UK: Procurement Methods in the Construction Industry

The choice of procurement route is vitally important to the success of any construction project. A number of different procurement routes exist but what are the essential ingredients of each and what are their relative advantages and disadvantages? This article discusses the differences between two of those procurement routes: general contracting and design and build.

The principal procurement methods are:

• General contracting;
• Design and build;
• Construction management; and
• Management contracting.

However, as experience suggests that international contractors generally prefer general contracting and design and build contracts.

General contracting is the traditional procurement method by which the contractor agrees to build the design that is provided by the employer. The contractor only has responsibility for construction and not for design. The contract price is often based on a bill of quantities provided by the employer which quantifies, so far as possible, every aspect of the works. Occasionally contractors will price the works without a bill of quantities, for example from drawings. However, re-measurement contracts, target cost contracts and even cost plus/prime cost contracts are also not infrequently used as a method of pricing. This method of contracting remains popular and in its favour it can be said that most employers and contractors would have experience of it. It is also thought that this route offers some price certainty if the design has been fully scoped out prior to construction (which is often not the case); and gives the employer greater control of the design as the employer controls the design team. This method also offers the advantage to an employer of having an independent professional in the role of the contract administrator monitoring the project. The main disadvantages of general contracting include split responsibility between construction and design. This can, and unfortunately often does, lead to disputes about whether defects are really design defects (for which the employer is responsible) or defects in materials and workmanship (for which the contractor is responsible). The other major disadvantage of this route is that the final design is often not fully developed before construction starts and this can create problems and price uncertainty. As we shall see below it can make general contracting unsuitable for public bodies with budgetary constraints.

Design and Build comes in various forms but is typified by the contractor taking both design and construction responsibility. In integrated D&B contracting the contractor develops the design and constructs the building based on a set of requirements provided by the employer. In contrast, novated D&B contracting is closer to the traditional model in so far as the employer's design team develops the design but is then novated to the contractor who takes the design responsibility and then constructs the building. "Turnkey" or EPC contracts are a type of D&B contract but Turnkey and D&B are not synonymous. The fundamental characteristic of Turnkey contracts is that at completion the contractor should simply be able to "hands over the keys" to the employer who can then operate the plant in question. Turnkey contracts are typically associated with process or power plants or works with a heavy engineering element and tend to be associated with performance based contracts. They typically place most of the risk on the contractor. The main advantages of this method of procurement are single point responsibility by the contractor for both design and construction and the ability to fast track the project. D&B lends itself more readily to allowing contractors to start on site before the design is completely finished. This can be important, particularly to government bodies who sometimes need to spend their budget for the project within allocated periods. This procurement method is increasingly common and shares the advantage that most employers and contractors would have experience of it. The disadvantages of D&B include the loss of design control by the employer. Experience suggests that in an effort to bring projects in on budget D&B contractors can often compromise on design and this can be a problem for employers. It places a greater responsibility on employers to carefully detail their requirements without being over prescriptive to the point where they are effectively providing a design themselves. The client also faces the absence of the contract administrator as his eyes and ears for the project.

There are many standard forms of contact available and the majority of construction work is carried out with employer amendments. For international contractors the most common form of contract is FIDIC. FIDIC is the Federation Internationale Des Ingenieurs-Conseils, an association of national associations of consulting engineers. The contracts are based on the ICE conditions. FIDIC comprises a large suite of contracts and in this context the 1999 edition Red Book is appropriate for general contracting while the 1999 edition Yellow Book is appropriate as a D&B Contract. The Silver Book is for use as either as an EPC/Turnkey contract on a traditionally procured project or alternatively for use as a construction sub-contract on a PPP project. Mention should also be made of the FIDIC Red Book 4th edition (the predecessor of the 1999 Red Book) which still enjoys use in some parts of the world as a re-measurement contract for civil engineering works and the draft 2nd edition of the "new" Red Book which is yet to be published.

It is often the case that the form of procurement route will be prescribed for the contractor, particularly with large international projects where funding bodies may prescribe the choice of contract. However, the choice of procurement method remains an important consideration where some choice is involved for both employer and contractor and the success of the project may depend on the right contractual vehicle being chosen.