Contracting is a seller’s market right now, which is forcing more clients to go down the construction management route. As this is more dangerous than other methods, it requires more precautions
There’s no doubt about it: whatever turmoil is afflicting the financial markets at the moment, it has not had an impact on construction – the industry is booming. A glance at the number of adverts in the back of this magazine will confirm the demand for staff. Firms are stretched and it is proving increasingly difficult to interest contractors in tendering.
Construction, of course, is not immune to the laws of supply and demand. Contractors want the right amount of work. When it is in short supply, they fight over it and their prices are competitive. When there is an over-supply, prices increase and contractors become risk averse.
So, for more complex and risky projects, clients and their advisers are having to adopt procurement routes in which contractors’ risks are minimised and their potential for profit is maximised. The first step is to move to a two-stage tendering route.
Two stage goes a long way towards satisfying the contractor’s wish to minimise risk, as it has an opportunity during the pre-commencement period to influence the design, and to identify and price risks.
It suits clients too, because it attracts contractors’ interest in their projects while still allowing a firm price to be agreed.
Most construction management projects go wrong because they proceed without adequately defining their scope
Recently, however, it has become clear that in some cases even two-stage tendering is not enough. My experience, reinforced by some coverage in the press, indicates that construction management (CM), arguably the most risk-free form of construction for contractors, is on the rise again. About a week ago, it was announced that the BBC MediaCity:UK project in Manchester is to go down that route.
At this point I get a strange feeling of deja vu. I remember the rise of CM 15 years ago, against a very similar economic backdrop. I also remember that, although some hands-on clients found it worked well, it lost favour and fell out of mainstream use, principally because of cost overruns. The killer blow was landed by the Scottish parliament, which ran 10 times over budget. If CM is on the rise again, it’s worth considering what we can do to avoid the same problems occurring.
n Know what you are going to build. Most construction management projects go wrong because they proceed without adequately defining their scope, so take the design to an advanced stage before you start construction and make sure there are no gaps between the trade packages
- Budget management problems. CM is more complicated to control than traditional projects. Let the construction manager deal day-to-day with the trade contractors and employ an independent QS as the strategic cost manager. The QS will pay for itself from cost savings achieved
- Don’t start before you should. It’s all too easy to be tempted to start construction as soon as you can. Don’t. Wait until 90% of the works by value has been tendered, check where you stand against the budget and go ahead if you are comfortable with the predicted outturn cost. Even then, allow a hefty contingency
- Think CM. Recognise that, as a client, you hold risks that would conventionally rest with the contractor and that you need to budget for them. Don’t forget, for example, that if a trade contractor goes bust, you will have to finance the cost and time implications of getting a replacement
- Damages. You will not have a weekly rate of liquidated damages to recover if the project runs late. While it is possible to recover from individual trade contractors, none of them is likely to agree to pay the overall project rate you might recover on a traditional job. The construction manager will be liable for damages if it is negligent, but recovery under this route will be more difficult than with liquidated damages.
CM is an appropriate procurement route to consider for certain projects, but it should not be adopted without addressing how to minimise the risks inherent in it.
Andrew Hemsley is head of specialist services at Cyril Sweett