At a pre-agreed time, when the tendered value of trade contracts is sufficient to allow it, the contract is converted into a lump sum of some kind. The contract sets out a methodology for this conversion.
This suits the pressures of fast-track development, as it enables the contractor to be brought on board without the need for a complete design. All the contractor tenders at the beginning is the cost of preliminaries, overheads and profit, and the cost of providing pre-construction advice. When each of the trade contract packages has been designed, it is tendered to a carefully selected list of subcontractors and is therefore self-checking for competitiveness. Everything is in place to allow the contract sum to be agreed before the main works start. Or is it? Often when the contract sum is due to be fixed, the parties fail to agree on a figure. The usual reason for disagreement is how to deal with risks.
Let me give an example. Under the terms of the lump sum contract, the contractor is responsible for the performance of the trade contractors and for replacing them at no extra cost or time if they become insolvent. This was set out in the original tender enquiry to the contractor. Assume that the cladding has been tendered and the best trade contractor has been agreed between the team and contractor. Despite being involved all the way through the selection process, at the eleventh hour, the contractor has doubts about its financial stability. There is nothing definite, but the contractor wants another £1m and eight weeks on the programme for the potential impact. After all, who can say the contractor won't go bust? This is not a failure of the contractor to agree with the contract rules, just a discussion on the price that should apply. But the contract sum is never concluded.
Choose the right type of contractor. Traditional lump-sum contractors are used to the adoption of risk. Management contractors tend to get worried and to price everything.
Is this a reason for not choosing a hybrid procurement route? In reality, on many major projects there is no other way to proceed, so how can this be solved? There seem to be no answers in tweaking the contract. This already sets out the position clearly. Neither is it an answer to build in an exit route and the opportunity to go to another contractor. The present incumbent is always too firmly entrenched and time is too pressing. What is needed is a strategy for dealing with issues that may arise.
- Carry out a detailed risk assessment to identify what might prevent agreement of the contract sum. Do it in a facilitated team workshop when the contractor is first aboard. Involve people who have had problems before – from both sides. Agree the allocation of individual risks on a package-by-package basis. Agree "what if" scenarios to explore practical examples of the difficulties.
- Appoint a risk manager with a clear brief to control and eliminate the risks. Consider making this a separate appointment from the other consultants or contractor so that they are independent.
- Choose the right contract. Conversion to a design and build contract will be more difficult than to a JCT-style one because of the differing degree of risk transfer to the contractor.
- Choose the right type of contract. Traditional lump-sum contractors are used to the adoption of risk; management contractors tend to become worried and want to price everything.
Don't be frightened of hybrid routes, though. Just make sure your strategy is in place before you embark on one.
Andrew Hemsley is managing director of consulting at Cyril Sweett.