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Traditional
Contracts

On traditional contracts the Client and his
appointed Consultants will retain control of the design, cost and
administration of the contract. The main contractor is responsible for carrying
out the works in accordance with the contract documents. This responsibility
extends to all workmanship and materials, and any sub-contractors the main contractor
may appoint to carry out the works on his behalf.

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This form of contract is
generally more suited to projects that are complicated or of architectural
significance where the Client wishes to retain overall control of the project.

These contracts may be tendered with or
without quantities. If the tender is with quantities the Clients Cost
Consultant (Quantity Surveyor) will prepare a Bill of Quantities for pricing by
the Contractor. The priced Bill of Quantities will then be used to calculate
the nett cost of the contract. In these instances the Client takes the risk on
the quantities and the works on site will be subject to re-measure with any
difference agreed as part of the administration of the works.

 

If the tender is without quantities the
tendering contractors will prepare their own Bills of Quantities, based on the
specifications and drawings issued with the tender documents. In this approach
the tendering contractor takes the risk of the quantities and elements will
only be re-measured as a result of the specification or drawings changing.

 

This form of contract has the advantage
that the Client and his team maintain control of the design and administration of
the project. It does however require a full design, specification and contract
documents to be provided prior to going out to tender. This can be a lengthy
and costly exercise.  In addition the
Client retains responsibility for any changes that are made to the contract
documents; therefore any changes to the design or specifications may lead to
variations on the contract. If these are extensive the can lead to both the
project costing more than the original budget, and programme over runs.

 

When tendering this form of contract a main
contractor is usually taking less risk than on a Design and Build Contract,
therefore the design risk will not be a major consideration when pricing the
works. The main considerations will be accurate pricing of the Bills of
Quantities, and the duration of the contract programme and associated
preliminary cost.

 

Particular care will be taken to ensure the
rates in the Bills of Quantities are accurate as these will be used to value
any re-measured works as a result of changes to the contract documents.

 

The Main Contractor will also have to
consider project risk such as site conditions, site location and access etc.

when preparing his programme and preliminary cost.

 

Management
Contracting

There are several types of management
contracting, but the approach usually taken is for the Client to appoint
designers to prepare the project drawings and specifications, and then appoint
a management contractor to manage the works.

 

Several management contractors will be
asked to provide a proposed schedule of works and a management fee for carrying
out the works.  The client will then select
and appoint a management contractor based on their proposals. A cost plan will
be developed for the project to give an overall budget for the works and target
cost for the individual work packages.

 

The management contractor will not carry
out the works but will tender the individual works packages to sub-contractors
who will then carry out the works.

 

This form of contract allows greater
flexibility than the traditional form of contract as it is possible to commence
works before a full package of design information is available, whilst allowing
the client to maintain greater control.

 

The main disadvantage of this form of
contract is that there is not a fixed cost at the start of the project, and
careful control is required to ensure cost expenditure is controlled during the
contract.

 

This is a specialist form of contract, and is
administered by companies that focus on this type of work. It is a good
alternative to the traditional form of contract if the Client wishes to
commence procurement / work before the detailed design is complete but wishes
to maintain overall control of the project. It is generally implemented on
complex projects, and used by experienced clients.

 

Design
and Build Contracts

In this form of contract the main contractor
will be responsible for the design and construction of a project based on a set
of information provided at tender stage. As the contractor is ultimately
responsible for the design the information that needs to be issued with the
tender documents is significantly less that that issued under a traditional
contract.

 

The contractor will provide a fixed lump
sum bid, based on the information provided, and his design proposals. This lump
sum will only change if there is a change to the documents provided at tender
stage.

 

The advantage of this form of contract to
the client is that the cost is fixed if the brief does not change, and the main
contractor carries both the design and construction risk of the project. In
addition the early involvement of the main contractor who will be carrying out
the works allows “buildabilty” issues to be addressed and resolved at an early
stage of the design process.

 

The disadvantage is that the client does
not have the same level of control over the design of the project as he would
have in a traditional contract.

 

When pricing a design and build contract at
estimating stage the main contractor will need to consider the level of design
available to him, and if there are any cost associated with the development of
this design. In less complex projects it is likely that the contractor will use
his experience to fill any gaps when pricing the works, and will not make any
specific allowance in this respect. On more complex project a cost for design
development (based on a percentage of the overall cost may be included, but
this is generally no more than 1 to 2 % of the nett tender sum).

 

An advantage of this form of contract to
the main contractor is that he can introduce his own design proposals and
specialist contractors into the tender process, allowing them to innovate and
use alternative solutions where applicable. This can give an advantage in terms
of both cost and programme to the client, whilst helping the contractor win the
work.

 

·      
Bespoke
Design

A bespoke design is tailored to match the
specific requirements of the Client, as opposed to a pre-fabricated or modular
building (McDonalds for example use prefabricated buildings for a number of
their restaurants). A bespoke design carries more risk than a prefabricated
building as it will be specific to the Client and site in question. The level
of this complexity can range over a wide spectrum, from say a simple steel
frame industrial unit to a large complex laboratory facility.

 

The type and complexity of the project will
need to be considered when choosing the form of contract for the works i.e. a
simple industrial building is more suited to a Design and Build Contract that a
large complex project. Large complex bespoke designs may therefore be more
suited to a traditional or management form of contract. The Client and his team
will need to consider the complexity of the design, and the control they wish
to retain when choosing the form of contract to tender the works on. They will
also need to consider the capabilities of the contractors they are proposing to
use to carry out the works and ensure they have sufficient experience and
resources to carry out the works. This is usually done by inviting suitable
contractors to pre-qualify for the works and then assessing the
pre-qualifications before inviting them to tender.

 

When estimating a project a main contractor
will consider the complexity of the bespoke design when pricing the works, and
the form of contract it is being procured under. From this information the Main
Contractor will develop a risk profile for the project.  If significant risk is perceived on a project
then it may lead to a monetary or time value being allocated to cover the risk
identified.

 

 

·      
The
Contract Period

The contract period is the period
agreed by the Client and Main Contractor for the works to be carried out. This
period may be initially defined by the Client if they have key dates that are
critical to them, or by the contractor based on the scope of works defined.

The contractor will review the
contract period when estimating the works. From the tender information provided
there he will calculate the optimum period to carry out the works. This
duration will generally be based on a normal working week. If the Client has
dictated a preferred contract period then the contractor will review this
against his proposed programme. If the Client period is shorter than the
contractor’s programme then he may consider accelerating the programme.

Considerations such as additional resources, 24 hour working and / or 7 day
working may be considered. Any cost associated with this acceleration will then
be reviewed and included in the tender sum, if considered appropriate.

If the optimum programme period is
shorter than the Client’s defined period then the contractor may wish to offer
the shorter period as this will inevitably be cheaper (as there is a
preliminary cost associated with the contractor being on site), and there may
be an advantage to the client of an earlier handover.

·      
Liquid
and ascertained damages

Liquid and ascertained damages (L.A.D’s)
are a cost charged to a contractor for not achieving the agreed date for
Practical Completion. These damages should reflect the cost a Client will incur
as a result of the late completion, and they should not be punishable. 

 

During the estimating stage a contractor
will consider the proposed level of L.A.D’s. A reasonable level of damages is
to be expected, and is unlikely to affect a contractor’s submission in terms of
programme or cost. However a significantly high level of damages will need to
be considered as part of any contractor’s adjudication process. The following
actions may be considered and / or included if a high level of Liquid and
ascertained damages are proposed:-

 

·    
Extend the programme from that proposed to build
some float into the contract period

·    
Add an extra charge to the contract sum to cover
any potential cost.

·    
Suggest a period of time when damages will not
be incurred is added to the contract.

One innovative consideration
that may be considered by the Client is to incentivise an early completion in
addition to damages for late completion.

·      
Retention Sums

Retention sums is an amount of money that is
held back from the contractor’s payments to ensure that the contractor properly
completes the contracted works. These are usually either 3% or 5%, half of
which is released at the certificate of practical completion, with the
remainder paid at making good of defects.

 

Retention affects a contractor’s cash flow,
and often the retention money held is equivalent to the profit that the main
contractor will make on the project. High levels of retention may therefore
reflect in higher tender sums.

 

·      
Defects rectification

Any defects that are identified during the
defects period (usually 12months after PC) will need to be resolved before the
final retention money is released. Any consideration at estimating stage is
more likely to be based on the proposed level of retention and when it is
released, rather than on defects rectification.

 

·      
Fixed and fluctuating prices

When pricing work a contractor will usually
consider the effect of inflation based on the proposed start date and the
length of contract, and make allowance for this in his tender sum.

 

If a contract has no fixed start date, or is
to be carried out over several years then consideration should be given to
linking the contract sum to a mechanism that increase prices in line with
inflation.

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