QUESTION 1 Advise the employer of the advantages and disadvantages of the procurement routes available.

Select a suitable procurement route and identify the factors which have informed your decision, and also suggest a suitable standard form of contract. (60 marks) Introduction: The objectives of this study is to provide a professional advice to a client who intends to build a commercial and leisure facilities on an inner-city site. The study is about different types of procurement routes and their advantages and disadvantages that are available in construction industry, main factors that influence the choice of a suitable procurement route and suggest a suitable standard form of contract. Types of Procurement Routes: Procurement routes have been categorised by many people, in many different ways, and with varying degrees of complexity. The Thinking about building report (NEDO, 1985) categories procurement routes into four groups. 1. 2. 3. 4. Traditional single or two stage tender Design and build single source Management Management Contracting, Construction Management Design and management

Traditional Route: Traditional procurement route involves the clients design team producing a full construction design. The client appoints a consultant for design and for cost control. After design completed, the contractors are invited to bid for the construction works. The contractor obtains the work by competitive tender and carries it out for an agreed lump sum.The common variations in traditional route are Sequential, Accelerate, and Partial design of elements of the work. Advantages of Traditional Route: Completion of design prior to tender provides good time and cost control; if design has been fully developed at tender stage client can know their financial commitment before entering into a construction stage, that means a price certainty at the award of the contract; involvement of the designer throughout the construction process gives good quality control; competitive equity as all tendering contractors bid on the same basis; variations or changes to the contract are easy to arrange and manage; Disadvantages of Traditional Route The process is very sequential and efforts to reduce the overall time frame by tendering on incomplete data tend to lead to an increased risk of higher prices and time over-runs. A longer period of overall design and construction may make the total project price higher because of increased periods of interim financing charges and interim payment to consultant. Separation of design teams from construction teams may lead to the establishment of adversarial attitudes; If specialist subcontractors are involved the contractual obligations of the main contractor may be diluted. Limited opportunity for the contractor to input skills and ideas on constructability issues during the design phase thus enhancing overall value for money.

Design and Build Route: Design and build route can be describes as where one contractor is responsible to the client for both design and construction and delivery of project on time within budget. The close integration of design and construction

methods and relative freedom of the contractor to use their purchasing power and market knowledge most effectively can provide a client with a competitive price. A number of variations of design and build exists which Turner (1990) explains, as Direct, competitive, develop and construct, package deal, Trunkey and Private finance initiative. Advantages of Design & Build Route: Client obtains single-point responsibility from one organization a contractor As contractor has responsibility for both design and construction, it is claimed that this produced economies for both contractor and client. One of the apparent advantages of design and build is that a contractors expertise in build ability and procurement skills can be used to his and to his clients advantages. Overlap of design and construction activity can reduce project time and increased the construction speed. Certainty of cost is obtained before the construction start as clients requirements are specified and changes are not introduced.

Disadvantages of Design & Build Route: Difficulties can be experienced by client in preparing an adequate and sufficiently comprehensive brief; The nature of design and build contracts tend to restrict changes during construction because client changes to project scope can be expensive. Alternative design proposal may not be easily comparable because each design will be different, project program will vary between bidders and prices for the project will be different for each design. Not so good where high quality design is required. It has been said that design and build contracts build down to a price not up to a quality. Design liability is limited to the standard contracts that are available.

Management Route Several variants of management procurement exist, which include; management contracting, construction management and design & manage. There are some subtle differences between these procurement methods. In Management contracting the client appoints an independent professional team and also a management contractor. Their involvement at pre-construction stages will be as advisor and during construction they will responsible for executing the works using direct works contracts In Construction management a management contractor is paid a management fee. The basic difference is that works arranged and administrated by management contractor. In Design and manage contracts, the contractor is paid a fee and assumes responsibility not only for works contactors, but also for the design team. Advantages of Management Route: the client deals with only one firm, which enables improved coordination and collaboration between designers and constructors; under a design and manage form, the contractor assumes risk and responsibility for the integration of the design with construction; improved constructability through constructor input into the design; roles, risks and responsibilities for all parties are clear; flexibility for changes in design

Disadvantages of Management Route: price certainty is not achieved until the final works package has been let informed and proactive client is required close time and information control required client must provide a good quality brief to the design team as the design will not be complete until resources have been committed to the project (Construction management and management contracting); client loses direct control of design quality which is influenced by the constructors (design and manage);

Suitable Procurement Route: There is consensus that there is one procurement route that is in some sense better than all other for an individual project, but that no one procurement method is likely to be better than others for any project (Love et al., 1998). There are different factors that have influences while selecting an appropriate procurement route for building project. These factors ranging from the structure of the client organisation, to risk management, to market trends.

Factors which influences the procurement route decision:

Timing Commercial projects are required to complete within a specific time frame. There are two aspects to programme and timing. One is completion at time, expected by the client and second aspect of timing is in sense of earlier completion. This is a very high priority for the client because they intend to function and complete the project within 24 months. Programme completion is paramount. Expected rental income is good but the effect of a downturn in the property market required a risk of long, uncertain programme to be minimised Controllable variations Changes in scope invariably result in increased costs and time, especially if they occur during construction. Variations in building contacts very often produce conflict between clients, consultant and contractors. As client intends to build high quality apartment, restaurants and leisure facilities, so there is possibility for the client to bring the changes in order to meet the tenants and retailer requirements as the project progresses. Flexibility in responding to possible tenants or purchaser would necessary in such scheme. A fixed, immoveable internal layout would be disadvantage. The space of leisure facilities would need to be flexibly provided. An ideal procurement route should be able to adjust these revision to standard form of contract and maintain a balance of risk and remedy within construction contracts between client and contractors. Complexity Project complexity is important factor in procurement route decision making. The project size, complexity, location and uniqueness of the project should be considered as this will influence time, cost and risk. The requirements of project are not straightforward clear. Complexity in the building form and in its environmental services would likely to be factor. The external appearance will to be modern, prestigious, and attractive to national and international organizations. The importance of buildability that would allow fast construction will be important.

 Price certainty Price certainty is critical factor in choosing a procurement route. Price and certainty means: Price is taken to mean the total construction cost of design fees, construction contracts, financing cost and client management cost. Whereas certainty is taken to mean relative assurance, within defined parameters of time and money, design and construction is completed. Our client is real estate Company which aims at maximizing profit. It will therefore not intend to spend more than it has budgeted for each section of development. Financial objectives The funding mechanisms for a project can have a significant impact on the procurement. Mostly in private sector client is in a joint venture with another funder and funder may dictate certain requirements of the procurement route to ensure cost certainty. Risk avoidance Risk is inherent in many activities of building procurement. It continues to be perceived as the single most important factor in choosing a contract or procurement route among many organisations. Most common risks in building procurement are of a project taking longer time and costing more than intended, and not reaching the quality expected for it. It is important that any risks to the project are to be effectively managed by the party that is best able to handle them. And every procurement system distributes the risks between the client and contractor (Masterman 2002). Some procurement methods allocate more of the risks to the client and others more to the contractor. Because the client is quite experienced in construction, will prefer to leave to as much of the speculative risk as possible with a single contracting entity. Suitable rout for Client development project: From the above reviewed factors it is established that Design and Build route is not suitable because the client has extensive construction experience and it is expected that he will be involved, even interfering, during the briefing, design and construction process and mostly it is proved through experiences likely that the advantages of design and build would not occur. The quality of high-profile conceptual design is not ready so it would not readily available to design and build organization, and so would not meet clients requirements. Whereas Traditional Route is also not ideal route because the amount of overlap of design and construction required to meet the programme would not allow for production of any form of bill of quantities that would be representative of the whole job, even by using an approximate bill. Traditional Two-stage tendering likewise in not appropriate. For the mixed development having high-quality apartments, restaurant and leisure facilities is mostly considered as complex project and Management Contracting route is suitable for such large scale and complex projects. A fast program, with flexibility of response during construction in order to accommodate variations, is likely to be achieved by management contracting or Construction Management. Advice of construction procurement would be available, critical materials to be programmed and advance orders placed. The procurement and buying knowledge of major management contractor or construction management would be essential to enable the design team to design with confidence, knowing their construction proposals could be purchased and installed in the buildings in accordance with overall program required. Flexibility in the design and construction would to be allowed for, to provide for some changes if the market required them. It will possible that, in response to market, the development project would be phased, accelerated or slowed as required. Only the flexibility of working within the framework of management contracting readily provided all these possibilities.

Forms of Contract: The standard forms of contract for management procurement are: For management contracts Joint Contract Tribunal, Standard Form of Management Contract 1987 Edition Joint Contract Tribunal, Standard Works Contract 1987, between a Management Contractor and his various Works Contractors NEC Engineering and Construction Contract (ECC) 1995, option F.

For construction management NEC Engineering and Construction Contract (ECC) 1995, option F.

Conclusion: The conclusion that may be taken is that there is no best practice solution for procurement of construction projects. The essence of best practice, is the ability to know the full range of tools and techniques that are available to allow clients to leverage their business position effectively. Every procurement route has its own advantages and disadvantages. For this specific project, it is recommended that for a successful execution of development project, management contracting should be adopted. However, it must be noted that, the success of project does not only depend on the procurement method used but also on the efficiency of the consultants and the contractor used.

Reference:
CEM (2012) Procurement Strategy, Paper 0260, Reading: College of Estate Management. CEM (2012) Standard forms of contract, Paper 0484, Reading: College of Estate Management. Dr. Jones. (2005), Procurement strategies: Best Practice Procurement, Available at: http://www.isurv.com/site/scripts/documents.aspx?categoryID=65 [Access on 27-12-2013] Larmour. J (2011), A study of procurement route and their use in the commercial sector, Available at: http://www.idbe.org/uploads/Larmour [Access on 21-12-2013] Miller. G & Craig (2009) Built Environment Procurement Practice: Impediments to Innovation and Opportunities for Changes, Curtin: Curtin University of Technology. Available at: http://eprints.qut.edu.au/27114/1/Furneaux_-_BEIIC_Procurement_Report.pdf [Access on 19-12-2013] Murdoch. J &Hughes. W (2008), "Construction Contract "(4th Edition), New York: Taylor & Francis NEDO (1985), Thinking about building: A successful business consumers guide to using the construction industry, Available at: http://dl.nsf.ac.lk/bitstream/1/8323/2/BESL-7(2)-43.pdf [Access on 05-01-2014] New South Wales Department of Commerce (2006), Procurement Method Selection Guidelines, Available at: http://www.commerce.nsw.gov.au/Home.htm [Access on 27-12-2013] Turner. A, (1997), "Building Procurement "(2nd edition), New York: Palgrave Macmillan

QUESTION 2

The client is concerned about recent reports of some major contractors becoming insolvent, and he has asked you to review what safeguards could be put in place before entering into a contract with a main contractor in case the main contractor becomes insolvent during the construction process. The client wishes to reduce the risk of any liability against himself in the event of insolvency of his contractors while on site. With specific reference to a standard building contracts insurance clauses and construction bonds, advise your client with considered advice, outlining the various options available to him at the pre-contract stage. (40 marks) Introduction: In the current economic situation, the threat of contractor insolvency emerges over clients, financial institutes and other participants in construction projects across the UK. Contractors insolvency always appear on a clients risk record for any construction project they undertake but in these recessionary times, it is more important that this risk is managed and protective measures are put in place. When a contractor becomes insolvent during a project, an employer will be faced with the choice of either somehow completing the works, usually at an increased cost and with an alternative contractor, or else abandoning the project altogether. An employer can protect itself to face with an insolvent contractor. As with most things, preparation and planning are the key ingredients to achieving maximum protection. The key protective measures should be built in at the front end in the building contract. Protective Measures in the Contract An employer should ensure the following provisions are in its contract: on insolvency of the contractor, the employer is not obliged to make any further payment until the works are complete; allow the employer to appoint an alternative contractor and recover those costs or set off those costs from any amounts owing to the original contractor; to allow the works to continue, there should be provision allowing the employer to make direct payments to sub-contractors, suppliers or consultants. This is a difficult provision as the employer has to: a) avoid cutting across the insolvency rules on the ranking of creditors, otherwise the provision will be struck out; b) and avoid having to make a double payment e.g. one to the sub-contractor and another to the contractors liquidator for the same services; ensure that insolvency is a ground for terminating the contract and insolvency should be defined widely enough to cover all types of procedures including those in other jurisdictions e.g. Scotland; allow the employer to terminate if he suspects that insolvency is imminent as this will allow the employer to negotiate with the contractor; Bonds A bond is an arrangement under which the performance of a contractual duty owed by one party (A) to another party (B) is backed up by a third party (C). What happens is that C promises to pay A sum of money, if B fails to fulfill the relevant duty. It is possible for almost any contractual obligation to be the subject of a bond. The commercial purpose of bonds summarized by Lord Potter in Cargill International SA, Geneva Branch Cargill (HK) Ltd v Bangladesh Sugar & Food industries Corporation (1997): First Such a bond is guarantee of performance. Second, its purpose is also that the buyer may have money in hand to meet any claim he has for damage as a result of the sellers breach. Third, it confers a considerable commercial advantage upon buyer. The bond is most common type of guarantee, in which every aspect of the contractors performance is covered. The requirement for the contractor to provide such bond is found in both ICE 7 and in the FIDIC Conditions of

Contract. In practice there are three types of bonds which provide protection to employer against if it is faced with an insolvent contractor. a) Advance Payment Bonds b) Performance Bonds c) Retention Bonds a) Advance Payment Bonds The Employer makes an advance payment, as an interest-free loan for the mobilization the contractor will be expected to provide a bond equal to the amount that he has received. Advance payment provisions are now provided for in clause 4.8 of the JCT SBC 2011 edition and a form of Advance Payment Bond is included in Schedule 6 Part 1. b) Performance Bonds Performance bonds are provided by a third party on behalf of the contractor. A performance bond is usually capped at 10% of the contract sum. Performance bond can be either conditional or on demand, conditional bond is only payable once written condition is fulfil whereas on demand bond is payable once a compliant demand is presented by the employer to the surety without proof of contractor breach or employer loss. While drafting of contract make it sure the bond can be triggered by insolvency as opposed to just a breach default or termination. c) Retention Bonds Retention bonds sit in a separate category and are used as an alternative to operating a retention mechanism under a construction contract. Parent company guarantees Another common method of protecting against contractor insolvency is to obtain a parent company guarantee. The idea is that a parent company will have a stronger contract strength than its subsidiary and will provide an alternative and larger balance sheet against which to claim. A Parent company guarantees will also not normally have any limitation as to the amount that can be recovered, save that it will usually mirror the liabilities and the amounts that could be reclaimed under the building contract. A Parent company guarantees can be a separate document or the parent company can be a party to the building contract thereby guaranteeing performance of the contractors obligations. The employer can further protect itself by ensuring that the parent company acts as primary obligor however, this provision is likely to be resisted by the parent company. Bond in respect of Plant Equipment and Materials If a contractor has plant, equipment and materials on site the employer should consider providing a right in the contract to enable it to use those materials to complete the works and thereafter to have the right to sell the plant and equipment and apply the sale proceeds to satisfy any debt owed to it by the contractor. Offsite materials pose a greater risk to the employer as they are not within the control of the employer. The best protection is an offsite materials bond which a contractor should provide to the employer as a pre-condition for payment. A better position is found in contracts such as the JCT 2005, which provide that: The contractor must provide reasonable proof that ownership of offsite materials is vested in the contractor; the employers most effective protection is to require an offsite materials bond as a pre-condition to payment, which would entitle the employer to make a demand up to the value of the offsite materials Provision for Project bank account Another method of protection is the use of a separate bank account for the building project. A Project Bank Account is intended to act purely as a protected payment mechanism. Generally, a Project Bank Account is set up as a trust for the benefit of all of the project participants. The underlying advantage of the Project Bank Accounts

trust mechanism is that in the event of the insolvency of the main contractor, payments will continue to pass to other participants in the supply chain rather than being held by an insolvency practitioner. Alternatively, an escrow account can be arranged that only allows the contractor to withdraw any money once they fall due. The terms of any contract that provides for such a facility should specify the events that would allow the money to be released to the employer, such as default of any of the contractor's obligations. Collateral warranties, Provision for step-in rights A collateral warranty is an agreement which exists alongside another contract and is related to that other contract. It is a method of joining together parties who in other circumstances would not have a contractual relationship, but who are nevertheless involved in the same undertaking. In the event of main contractor insolvency, the employer will wish to retain the momentum of the project through the services of suppliers and subcontractors who have contracted with the insolvent contractor. Where a main contractor becomes insolvent and the employer has step-in rights under sub-contractor collateral warranties, the employer can avoid the effects of the contractors insolvency by stepping into his shoes and keeping subcontractors working on the project. The employer may also have the ability to replace sub-contracts to a new contractor upon the main contractors insolvency. It can however be difficult to resurrect the sub-contractors faith in the project where payments have not been made, but step-in remains a useful tool. Conclusion: The risk of contractor insolvency runs to the core of every project. It is therefore vitally important to the success of a project that preventive steps are taken to provide for a contractor insolvency situation. The decision as to which steps are taken will ultimately depend upon the size, nature and other particulars of the project and its parties, but the bite of the credit crunch has brought into sharp focus the need for employers to consider these possibilities now more than ever.

Reference:
CEM (2002) Contractual security, Paper 3720, Reading: College of Estate Management. CEM (2012) Contract Administration: Insolvency, Paper 0256, Reading: College of Estate Management. CEM (2012) Insurances, bonds, guarantees and collateral warranties, Paper 0151, Reading: College of Estate Management. Insolvency, Available at: http://www.isurv.com/site/scripts/documents.aspx?categoryID=3833 [Access on 0701-2014] Maxwell Winward (2008), Construction Newsletter: Protecting the Project against Insolvency, Available at: http://www.maxwellwinward.com/wordpress/wp-content/uploads/2012/07/Construction-Newsletter-Winter08.pdf [Access on 11-01-2014] Murdoch. J &Hughes. W (2008), "Construction Contract ", 4th edition, Taylor & Francis, New York Protecting the Project against Insolvency Available at: http://www.maxwellwinward.com/wordpress/wp-content/uploads/2012/07/Construction-Newsletter-Winter08.pdf [Access on 07-01-2014] Turner & Townsend (2011), Contractor Insolvency: Contract Risk Management, Available at: www.turnerandtownsend.com/Contractor_Insolvency_Iy1KK.pdf.file [Access on 05-01-2014]