As described in our recent report, Strategic moves: why the office is now a business-critical decision, the COVID-19 pandemic undoubtedly brought lasting change to how and where we work, prompting continuing reassessment by organisations as to their property needs. This reassessment is now also taking place against a backdrop of more difficult trading conditions for businesses, which inevitably sharpen occupiers' focus on value.
From consolidation of office space to a greater focus on environmental credentials, logistics or 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.
1. Specialist support
Procurement of construction projects requires specialist support to advise on issues 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? Does the specification achieve the necessary sustainability credentials in the light of increasing regulatory obligations, societal expectations and, of course, high energy costs? Is part of the procurement process 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? Is the specification clear enough to reduce the need for suppliers to tender based on a myriad of assumptions? You may need to be prepared to include some form of price fluctuation provision to reflect the uncertainties around availability of materials and the commercial challenges this can present to the supply chain.
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 the 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 and it is key to make sure you choose the correct form for your project and the version that reflects current law (see item 9 below). The choice of the contract is driven primarily by the form of procurement selected. Organisations would be wise to consider issues 1 to 5 before instructing their 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, collateral warranties, vesting certificates etc. This is key in the current market where, unfortunately, there has been an upturn in supplier insolvencies.
7. Contract documents
While 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 the 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 the 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 HGCRA), the Construction (Design and Management) Regulations 2015 (the CDM Regulations) and the Building Safety Act 2022 (the BSA):
- The HGCRA, 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 HGCRA. 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 HGCRA's requirements (see issue 1 above), which includes the giving of various notices within set time periods.
- The CDM Regulations contain provisions concerning health and safety, which have recently been supplemented by the BSA. The BSA is lengthy and complex, and you are likely to need legal advice to establish which parts of the BSA apply. For example, the BSA established a new dutyholder and competence regime which applies to any project that requires building regulations approval, with only limited exceptions. Clients need to ensure they have arrangements in place to comply with their duties under both the BSA and the CDM Regulations. Noting that the duties under each of the CDM Regulations and the BSA are separate, but both need to be considered at the conception stage of a construction project.
10. Third parties
Lastly, thought should be given to the relevance of third parties who have an interest in the works, e.g. funders and 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 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.