Matthew Jones explains how design and build contracts should be structured to best manage risk
How we go about procuring buildings is of perennial importance for our industry, even as procurement evolves to suit market norms and conditions.
A recurring challenge is the pursuit of safe passage through the construction phase, which is likely to be the riskiest phase in the whole life cycle of any built asset.
Managing risk is the right starting point. Time, cost and quality are inextricably linked, but each may have a different risk prioritisation for any given project. Managing these risks is therefore both subjective and relative.
It is commonly perceived that design and build contracts carry the least risk for clients. It is also a reasonable presumption that design and build procurement should attract a price premium, given the risk transfer to the contractor. While these are a starting proposition, further questions need to be asked.
The first question is: what do we mean by design and build? The JCT form will place design development responsibility and risk on the contractor, while antecedent design responsibility remains with the client. It could be said that this is “light-touch D&B”. Then, there is “single-point D&B”, whereby the contractor becomes responsible for all design, whether carried out pre-building contract or post.
Single-point or light-touch?
Many developers prefer the single-point version as it is perceived as safer to have one party responsible for all design or workmanship. This is also true for many other interested parties such as funders, purchasers and tenants, given the typicallly long lease profile of buildings, full repairing and insuring obligations for lessees, and comparatively long limitation periods. This logic holds only for so long as a contractor continues to be solvent, of course.
How do single-point D&B contractors manage this risk transfer? The prudent approach is to require novation of design consultants from client to contractor. Alternatives include for design consultants to provide direct contractual warranties or third-party rights to the contractor; or for the contractor to separately appoint the same consultants to verify or assess the design.
In recent years, there have been increasingly prevalent factors that pose challenges for single-point responsibility. Construction cost inflation has been a strong motivator for disaggregating works, in the hope that savings will be achieved by separating out significant elements of the works. Time can also be an issue, particularly for major schemes where design development is progressed after the start of works on site. As a result, early works, basement box, shell and core and/or fit-out contracts seem to be more commonplace today than they have ever been before.
The strategy with disaggregating works is to later seek to integrate them into single-point D&B for aggregated works. That preferred procurement strategy is achieved by novating any early works contracts to a main contractor at the time of letting the main contract. Provided those earlier works are carried out satisfactorily, with monitoring and verification, and there are no surprises in terms of final account and programme, novation of this kind is typically acceptable. Novation part-way through those works is possible, but needs careful navigation by all parties in the period prior to the main contract.
There are, however, potential wrinkles in this procurement strategy. The key source is when clients and/or their advisers wish to maintain single-point responsibility throughout, when, by definition, the procurement is not at all times single-point. For example, a basement box contractor might prefer novation of relevant design consultants if a single-point D&B contract for those works is proposed. Here is the crunch: it is not conceptually possible or appropriate to seek to novate part of an appointment. It is also unlikely that novating an appointment for the whole of a project is appropriate to a basement box contractor.
This is when procurement strategy can start to morph to patch this problem. “Splitting” design appointments between, for example, basement and superstructure design, is a potential solution, but there are interface and co-ordination issues to be considered. You also need consultants to agree the split when that is not as originally envisaged. Splitting appointments, at best, begins to look inelegant as a way to retrospectively solve this issue.
Solutions exist that are pragmatic and proven. Rather than assume that single-point D&B must apply by default at all stages, using a traditional form of contract – which also allows for design development of relevant elements of the works – is a neater interim solution. The alternative is to row back to a light-touch D&B form. That will allow design consultants to stay client-side, pending letting of the main contract. It also avoids the compulsion to split appointments to effect interim novation of relevant design consultants to any early works contractor.
If applied sensibly, main contractors should be accepting of those arrangements, provided that appropriate measures mentioned earlier are in place. Single-point D&B may then be a preferred destination, but might be better coupled with a traditional or light stop along the way.
Matthew Jones is a partner and head of the construction and engineering team at Taylor Wessing