What is it?
Management contracting is the appointment of a contractor in two phases. During the design phase, which will extend into construction, the contractor's role is to advise the employer on the buildability of the design, plan the construction and agree cost estimates with the QS. During the construction phase, the contractor is responsible for tendering parcels of work and negotiating contracts with the subcontractors (known as "works contractors") on behalf of the employer.
The contractor then enters into lump-sum works contracts with the works contractors and is reimbursed the amounts due to the works contractors by the employer. The contractor is solely responsible for project management, including completion to time and quality. For this it is paid a fee, sometimes incentivised if the project is finished to time and budget. In addition, it is paid for providing site management, site facilities and administration, either on a cost-reimbursement basis or by lump sum.
Why use management contracting?
The procurement route is intended to speed up the build process by allowing construction to start before completion of the design and by getting the contractor to advise the design team on buildability. It is also intended to avoid adversarial relationships between the contractor, employer and design team. The contractor becomes a part of the employer's team and can concentrate its efforts on assisting the design team, co-ordinating the works contractors, site management and quality control. The employer will also get the benefit of the contractor's buying power with works contractors. Management contracting was thought to be particularly suited to technically simple projects with short lead times where the employer could tolerate some cost uncertainty.
Who takes the risks?
The management contractor is paid a flat fee for its services and essentially indemnified for the cost risk of the works contracts. The risk of delay to completion is, in theory, passed down to the works contractors, although in practice it has proved impossible on many occasions to make works contractors accept liability for liquidated damages due on a major project.
The management contractor is liable for liquidated damages only if delay is caused by its default in managing the project. The employer accepts the risk of cost and time overruns except insofar as such costs can be recovered from the works or the management contractors for their default. This "indemnity" was cumbersome and complex to draft, and clauses 3.21 and 3.22 in JCT87 have been heavily litigated (for example, the recent case of Copthorne Hotel (Newcastle) vs Arup Associates (No 2, 85 BLR 22). In practice, it can be difficult for a claimant to establish a chain of causation from cost incurred to "default" on the part of the management contractor. The employer is intended to be compensated for assuming the increased risk by getting its building early, so saving in time-related site costs.
Cost control was almost impossible, completion to time unlikely, quality poor and the non-adversarial approach often a myth
What went wrong?
Management contracting did offer the advantages of shorter lead times and ensuring buildability – but at a price. In fact, cost control was almost impossible, completion to time unlikely, quality poor and the non-adversarial team approach often a myth. The reasons for this would fill a book, but can be summarised as follows. Designers often found it difficult to keep pace with the management contractor's programme. They were either under-resourced or unused to completing co-ordinated drawings sufficient to obtain fixed-price tenders from works contractors to a rigid programme. That in turn led to the usual accusation and counter-accusation between design team and contractor.
Management contractors frequently failed to understand their role and continued to behave like lump-sum contractors. They sought to improve their fee by making claims, under-resourcing projects and even, occasionally, entering into distinctly dubious "hidden discounting" arrangements with works contractors. Works contracts were not placed on time, co-ordination of works contractors on site was poor, and inefficient and chaotic site conditions pushed up works contractors' costs. The tender price inflation of the late 1980s was allowed free rein in management contracting and many employers faced spiralling costs.
A number of high-profile projects collapsed into litigation.
The best of all possible worlds?
Probably the only standard form to have been used to any significant degree is the JCT Standard Form of Management Contract 1987 Edition (now reissued in a 1998 edition). Use of the JCT contract has fallen dramatically since its heyday in the late 1980s, but the principle still has a role in certain bespoke contracts.
The intention is to get the advantages of a telescoped design and construction phase, but to combine them with the cost and time certainty of a lump-sum contract, and the single-point design liability of design and build.
Christopher Hill is managing partner of solicitor Norton Rose's construction and engineering group.