The builder who built on sand: top 10 construction issues for occupiers investing in their property portfolio

7 minute read
13 September 2021


One of the clear effects of COVID-19 is the reassessment by organisations as to their property needs. From consolidation of office space to a focus on more logistics and production facilities; to relocation or expansion, it is likely that any such investment will involve some element of construction work. For those not familiar with procuring construction projects, we set out our top 10 issues to consider if you want your construction project to run as smoothly as possible.  Get the foundations rock-solid so that you don't risk facing the fate of the builder who built on sand.

  1. Specialist support: procurement of construction projects requires specialist support to advise on issues that are specific to the construction sector - does the procurement team have the project management, commercial, insurance, technical and legal expertise? This includes suitably qualified contract administrators, designers and quantity surveyors.
  2. Quality: thought needs to be given to what the organisation wants and needs to be built. Is the project team able to clearly set out its specification for the works? Who is going to design the works? Is the specification appropriate for procuring works that obtain best value and best suit the organisation's objectives and desired outcomes? Is part of the procurement process actually going to be contracting with a supplier to provide such a specification via two-stage contracting, for example?
  3. Price: most construction projects are carried out for a fixed price but contingencies are needed for risks that could increase the price. You also need to budget for the cost of third party advisers. Do you have sufficient knowledge about what risks an employer would normally need to allow for in its budgeting in the current market e.g. the impacts of COVID-19 and Brexit? Is the specification clear enough to reduce the need for suppliers to tender based on a myriad of assumptions?
  4. Time: how time sensitive are the works? What impact would a delay in completion of the project have on the organisation? Do you have sufficient knowledge about what contingencies an employer would normally need to allow for in its programme in the current market? Do alternative, contingency accommodation arrangements need to be put in place?
  5. Form of procurement: there are a variety of procurement structures in the construction sector. Making an informed decision about quality, price and time (see above) will enable effective decisions to be made about choice of procurement. Do you want the convenience and comfort of the contractor taking full responsibility for the design and build of the works? Or are you comfortable with different parties being responsible for the design and workmanship (traditional contracting)? Is the organisation looking at some sort of 'package' contracting? Is two-stage contracting needed (see above, '2. Quality')? Do orders need to be placed prior to entering into the works contract? Does the organisation want or need to use specific suppliers?
  6. Form of contract: the construction sector most commonly contracts using one of the standard form construction contracts as a base. Choice of contract is driven primarily by the form of procurement selected. Organisations would be wise to consider issues 1 to 5 before instructing its legal team to prepare a contract for the project. It is also a feature of the construction sector that standard forms are often amended, and this is where legal advisers can support in enabling organisations to decide whether the standard form should be subject to a set of bespoke amendments. This will include considering what security may be required from the contractor: Parent Company Guarantees (PCGs), performance guarantees, advance payment bonds, vesting certificates, collateral warranties, vesting certificates etc.
  7. Contract documents: whilst legal advisers can draw-up the legal terms for the project, thought needs to be given to how the commercial and technical elements of the contract will be populated. Most, if not all, of the details needed will have been identified as part of a consideration of issues 1 to 5 above, and, in an ideal procurement, finalising technical/commercial aspects with your legal team will act as a check and balance to reveal any gaps/uncertainty as to position on quality/price/time before going out to tender.
  8. Insurance: the contract will need to specify the insurance a contractor is to put in place and maintain. Does the project team have the expertise to make decisions about structure, type, level and basis of insurances? Insurance can be a challenging issue when it comes to works to existing structures, particularly if you do not own the building. Insurance arrangements should be discussed with your insurance consultant at tender stage and you should provide your lawyers with details as to what the proposed insurance arrangements are so that the contract terms align. Insurance is often dealt with at the last minute in negotiations but it is a key issue you should engage with as soon as possible, to make sure your interests are properly protected.
  9. Statute: organisations need to be mindful of the Housing Grants, Construction and Regeneration Act 1996 (as amended) ("the Act"). This legislation, amongst other requirements, mandates that contracts for the carrying out of "construction operations" include specific payment provisions. Failure to comply with these terms could result in onerous payment periods for the payer and an obligation on the payer to pay sums it does not consider to be due, which then may only be recoverable via dispute resolution. How you deal with payment for other supplies within the organisation may not be in line with the requirements of the Act. It is important you understand what the requirements are, how these need to be dealt with in the construction contracts and the potential impact this may have on existing payment processes. It is also key that your organisation has the expertise to manage payments under the contract in line with the Act's requirements (see issue 1 above), which includes the giving of various notices within set time periods. Finally, as soon as an organisation starts thinking about a construction project it needs to make sure it complies with the health and safety requirements of the Construction (Design and Management) Regulations 2015.
  10. Third parties: lastly, thought should be given to the relevance of third parties who have an interest in the works e.g. funders, landlords. Early engagement with such parties (and their advisers) is key to ensuring your construction contracts adequately deal with their interests and concerns and that you are not faced with any last minute requests from such parties (or more likely their advisers).

Tackling these 10 issues early on in the procurement process will create solid foundations for any construction project and hopefully avoid the fate of the builder who built on sand.

If you have any queries relating to these issues, please contact Ruth Griffin.

NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.