Chapter 7 Construction

Property Development (6th Edition)

Publisher: Routledge www.routledge.com

Authors: Professor R.G. Reed and Dr S. Sims

7.1 INTRODUCTION

• In the development process a property developer’s second major financial commitment is to place a contract to construct the development.

• Construction is a crucial stage in the development process and the key aim is to construct a good quality building that performs on time and on budget.

• The selection of the procurement route needs to be decided early on as it has an effect on the composition and the size of the professional team.

• After the initial brief is decided, a schedule of accommodation is prepared and the broad design constraints are decided, the choice of building contract can be made.

7.2 PROCUREMENT

• The decision on the form of contract will depend on the developer’s requirements and the size and complexity of the development. Time, cost and performance are key influencing factors.

• Different types of developer and stakeholder attach varying degrees of importance to time, cost and performance (quality) and these factors will influence the procurement strategy to be selected (Table 7.1).

Table 7.1 Examples of Prioritised Criteria by Client Type

(Source: based on Morledge in Kelly et al. 2002)

7.3 THE TRADITIONAL APPROACH: DESIGN-BID-BUILD

• This type of contract tends to be used on relatively straightforward small to medium sized schemes where the developer is able to use a number of variations and amendments to tailor the contract to the needs of the project.

• Developers appoint their own professional team who are responsible for designing the building to meet the specified requirements, for supervising the construction phase and for administering the contract.

7.3.1 The Traditional Roles of Professional Team Members• The architect is responsible for the design of the buildings in terms of aesthetics and

functions following the developer’s brief and budget. • The quantity surveyor is responsible for preparing estimates of building cost,

preparing the Bill of Quantities (i.e. measured specification of materials and work to enable the contractor to submit a price) and, during construction, for preparing valuations of work.

• A clerk of works or resident engineer may carry out a full-time ‘on-site’ supervisory role.

• Other members of the team can vary and may include a project manager, structural engineers, mechanical and electrical engineers.

Discussion points: Who are the key professionals a developer needs to bring into the development team? What role does each professional play in the team?

7.3 THE TRADITIONAL APPROACH: DESIGN-BID-BUILD

7.3.2 Choosing the Contractor• Once the detailed design is completed, the quantity surveyor prepares the Bill of

Quantities, which specifies and quantifies the materials and the work to be carried out in great detail.

• When choosing contractors to be invited to submit competitive tenders for carrying out the work, it is necessary to limit the total number of contractors invited to submit competitive tenders.

• If the work is specialised, contractors skilled in that type of work are selected. Sometimes it will be preferable to use a large national contractor, while at other times local or regional contractors are favoured.

• Developers are often guided by their architect, project manager and/or quantity surveyor on the selection of the contractors for the tender.

• The prices submitted by each of the contractors are examined by the quantity surveyor and the project manager to ascertain what is offered.

• The reliability and financial stability of the contractor are vital considerations since the failure of a contractor is a major disaster from the developer’s perspective as long delays occur while the legal position is resolved and another contractor is found to complete the work.

7.3 THE TRADITIONAL APPROACH: DESIGN-BID-BUILD

7.3.3 Paying the Contractor• The method of payment for the works has a substantial impact on the

developer’s cash-flow position. It also has significant impact on the cash-flow of the contractor, who has to consider the method of payment when preparing the price for the work.

• The developer has to pay out very substantial sums of money over a considerable period of time before obtaining the benefit of a completed building at the end of the contract.

• The ideal arrangement for developers is for the whole of the contract price to be paid when the building is handed over, so that they do not part with their money until the time when they should be receiving an income from the building or have the benefit of occupation of it.

• The method of paying for the work has to be related to the circumstances of each contract. The contractor is more likely to be flexible if they are a partner in the scheme and stand to benefit in terms of a profit share.

7.3 THE TRADITIONAL APPROACH: DESIGN-BID-BUILD

7.3.4 Calculating the Cost• An accepted approach is for the contractor to submit a bid on either a ‘firm

price’ or a ‘fluctuations’ basis. • Quantity surveyor’s re-measurements, architect’s variation orders and

instructions and extensions of time may affect the cost. • Developers and their professional advisers must decide on what basis they

wish contractors to prepare their competitive bids in order that the contractors submit prices on the same basis.

• Often there are two main alternative methods of calculating the cost:(i) A cost-plus contract where the contractor is paid on the basis of the

actual cost of the building work (‘prime cost’) plus a fee to cover their overheads and profit.

(ii) A target cost contract might be negotiated or established by tender. A target cost is agreed with the contractor plus the contractor’s fee and any savings or additions to the target cost are shared by the parties.

7.3 THE TRADITIONAL APPROACH: DESIGN-BID-BUILD

7.3.5 The Duration of the Contract• The date agreed in the contract for the completion of the building is not

certain as the contractor can apply for extensions of time for a number of reasons.

• Extensions of time usually result in an increase in the cost which will certainly include the contractor’s ‘preliminaries’ (overheads such as insurance, cost of plant hire, etc.). The impact of an extension is felt twice by the developer: firstly, it affects cash-flow and, secondly, it increases costs.

• The main reasons for extension of time which entitle the contractor to recover additional loss and expenses include inadequacy and/or errors in the contract documents, the drawings and/or the Bill of Quantities; delays by the architect in issuing drawings or instructions; delays caused by tradesmen directly employed by the developer; failure by the nominated subcontractors; bad weather; strikes and lockouts; shortage of labour; damage by fire and natural disasters.

• Key advantages and disadvantages of the traditional approach are summarised in Table 7.2.

Table 7.2 Advantages and Disadvantages of Design-Bid-Build Procurement

Advantages Disadvantages

Competitive equity and fairnessDesign-led facilitates high quality designReasonable price certainty based on market forces with reduced unknownsAcceptable strategy in terms of publicaccountability and transparencyWell-known procedure and prove approachFlexibility – changes are easy to arrange and have limited effect on value

Strategy is potentially open to abuseresulting in less certaintyOverall construction timeframe may belonger than other options because there is no parallel workingNo ‘buildability’ input from contractorThe strategy can lead to adversarialrelationships between the partiesApproach is not fully promoted by allstakeholders

Discussion points: For what reasons might a developer select a traditional (design-bid-build) contract for a development project? What are the two types of bids that a contractor can submit?

7.4 DESIGN AND BUILD

• Typically the contractor actually assumes the risk and responsibility for the design and construction of the scheme in return for a fixed-price lump sum. Design and build is a fast track strategy.

• Use has become more widespread due to dissatisfaction with other types of contracts and the problems encountered with splitting design and construction responsibilities. Design and build was originally used on simple and straightforward schemes but is now used on many types of building projects.

• The contract is based upon a performance specification by or on behalf of the developer. Performance specifications vary from being fairly simple to very detailed depending on the nature of the scheme.

• A developer using this type of contract may appoint a specific contractor with which they have successfully worked before or who has expertise in constructing buildings similar to the one proposed.

• The advantages of this type of contract for the developer are that while it is possible to provide for fluctuations in the contract price, and there are various alternative ways of paying for the buildings as the contract proceeds, usually a lump-sum fixed price is agreed.

7.5 MANAGEMENT CONTRACTING

• A management contractor is engaged by the developer to manage the building process and is paid a fee. Initially developed in the USA, this type of contract became more widespread in an international context because developers were impressed with the fast track methods of construction.

• The developer appoints the professional team to prepare the drawings and specification for the project. The quantity surveyor prepares a cost plan based on the drawings and specification. The actual cost incurred by the management contractor (‘prime cost’) is paid by the developer, having been certified by the architect and monitored by the quantity surveyor.

• Note that the management contract itself is not a ‘lump-sum’ contract. The management contract is based on the contract cost plan prepared by the quantity surveyor, which is only an indication of the price.

• The developer may have to accept a very high degree of risk with this type of contract. Developers who have used this type of contract have found cost control the biggest problem as there is no tender sum.

• The key advantage is the saving of time, achieved by overlapping the design and construction of each package and involving the construction manager at the beginning of the design process.

7.6 PROJECT MANAGEMENT

• The appointment of a project manager is not necessary for every project. A project manager tends to be needed for large and complicated rather than small, simple projects.

• Project management is an occupation and project managers may be architects, quantity surveyors, real estate managers, valuers/agents, or have a building/contracting background.

• The project manager is concerned with the overall management of the project and is not involved in carrying out any part of the project. The project manager needs plenty of common sense, administrative ability and a good knowledge of construction.

• The objectives are to ensure that the finished project is suitable for its intended purpose, that it is built to satisfactory standards, that completion occurs on time and that the project is carried out within the budget.

Discussion points: What are the benefits of having a project manager in the development team? Under what circumstances might a developer decide to appoint a project manager?

7.6 PROJECT MANAGEMENT

7.6.1 Pre-Contract Preparations • The project manager should check that the developer has the necessary legal

title on the site, whether it is freehold or leasehold, and that vacant possession of the whole site is available immediately.

• The project manager will arrange, if not previously carried out by the developer, all of the necessary ground investigations, structural surveys and site surveys, and communicate the results to the rest of the professional team.

7.6.2 Preparing the Contract Documents • The project manager’s most important job is to ensure that the contract is not

allowed to commence without adequate documentation. Incomplete drawings are probably the most common cause of delays and cost increases.

• The project manager needs to be absolutely satisfied with the availability of the drawings by the architect, as well as satisfied that the Bill of Quantities is as complete and accurate as possible.

7.6 PROJECT MANAGEMENT

7.6.3 Appointing the Contractor• If it is proposed to invite competitive bids from selected contractors, the

project manager should agree with the architect and the developer the names of the contractors who will be invited to tender.

• The quantity surveyor compares each tender against their priced Bill of Quantities. Once satisfied on all matters, the project manager then authorises the placing of the building contract.

7.6.4 Site Supervision• The project manager should be continually satisfied about the arrangements

made by the architect for site supervision during construction. • The size and complexity of the scheme may merit the appointment of a full-

time site supervisor, such as a clerk of works or a resident engineer or indeed a resident architect.

7.6 PROJECT MANAGEMENT

7.6.5 Construction Period• When the contractor has taken possession of the site, the project manager

ensures that the works are carried out on schedule and that the overall cost is kept within the budget.

• To carry out his duties effectively, regular meetings of the project team are held, such as on a monthly or fortnightly basis. The architect should report as to whether any variation orders or instructions have been given to the contractor, the quantity surveyor then presents a report on the financial situation and other professionals provide their reports.

• The project manager summarises the overall financial situation, particularly with regard to payments to the contractor, compares them with the budget, checks on dates of handover and compares the estimated date for the receipt of income or capital payments with the budgetary expectation.

• These are matters of vital importance to the developer’s cash- flow. If it appears that the project is running behind schedule, then methods of speeding up the work to recover the position are considered, together with the implications for cost.

7.6 PROJECT MANAGEMENT

7.6.6 Handover of the Completed Development• A short time before the date for completion and handover of the building from

the contractor to the developer, the architect prepares a list of all minor defects that must be remedied before handover occurs.

• If the development has been pre-let or pre-sold to an owner-occupier, then the occupiers and/or their contractors may wish to have access before formal handover by the main contractor working for the developer.

• The project manager, with the architect, needs to attribute and resolve problems quickly.

• The quantity surveyor should then be asked when any outstanding re-measurement work will be completed and be in a position to agree the final account with the contractor, so that the architect may issue a final certificate.

• The importance of inspecting the site and its immediate environs on the handover date should not be overlooked.

• Where an occupier is not taking possession immediately, then the developer is responsible for a vacant building and a programme of regular cleaning and maintenance should be instigated.

7.6 PROJECT MANAGEMENT

7.6.7 Monitoring Construction Process• The project manager’s objective is to produce the building on time and within

budget for the developer client. • Any delays in completion or increase in costs will affect the profitability of the

development; therefore it is essential that a developer is kept regularly informed on progress and cost.

• Typical reporting methods include: bar (or Gantt) chart (Figure 7.1), cashflow table and graph, financial report, checklist.

• Whilst regular reporting on progress and cost is a way of keeping the developer informed, it also provides the project manager with an essential tool, especially if the developer insists on regular reporting. The project manager will know whether the aims are being achieved and it will bring into sharp focus the targets that need to be achieved and the problems that need to be tackled.

Figure 7.1 Overall Development Programme – Gantt Chart

Discussion points: What are the main issues that developers need to consider during the construction phase of a project? What are the major risks the developer faces during this stage?

7.7 PUBLIC-PRIVATE PARTNERSHIPS (PPP)

• In the public sector, there are three main procurement approaches: (a) PPP, (b) Design and Build and (c) Prime Contracting.

• In bringing the public and private sector together, the aim is that the business community’s management and financial skills will lead to better value for money for taxpayers.

• Clients, designers and contractors have evolved their relationships with developments and developed different types of business relationships, among these is partnering.

• Partnering is a business relationship for the benefit of all parties, built on trust, openness and respect.

• There is a requirement to develop an environment for long-term profitability and to encourage innovation.

• Partners commit to improved project buildability and a lowering of project costs through the process of value management.

7.8 PARTNERING

Chapter 7 Construction

Property Development (6th Edition)

Publisher: Routledge www.routledge.com

Authors: Professor R.G. Reed and Dr S. Sims