect of the works; and providing a cost-management service. The precise scope will reflect subtle differences for each project, depending on the allocation of responsibilities between the construction manager and the other professionals. The construction manager and the other professionals. The construction manager undertakes no absolute obligation to complete the project on programme, to budget, or to the quality specified.
Benefits
Before considering the risks, however, let us consider the benefits;
- Early involvement enables “buildability” advice to be offered to the design consultants, resulting in savings of time and cost during construction.
- Construction management is flexible, allowing “fast tracking” by overlapping design and construction.
- Construction management gets the traditional main contractor “on-side” with the client, eliminating the adversarial relationship which has traditionally soured major construction projects, though relieving the construction manager of much of the commercial risk associated with a traditional building contract.
- Property organised, construction management provides the client with flexibility in the organisation and management of his project and the ability to respond quickly to problems as they arise.
- The client can tailor individual construction contracts to the particular works to be carried out.
Risks
(1)Mode of appointment
Construction management should be adopted early if the full benefits are to be realised.
The construction manager should be appointed at the same time as the other consultants so that he can contribute to the structuring of the project organisation, the packaging of the work and defining each party’s role in the project to achieve an efficient and workable allocation of responsibilities.
The terms of engagement of consultants published by the various professional institutions are modelled upon the traditional “main contractor” model of a building project and are not appropriate for a project adopting the construction management model. Therefore the consultants must be appointed on forms of engagement which reflect their roles and responsibilities and those of the construction manager. This is very much more difficult to achieve if the consultants have been appointed on the traditional basis prior to the decision to adopt construction management.
(2)Role of client
The primary consequence of a client adopting the construction management method of procurement is a significant enhancement of his own role in the project — and, consequently, increased risks.
The client’s principal responsibilities are:
- Defining the role of the construction manager and the various professional consultants. This involves consideration of the role of the architect and the quantity surveyor contrasted with that of construction manager, since the traditional roles of these consultants conflict with the duties normally expected of a construction manager. The role of the engineering consultants, particularly mechanical and electrical, and the specialist trades contractors must be identified precisely. The clear analysis of these points and, consequently, a definitive statement of responsibility is essential if conflict is to be avoided throughout the project. Furthermore, the client must be prepared to intervene promptly to avoid any “demarcation” disputes within the professional team, as these are fatal to the cooperation essential to successful construction management.
- Establishing a definitive project brief defining the client’s functional requirements of the building. The brief should also consider the requisite building design life span, the building management criteria to be adopted, and the client’s requirements as to energy efficiency and operational costs.
- The client (or his nominated representative) must be project chairman, monitoring the work of the professional consultants to ensure that each performs in accordance with the terms of its appointment and does not create difficulties for the other members of the professional team. The client must also be prepared to decide between consultants’ conflicting recommendations, eg between matters of design philosophy and construction efficiency.
- The client accepts a heavy administrative burden, executing all of the trades contracts and, each month, paying the trade contractors’ invoices. Additionally, the client will be involved in negotiating and settling any disputes arising during the course of the construction works.
- The client is more exposed to the consequences of any delays in his decision-making since the necessity for such decisions and the dates by which they must be taken will be identified on the construction programmes prepared by the construction manager and progress in the taking of such decisions will be monitored.
For any construction management project to succeed, the client must recognise this enhanced role and assign to the project the right calibre of client management personnel authorised to make the decisions necessary for the orderly progress of the project.
(3)Role of construction manager
The construction manager is obliged to exercise reasonable skill and care in organising and managing the works. Having done so, he carries no commercial risk should difficulties arise during the course of the project, though he must identify and agree with the client the most appropriate remedial action and then negotiate with the trades contractors affected by the problem or the proposed solution. The client should be involved in any such negotiations, since his objectives may differ from those of the construction manager.
The construction manager carries no direct responsibility for any defective workmanship of the trades contractors, his responsibilities being limited to establishing and implementing a quality management system satisfying the brief.
(4)Enforcement of contracts
The direct contractual relationships established between the client and the trades contractors enable the client both to sue for damage suffered by him resulting from breach of the trade contractor’s obligations and to avoid the “no loss” arguments associated with management contracting. Conversely, the client may be sued by a multiplicity of trades contractors if he defaults in any of his contractual obligations to them. There is a significant risk of the client being engaged in a number of simultaneous actions dealing with similar points, though a well-drafted contract would provide opportunities for consolidation. The client may also face difficulty in determining which contractor caused the default which has led to the problems and, even if this factual question can be determined, in producing adequate substantiating evidence in any subsequent court proceedings. In the worst circumstances this difficulty could leave the client without effective recourse against any trades contractor.
As the appointment of trades contractors may be governed by factors such as particular technical capability or product availability the client faces the potential risk that some contractors may, in the event of a default, prove to be insubstantial companies not capable of recompensing the client, resulting in an effective lack of recourse.
In the light of recent decisions of the Court of Appeal, the presumption that the construction manager can determine whether a trade contractor is in breach of its contract and advise the client in respect of the client’s right of set-off of damages thereby incurred may no longer be safe. This could mean that the client has lost its most effective rights of recourse and leave it having to embark on expensive litigation in order to recover its losses.
(5)Programme
The client assumes the risk entailed in achieving the overall project programme, as the client’s right of recourse against a defaulting trade contractor is limited to the scope of the individual contract in default, there being no single party under contract to the client with a responsibility for the overall achievement of the project programme.
The client is unlikely to be able to establish a genuine pre-estimate of the loss and expense claims which he may face from other trades contractors affected by any delay at the time a trades contract is entered into. He may not, therefore, be able to establish a liquidated and ascertained damages provision in a trades contract which is sufficient to compensate him for his potential losses in the event of default by a trades contractor. The aptness of a liquidated damages clause in a particular trades contract must be considered carefully.
(6)Financial performance of trades contractors.
As the client is in direct contract with each of the trades contractors, the risk associated with any of the trades contractors defaulting lies with the client. If a contractor repudiates his contract, the client may incur increased costs to complete the works and risks incurring additional costs in respect of the works of other trades contractors affected by the repudiation.
(7)Lack of financial certainty
The client’s cost control activities are carried out against a cost plan prepared by the cost consultant and/or the construction manager. This is a detailed estimate of the construction costs broken down to the level of each of the proposed trades contracts. Unlike a traditional building contract, there is no overall contract price against which the performance of the project can be measured. However, the “comfort” of such a “fixed” contract price is largely illusory, since almost all traditional building contracts provide for price adjustments for variations.
(8)Insurance
The client must consider carefully the insurance arrangements to be adopted for the project; he might be well advised to purchase a global project insurance policy and to extend the benefits of that policy to all the consultants and trades contractors engaged on the project. This enables the client to be certain of the degree of cover obtained when dealing with a large number of trades contractors and is likely to produce the most economic insurance arrangements for the project. The drawback is that the client will be responsible for establishing and administering a claims procedure which can be utilised by all the parties on the project.
Conclusion
Construction management offers a client a very flexible form of construction procurement, well suited to complex or long-term projects which may benefit from flexibility both in project organisation and in management. It will succeed, however, only where the client has fully recognised the associated risks and has established a project organisation which understands the risks, the importance of its role in minimising them, and has the authority to take all the decisions necessary to enable the project to proceed in a structured and coherent manner.
Although there are drawbacks from the client’s point of view — mainly associated with the lack of a single “main contractor” carrying (to a greater or lesser extent) the commercial and quality risks of the project — these risks are, for an expert client on an appropriate project, counterbalanced and probably outweighed by the programming flexibility and cost control discipline inherent in construction management. The benefits are perhaps less clear to an inexpert client who may be faced with employing yet a further consultant to act as the client’s representative in order to avoid the risks discussed earlier. Such a client will need to consider carefully the costs of employing such a consultant, the considerable degree of reliance it will place on the advice of such a representative and the consequences to the client if the consultant fails in its duties, before concluding whether construction management is an appropriate form of organisation for its project.
