Why construction management is a better alternative than design and build

Construction across all sectors is very challenging. Projects are harder to get off the ground and increasingly difficult to deliver on time and within budget. Global instability, inflation, insolvency risk, increasing regulation and supply chain pressures all reduce contractors’ appetite for large, onerous contracts. Faced with these challenges, the industry should adopt a more creative approach to procurement.

Design and build has been the dominant procurement model in UK real estate development for decades – prized for its apparent simplicity, single point of responsibility and lump sum price. But in a market characterised by contractor consolidation, supply chain pressure and ever-greater complexity, that simplicity is increasingly illusory.

Construction management offers a structurally different value proposition. It demands more of the developer but with the right mindset and team, it can deliver projects faster and at better value.

Where design and build has lost its edge

Considering the issues facing the industry, is design and build contracting still delivering the benefits and risk transfers that developers and lenders once anticipated?

Risk transfer has become a negotiation. High-profile insolvencies have reduced the pool of Tier 1 contractors and weakened risk appetite. Contractors and supply chains are pushing back on full risk transfers, seeking overall caps on liability and sub-caps aligned with the novated design team, liquidated damages holidays and ratchet mechanisms to limit exposure.

Lump sum pricing is often fictitious. Most UK real estate projects are bespoke and, unlike the US market, are unlikely to reuse standard details. Contractors are not therefore pricing tried and tested designs. Limited tender periods prevent full risk assessment, prompting contractors to pass risk down the supply chain. The result is layered risk pricing, inflated costs and developers paying premiums for risks that may never arise.

Construction management offers a structurally different value proposition. It demands more of the developer but with the right mindset and team, it can deliver projects faster and at better value

PCSAs used for risk return. Originally used to obtain informal specialist input to test proposals, PCSAs have become far more formal and negotiation-heavy. Contractors increasingly use them to identify and return risks to the developer (particularly on refurbishment and refit projects), leading to heavily negotiated risk allocation, increased legal costs and further erosion of single-point responsibility.

Programme risk generates an adversarial dynamic. Programme risk on complex projects leads to extension of time requests and adversarial behaviour. Liquidated damages agreed at the outset are often not claimed and the parties end up arguing over one large final account. Where a claim arises, the lump sum price can also quickly increase.

Where construction management can lead the way

Construction management is not suitable for every project, or for inexperienced clients. It requires a professional, engaged developer with clear governance, disciplined decision-making and experienced advisers. For clients who want to be completely hands-off, design and build still has its place, particularly for simpler projects. For complex schemes, however, construction management offers advantages that design and build cannot replicate.

Direct appointment and trade relationships

Under construction management, the developer directly appoints trade contractors and its professional design team. There is no main contractor. The developer engages a construction manager to assist with procurement and project delivery but the construction manager bears far less risk than a main contractor and no responsibility for the trades beyond default in provision of management services.

Developers can therefore select the best trade contractors rather than the cheapest. Projects including Broadgate, the Royal Opera House, Tate Modern and Bloomberg, while complex, have been delivered successfully using this model.

Building relationships with trade contractors and ensuring fair treatment reduces risk pricing. Many trade contractors prefer direct engagement by respected developers. Construction management also attracts high-quality people who enjoy the collaborative, problem-solving nature of the work.

Early engagement, buildability and flexibility

The construction manager can provide early input on capability, buildability and quality, on an open-book cost basis. Developers should ideally engage them at RIBA stage 2.

Construction management delivers a better fit between designers’ intent and construction know-how. Rules-based design can be produced with buildability constraints set early by package leaders, improving buildability and providing price certainty whille encouraging collaboration.

Developers should utilise a concise schedule listing construction manager and trade responsibilities, providing upfront clarity on prelims, temporary works and interfaces. Regular senior forums with all trade package directors can address issues collaboratively – an approach successfully implemented on the original Broadgate project.

Construction management gives developers real-time cost and programme control, with greater flexibility to respond to tenant changes or market developments.

The developer and construction manager can work together to decide where short-term expenditure reduces overall project cost. On one Lipton Rogers project, increasing groundworks expenditure at the construction manager’s recommendation ultimately saved considerably more on the final cost and brought delivery ahead of programme – highly unlikely under design and build.

Construction management can also encourage innovation, because clients retain control and specialists can propose solutions that improve long-term outcomes. Under a lump sum contract, by contrast, the contractor’s incentive is to deliver as quickly and cheaply as possible.

Construction management is not without its critics. However, the two most common objections – lack of cost certainty and the absence of single-point responsibility – are not as clear-cut as they first appear and both can be effectively managed with the right approach.

What about cost certainty?

Funders ultimately need cost certainty and construction management appears to offer only estimates. However, under design and build (or indeed any other procurement route considered “fixed price”), cost and programme fixity is often an illusion. Provisional sums and variations will quickly unravel the agreed price.

Under construction management, there is progressive commitment and price certainty as the design develops. In our experience, by the time most projects break ground, approximately 70% of packages by value will have been procured, including structure, MEP, lifts and facades. There is no need for provisional sums, as design choices can be made when actually required during the programme. Many developers also prefer the progressive final accounts approach, with each trade settled as works complete, rather than a single adversarial final account at project end.

Removing the risk premium payable to a single main contractor under design and build for risks that may never ultimately materialise can often result in a lower outturn cost.

Of course, as with any project, a developer embarking on a construction management scheme should carry out careful financial vetting of the project team and agree appropriate client-held contingencies, backed by a construction manager who scrutinises costs throughout. Where this is done correctly, the financial performance of construction management projects can be very successful.

What about the warranty gap?

Developers, funders and end-users can be put off by the lack of single-point responsibility in construction management. However, robust warranty packages from the professional team and key trades can offset this concern. Some developers reserve a “fighting fund” using savings from not paying the contractor’s risk premium under design and build, administered by the construction manager to resolve multi-party defects. Some construction managers may also be open to providing some form of warranty, subject to negotiation.

It is also worth noting that if a design and build contractor becomes insolvent, the single wrap disappears. The developer is then exposed to the same fragmented liability landscape it would have faced under construction management, having already paid the risk premium. Latent defects insurance is not a complete solution either: these policies do not cover all defect risk and can be expensive.

In our experience, lenders will be comfortable with construction management projects where the benefits and rationale are made clear at the outset.

Comparing design and build and construction management

Using construction management in today’s market

Outside of the real estate sector, management-style procurement is commonplace – particularly in energy and infrastructure, where projects are too large for a single contractor and specialist suppliers are unwilling to assume responsibility for others. Contracting directly with specialists allows developers to benefit from best-in-class selection and direct engagement, including the opportunity to procure spares, maintenance and repair arrangements simultaneously. The real estate sector could benefit in a similar way.

Construction management also offers wider industry benefits: faster payment for the supply chain, encouragement of innovation and reduced risk of Tier 1 insolvencies in an environment where projects are becoming inherently more complex.

Design and build will remain appropriate for straightforward projects and its familiarity will sustain its use across parts of the market. But for complex, high-value schemes, the risk transfer it promises is increasingly fictitious

Design and build will remain appropriate for straightforward projects and its familiarity will sustain its use across parts of the market. But for complex, high-value schemes, the risk transfer it promises is increasingly fictitious. The cost certainty it offers is regularly undermined and the adversarial dynamic it generates is costly for all parties.

Construction management, properly structured and led by an experienced team, offers developers greater control, better quality outcomes, genuine cost transparency and a more collaborative supply chain relationship. It is time for the industry to challenge orthodox procurement methods and embrace management models before the expertise required to deliver them successfully is lost.