New procurement strategies and legal contracts

The Government Construction Strategy of May 2011 moved into implementation when the interim report of the Procurement/Lean Client Task Group appeared at the beginning of February. So what does the report say and what will it mean for government clients and their contractors in practice?

The report proposes three new procurement strategies, all of which embrace early contractor involvement as being a critical factor to driving innovation and removing waste. All three options also assume that an integrated design team should involve not only the consultants and main contractor, but also key subcontractors and suppliers.

None of this is new as such, but there are breakthroughs that attract immediate attention.

First, the new strategies are very specific:

• Cost-led procurement under frameworks where two or three integrated supply teams develop their bids through early contractor involvement, within a pre-established cost ceiling, in order for one to be selected to deliver the project on site
• Integrated project insurance, through which an integrated supply team is selected early to work up designs and savings within a pre-established cost ceiling, and project implementation is supported by an insurer that top-slices commercial risk on matters including cost overruns beyond an agreed “pain share” threshold
• Two-stage open book, under which the client selects an integrated supply team at an early stage against an agreed fee to work up designs and open-book costs systematically within a pre-established cost ceiling, but without the benefit or cost of integrated project insurance.

A key departure in all three options is the requirement of a structured approach to early contractor involvement that depends on a formal pre-construction phase appointment rather than merely a two-stage tender process. This enables the client to ensure that the main contractor and subcontractors provide their input to design, value engineering, price finalisation and risk management tasks in accordance with agreed deadlines. It also enables the client to control any early works orders and to make the start on site conditional on all parties showing that the project can be delivered to brief and within budget. Without this structured approach, a two-stag e process can degenerate into manoeuvring and negotiation, with the client on the back foot as the project gets closer to start on site.

The task group is clear that contracts should not be amended

Which brings us to the recommended forms of contract. No single form is mandated, but interestingly the task group moves away from the previous government preference for NEC3. Its recommendations open the field to three alternative forms of contract to be used on the trial projects: NEC3 Option C, PPC2000 and JCT Constructing Excellence. They anticipate allocating one form to each of the procurement options, and then reviewing this after the trial projects.

The task group is also clear that contract forms should not be amended and should not include traditional remedies such as liquidated damages, retentions or third-party guarantees - on the basis that these are considered poor value for money. This should, for example, create savings on the costs otherwise quoted by subcontractors for the risk of unpaid retentions.

The report recognises that new procurement models and contract forms alone will not change behaviours. It recognises the need to develop an “intelligent client” role equipped with the skills to deliver on the new models. All in all, these are refreshing recommendations. It is a pity that they stop at capital projects and do not, as yet, offer new procurement models for PFI projects or long-term repairs and maintenance programmes. But these will be the task group’s next targets if the trial projects prove successful.

David Mosey is a partner and head of projects and construction at Trowers & Hamlins