Which Method of Procurement Is Most Beneficial?

This report will provide a clear indication of which method of procurement and tendering would be most beneficial to the successful conclusion of the project. Whilst taking into account the recommendations from the Latham and Egar reports. Following analysis of the NEC3 contract we will provide you with guidance about two possible risks to you and how these risks can be reduced.

We will provide you with the legal requirements that are needed in the formation and operation of the contract. This will ensure that no legal factors will hinder the construction project.

We have used various sources to conclude our finds, for example Government web sites, various authors and NEC3 contract.

From this report our findings will provide you with a clear indication of the best route to take, which is vitally important to the success of this construction project?

Recommendations discussed include;

Procurement – Design and Build

Tendering – two stage selective with negotiation

NEC3 Contract – two possible risks to the client

Legal factors which hinder the Formation of the contract

Legal factors which hinder the Operation of the contract

Concluding remarks from this report is that we have highlighted the strengths and implications to you with regard these recommendations. We have made you aware of possible cost implications. We perceive that early involvement from the contractor in the process will provide more benefits, but inevitably it could come at a price.

There are limitations in this report when recommending the most appropriate routes. More information needs to be given in order that we can interpret priorities. For example we need to know which is more important cost, time or quality and what risk allocation.

2.0 introduction

The nature of this purposed project is the building of two underground roads across the city in the north-south and east-west directions is a complex construction project.

This report will identify which procurement strategy would best suit this project, in light of the Latham and Egan reports with emphasis on collaboration between design and construction, risk allocation, costs, whilst we also take into account constraints. Also we will advise which tendering method gives you the potential to appoint the best contractor on the basis of price, programme and risk allocation.

The NEC 3 standard form of contract will be used for this project and we will discuss two provisions of NEC 3 which are risky to the client and advise the client on how to mitigate these risks. We aim to give you guidance regarding the legal factors which could hinder the formation and operation of the contract between the client and contractor.

Project Procurement

There are a number of different procurement routes that exist and we will advise you which particular procurement will best suit this project in view of the Latham and Egan reports. We must look at alterative procurement methods than traditional which minimises the lack of coordination between design and construction and reduce the effects of the clashes.

3.1 Traditional

We have dismissed the traditional approach of procurement because it does not follow the principles set in the two reports regarding teamwork, and reduction of conflicts. Also the risk allocation between contractor and client.

3.2 Partnering

The partnering approach would seem to be the best procurement process but to make the project a success it requires that all parties involved must be ready to make partnering work, it is based on mutual trust and openness and it is clear that there are many benefits to partnering but you must ask yourself are you ready to work in new ways.

Problems can arise if the wrong team of consultants are employed. Good interpersonal skills are required between all parties. Clear project objectives are also required so that all parties are clear of how partnering works. In future developments partnering should be considered due its very nature of working together.

3.3 Design and Build

Taking into account the main procurement options we believe that the design and build route of procurement is best suited, through the construction phase of the project. With the design and build procurement, the entire construction project can be coordinated and managed by one principal contractor. If problems arise you don’t have design team blaming the construction team and vice versa unlike the traditional procurement methods. The Latham report highlighted the need for team work, cooperation and most importantly he encouraged the reduction of conflicts and to avoid disputes, he wanted a link between design and construction.

This particular process allows for better interaction on a one to one basis which contributes to a thorough understanding of the client’s brief, construction goal. There are many benefits secured by opting for the design and build route the contractor bears the majority of the projects risks and maintains more control as a result. Please refer to appendix 1 which highlights the risk allocation associated with various procurement methods.

But you must be aware that with this option there are risks, such as there will be less control over the quality and specification. The contractor could add a risk premium, and there is complex legal issue over novation of design team. Within the contract add a clause that the design needs to be fit for the purpose it is intended for.

The reports also highlighted the need to reduce costs. There can be difficulties that can be experienced when clients have not produced a comprehensive brief. We would recommend that you consult various consultants to come involved in preparing outline designs for feasibility studies, conceptual designs. This will limit the variations thereafter, thus reduce costs.

Briefly this method of procurement will offer you the following recommendations form the Latham and Egan reports.

Early completion due to overlapping design and build;

Single point of responsibility, cost efficiencies;

Early involvement with contractor leads to possible more economic design;

Good collaboration between design and construction.

Accurate communication

Increased accountability

TENDERING

The primary objective is the selection of the most suitable contractor, the process you should adopt is two stage selective tendering with negotiation. This technique takes on the principles of Egan and Latham into the process.

The principle contractor is appointed early in the design and planning stage of the project, which reduces risk and raises quality. This process encourages collaborative interactions between both parties. It can also reduce the risk of major price increases during the build stage of the construction; this is achieved as a greater tendering certainty through the second stage of tendering and negotiation.

Because of the early involvement with the contractor leads itself up to enabling helping to identify risks and manage the risks at an earlier stage. This method transfers a greater degree of design and construction risk to the contractor. Open tendering would not be practical solution and one stage tendering requires complete designs prior to tender.

Summary of the process: (Please refer to appendix 2 two stage tender process flow chart)

Competitive selection from a maximum of 6 contractors based on preliminary design

Establish pricing (quantities, sub-contractor prices, overheads, etc)

Negotiation with selected contractor continue until agreement is reached

Pricing + Negotiation = Final price

The implications to you for adopting this approach, the contactor may take advantage of the negotiation which could lead to cost increases that are higher than anticipated, so there is a potential for failure of the parties to agree the contract sum at the end of stage two, which could leave the client open to the risk and cost of re-tendering. This process can take longer than single stage tendering which could have implications on start date on site.

To elevate these potential risks you should adopt with the contractor an open book policy and try to agree at an early stage the conditions under which the principle contractor will be obliged to submit a second stage tender. A cost certain and time certain contract would reduce these risks. Also highlight the scope of works that is needed to be carried out before second stage talks can occur.

5.0 NEC3 – Contract Clauses

Clause 60 – Compensation events

Clause 80 – Risks that belong to the Client

We can state that no building project is free from risks; the Nec3 form of contract is proactive in determining and allocating risks to progressively drive the risks out.

5.1 Good Project Management

The project manager will run the project on behalf of the employer, bad project management can have a massive consequence to the project the impact to the development can seriously add costs. The project manager is employed to ensure work is carried out efficiently and to the correct standard.

They must understand the procedures in the NEC3 contract. For example he must be aware of clause 61.4 failure to reply to a notification of a compensation event, if the project manager fails to reply it is deemed accepted. The effect to the client is the costs are fixed by the contractor quotation and may not even constitute a compensation event.

The project may get overloaded with compensation events and there is a risk that an instruction is given without costs being agreed, due to the compensation event process. .

The project manager also needs to be impartial and work together with contractor, if not there is another risk as highlighted in the case Bechtel v Costain appendix 3 which highlights the risks mentioned above.

To evaluate these particular risks to the project the client should get a track record of pervious projects the project manager has been involved in this will ensure that they are able to cope with the scope of works. He must understand the NEC3 contract and the clauses and procedures within the contract.

The project manager needs to proactive and get good working relationship with the contractor; the contract needs to have openness and trust. An early warning system is setup to identify potential problems. From the beginning the NEC3 contract will setup accountability, which should motivate all parties to pull together and achieve a successful conclusion.

5.2 Clause 60.1(12) – Physical Condition

This clause deals with physical conditions which are not weather conditions on site that have a small chance of occurring which would not have been allowed for by the contractor.

These can be a risk to the employer, if there is heavy rainfall off site over a number of days which leads to a nearby river breaching its banks and flooding on site, which damages the contractor plant. The contractor can seek compensation events due to the unforeseen occurrence. This is not classed as a weather condition, because the flood was due to the nearby river and not the direct rain fall on the site.

The general rule is the employer will take the risk of unforeseen ground conditions, which is shown in the case Humber Oil Trustees Ltd v Harbour and General Public Works (1991).

The Client could pay indemnity insurance on the possible occurrence, but it would be better not to pay for an event which is unlikely to happen.

The client could also exclude the clause as a compensation event, which would leave the risk with the contractor. The Contractor is likely to put a contingence in the case of the event, the likelihood is only small and the impact is medium so a 5% contingency would be recommended.

Risk allowance = chance 5% impact £100,000

Risk allowance = 5/100 x 100,000 = £5000

Formation AND OPERATION of a Contract

6.1 Formation

A contract consists of an agreement between two or more legally competent parties. In order that a contract is legally binding the formation of the contract must contain the following. If the contract is deficient in its formation, it imposes no legal obligation on the parties which could hinder the contract.

Offer

Acceptance

Consideration

Capacity

Intention to create legal relations.

Offer

For a contract to exist there must be an offer, this is some form of communication by you the client (offerer) to the offeree. The offer must to be clear, complete, specific and cable of being accepted, offer’s can sometimes get confused with an ‘Invitation to treat’.  It is important that you do not get the two confused as there are different rules regarding both.

Acceptance

Also the same can be said of acceptance, in order for the contract to be formed a valid acceptance is required, for the contract to be valid it must meet the following criteria stated below.

The offerer, must receive the acceptance that has been communicated.

All the terms must match exactly with the offer, if not then this is called a counter offer thus the contract is not valid.

Lastly the agreement must be certain.

Consideration

A contract should always include a consideration, the law states that if there is no consideration between parties then there is no contract. If there is no consideration in the contract the contract will become void agreement.

You should state clearly in the contract what service you require from the contractor and the contractor, should also clearly state what price for completing the contract. The consideration should also be legally sufficient meaning each party is getting value, worth for their services etc. Also there must be a clear mention of the consideration in the contract then this will form a legal contract between both parties.

Capacity

You must ensure that both parties that enter into the contract are legally competent to enter into the agreement. They will need to have a good understanding of the aspects of the contract. If the persons are incapable of understanding of the contract they could make the contract void.

Create legal relations.

In order to make the contract binding it must be in contemplation of legal consequences.

In business it is common practice that agreements are legally bond

6.2 Operation

There are a number of legal factors can hinder the operation of a contract between the client and contractor, when the contract was first setup it had legal effect it was a voidable contract, but it can be annulled within the courts through a process called process of rescission.

Although all the elements of the formation of the contract are present upon setting up the contract such as offer, acceptance, consideration etc factors can still invalid the contract make it void.

misrepresentation, – (Fraudulent, Negligent, Innocent)

There must be no misrepresentation within the contract meaning that a statement which is made is known to be untrue. For example the contractor states in the contract that it can achieve to deliver the project within a time frame to the standard required but he known’s there is no way of achieving this, the client is not bound by the contract and could be able to take legal action against the contractor for compensation. Also fraud misrepresentation

mutual mistake,

When there is a different understanding to what is required within the contract, to elevate this situation is to give a clear and simple instruction to what is on offer. The agreement needs to be sufficiently clear.

Mistake,

An operative mistake can render a contract void an example of this is where one party is mistaken as to the nature of the contract and the other party is aware of the mistake.

Refer to case in Appendix Hartog v Colin & Shields [1939] 3 All ER 566

Duress, lack of free will of a contracting party,

There must be no physical duress, meaning you must not force a person to accept the offer you have made. Also there is economic duress using your economic power to virtually give the contractor no choice in accepting the terms of the contract

CONCLUSION

The objective of this report was to take into account various procurement strategies in light of the Latham and Egar reports. We have concluded that the design and build route would be most beneficial procurement. But there are implications to whatever approach is used we have based our recommendation on teamwork, risk allocation and timescale.

Because it is desirable to involve the contractor at an early stage due to complex nature of the project two stage selective tendering would be a more desirable option then one stage. Open tendering would not be practical, too much time and resources would be used to analysis all tenders.

Referring to the reference from “Sir Michael Latham with regards risks page 4 of report” No project is risk free, but by following all the procedures set out in the NEC3 contract will reduce the risks to you.

We can conclude that the five essential principles aforementioned must be included into the contract, to ensure that it is legally binding.