Monday, August 27, 2007

CONTRACTUAL ARRANGEMENTS AND DOCUMENTATION

Having considered the methods which a client may use to select his contractor, i.e. by competition or negotiation, there remains the decision as to which form of tendering is to be used, which contract to use as a basis for the `building agreement' and what system of contract administration is best suited to the particular set of circumstances surrounding the project. The options open to the client which are discussed in detail below include the most common alternatives available.

2.1 Traditional Method

The `traditional' method of tendering with which the industry is most familiar is perhaps the most convenient and satisfactory providing a number of preconditions have been fulfilled. The traditional method involves a bill of quantities, fully detailed and prepared in accordance with the latest edition of the Standard Method of Measurement, being supplied to each one of a number of contractors who have been (preferably) selected by the client to price the work in competition with each other. For such a system to work successfully it presupposes that for an accurate bill of quantities to have been prepared there must necessarily have been a great deal of finalised design work completed by the architect, which in turn depends upon the client having clear ideas of exactly what he wants at an early stage in the operations. Furthermore, in addition to the design work being completed and bill of quantities prepared, the use of this method also assumes a final choice of form of contract and contract conditions (including firm or fluctuating price, starting date, completion date, liquidated damages, etc.) has been made together with any other obligations or restrictions the client wishes to impose upon' the contractor. Thus, the success of the traditional method is only possible where major preliminary design work has been achieved. Where the drawings and bill are incomplete, vague or ambiguous or where the conditions of contract have been determined with little thought as to the consequences, the use of the traditional method will prove disastrous and no doubt the contractor appointed to carry out the work will have a field day reminding the client, to his cost, that the tender figure was based solely upon the information presented to him at the time of tender. The traditional method is also the most costly for the client initially, since architects' and quantity surveyors' fees must be allowed for and it takes a great deal of time for the drawings, bill and specifications to be prepared accurately. The time allowed for tendering (say three to four weeks) must also be added to the time for the preparation of the tender documents, and where time is of the essence to the client, the need to make an early start on site may well preclude the use of this method. In situations where the foregoing conditions do not present a problem to the client, the orthodox method can be relied upon to display a number of important advantages, namely:


1. Since the tender documents are prepared in advance and each contractor receives identical information at tender stage, then each of them will be pricing on the same basis, i.e. using the same descriptions and the same quantities thereby avoiding artificially low prices from a contractor who may have made different assumptions, or prepared his own quantities, which subsequently prove to be inaccurate.

2. Where work is to be carried out in phases with sectional completion of various parts of the project required at different dates throughout the contract period, the additional costs relating to this requirement can be established at an early stage by filling in the relevant details of the appendix to the conditions of contract (assuming the JCT Standard Form of Contract is used) and thereby bringing this contractual obligation to the contractor's attention at tender stage. On the submission of tenders, it can then be assumed that all the contractors have considered the point and included a sum within their prices to allow for this. The advantage of making a condition, such as phased work, clear to contractors at tender stage is that there is a good chance, given that the contractors in competition with each other are keen to obtain the work, that they may tend to reduce or even eliminate the risk entirely in the hope of keeping one step ahead of the opposition. A client who decides he would like phased completion once the contract has got under way or even once tenders have been received is likely to find himself with a major claim on his hands.

3. Once the successful contractor has been chosen and his priced bill submitted and accepted, at least the rates contained within the bill will, wherever possible, be used to price variations thus providing a fairly accurate measure of cost control and final account prediction.

4. In the absence of major variations, the orthodox method of tendering will present the client with a tender figure which should not differ greatly from the final account since all or most of the work is detailed and priced at tender stage - an important consideration where the client's budget is restricted.

2.2 Bills of Approximate Quantities

Where detailed drawings are unavailable at tender stage, accurate bills of quantities obviously cannot be produced, but nevertheless a bill of approximate quantities may be prepared where the scope and scale of the work are fairly well established at this point and a design and specification for the works and materials have been produced. Contractors will submit their tenders based on the approximate quantities with the actual being remeasured from detailed drawings as they are produced during the course of the contract or physically measured on site with payment being made accordingly.

Although the initial tender figure will be superseded by the value of the remeasured works later on, bills of approximate quantities do, at least, give the client a fair estimate of the likely final cost, and where the actual work does not deviate too much from preliminary plans the contractor is given a sound basis upon which to gauge the extent of his requirements for the project with rates inserted against items in the bill providing a realistic basis for measuring and valuing the subsequent building work carried out.

However, under circumstances where large variations to the anticipated work are likely, the contractor may well be justified on many occasions in revising his prices accordingly, with the result that the final figure may be far removed from the initial tender sum. This system is useful where a client wishes to make an early start on the construction without waiting for full details and bills to be prepared.

2.3 Cost Reimbursement Contracts


On occasions it may not be possible to ascertain by measurement the full extent and nature of the work involved before the contract gets under way, the design work remaining incomplete at tender stage. However, the client may still wish to appoint a contractor and make a start on the job as soon as possible resulting in decisions and final design work being determined as the contract progresses.

In such circumstances it is impossible therefore to use the traditional method of contractor selection, there being no detailed drawings or bills of quantities from which a firm tender figure can be obtained in advance. One option open to the client is a method of reimbursing the contractor on a suitable `cost plus' basis where the actual (rather than the predicted) costs of construction are paid, together with a `fee' which represents the contractor's management and technical costs and overheads and profit. The features of this system are as follows:

1. It encourages a greater degree of co-operation between contractor and client with both parties perhaps working together closely in the design stages and decision-making as the project develops, the client being able to take advantage of the contractor's knowledge and expertise. With both sides working together in this way, fewer disputes can be expected.

2. Since the contractor is paid in accordance with his actual costs incurred in building the project, it is essential that an efficient system of recording such costs (known as `prime costs') be devised whereby both the contractor and client are satisfied that `fair play' is being achieved. To this end, weekly time sheets verified by the architect or clerk of works must be submitted to establish labour costs, quotations, delivery tickets and invoices for material costs, and plant returns for machinery and equipment used carefully kept. Although an accurate record of the mounting costs can be maintained week by week, the paperwork involved in this procedure can be very costly with both client and contractor having representatives based full time on site engaged in this task.

3. The contract administration in general presents a problem and close co-ordination must be maintained between the architect and the contractor in establishing the optimum level of manpower and the extent to which plant and equipment is needed at each stage in the development. If this objective is not achieved, the inefficient contractor will be rewarded since there is little incentive for him to keep his costs down, particularly where the fee is to be calculated as a percentage of final costs!.

4. A cost reimbursement contract need not necessarily be entered into on a negotiated basis; an element of competition can be introduced into the method of choosing the contractor by allowing a number of selected contractors to quote their, own fee which can be either a fixed lump sum or expressed as a percentage of total costs. Either way, the contractor quoting the lowest sum or percentage would be awarded the contract. However, in order for competing contractors to arrive at a realistic fee, an estimate of the likely extent of the prime costs involved must be prepared by the client's quantity surveyor and must form part of the tender documents although in the event such an estimate can be only very approximate with design work and other information being incomplete at this stage.

Despite this drawback, it is important that the original estimate is assessed as accurately as possible in order to achieve some measure of cost control over the job. At regular stages throughout the contract, the value of the estimated cost will be compared with the actual cost to date, with the difference between the two figures indicating the extent to which the budget is overspent or the amount of savings made. Having this information to hand at any given time will enable the anticipated final account figure to be constantly updated which when relayed to the client may well influence his decision-making and level of expenditure on the remainder of the project.

5. The valuing of variations presents no problems, as the costs involved in design changes etc. are simply absorbed into the total figure as the work proceeds, although the cost of rectifying defective work must be clearly identified and kept out of the reckoning!

6. The contract may be executed not only by the main contractor himself, but also by nominated and private sub-contractors whose work may be valued on a different basis necessitating the additional task of separating such work and monitoring their costs as a separate operation.

The main drawback of a straightforward cost reimbursement contract is the lack of incentive for a contractor to minimize his cost; however, this can be overcome by developing the contractual arrangements a step further to produce a target cost contract.

2.4 Target Cost Contracts

The method employed on a target cost contract is similar to that used for the cost reimbursement type in that a provisional estimate of the prime cost is prepared, but this time the figure is agreed as being realistic by both the contractor and client before work commences. To this sum is added the contractor's fee for overheads and profit as before and the resulting figure is adopted as the ‘target cost’ for the work.

However, an opportunity for an added `bonus' to be earned by the contractor is introduced since reimbursement is made only partly on actual costs with a final adjustment being made in relation to the amount by which the actual cost, including the original fee, either falls 'port of or exceeds the target figure. In practice, this could result in the contractor receiving an extra payment over and above his original fee in the former case or being penalised and having to shoulder some of the extra cost in the latter. Looking at the positive side, this system could appeal to both parties since from the contractor's point of view, the lower the actual costs, the higher his bonus will be, and for the client, despite having to pay out a bonus to the contractor, the final account will still fall short of his budgeted figure, representing to him a saving on his anticipated expenditure.

Unfortunately, however, not all contracts run according to plan with site problems, weather or contractor's inefficiency all serving to push the final cost beyond the target figure. In this case both the contractor and the client will lose out since, again, final reimbursement is determined only partly by actual costs.

The extent of the actual saving or additional cost, as the case may be, to either party is mitigated to some extent by the effect of a predetermined 'share-out' of the money involved. For example, any savings made would probably be due in part to the architect's final design and in part to the contractor's good management and efficiency, in which case savings may be shared equally between client and contractor; similarly, any loss incurred being established on the same basis.

In cases where the contractor is called upon to accept a greater degree of risk perhaps involving an element of danger as well as uncertainty, an equitable split may be 70-30 per cent in his favour. Alternatively, the actual percentage can be introduced as a further competitive element into the tender in addition to the estimation of the prime cost, although in these circumstances it would be difficult, if not impossible, to decide which of two contractors would eventually be the cheaper where the estimated prime cost of one is lower but his required percentage of any savings achieved is higher!

The target cost contract certainly provides a much greater incentive to the contractor to work efficiently and reduce his costs; but at the same time, in trying to achieve this objective, careful supervision is required to ensure that the quality of the work does not suffer. Having agreed the amount of the target cost with the contractor, the contract administration work is the same as for the fixed fee cost reimbursement type with a careful and accurate record of all costs being kept as the contract progresses.

The greatest difficulty, however, is in obtaining a fair and reasonable estimate of the prime costs since contractors will naturally attempt to inflate the figure as much as possible thereby gaining the maximum advantage where large-scale savings are subsequently achieved. The client therefore needs expert advice from skilled and experienced quarters to ensure that prices whether obtained by negotiation or competition are realistic.

A variation of the normal target cost contract can he used where early completion is essential, the contract period being the critical ingredient of the project with cost being a secondary consideration. In this case, `time' would be the subject of the target with contractors competing by quoting anticipated completion dates, and bonuses or penalties based on the amount by which actual completion of the work falls short of or exceeds this date.

2.5 Continuity Contracts


On occasions where a client envisages further work beyond the immediate project, he may wish to maintain continuity of work with the same contractor. An ideal opportunity to make use of this sort of arrangement would present itself where a long-term large-scale housing scheme is planned involving, say, 300 dwellings. Such a large contract if attempted as a single job would not only be extremely costly, but also difficult to manage with any one contractor having to commit a great deal of resources to that job.

An alternative approach would be to award the work piecemeal to three or four contractors, each being comfortably able to carry out his allocation of work without overstretching himself, although this of course assumes that the client has the funds available to tackle the whole of the work immediately. Where this is not possible, the scheme is likely to be split up into say three phases, each one comprising 100 dwellings enabling the client, if he wished to treat them as three separate and independent contracts, obtaining orthodox competitive tenders for each and possibly ending up with three separate contractors.

However, the advantages to be gained by selecting the contractor for the first phase only by normal means and thereafter negotiating with that firm for the remaining two phases as and when they can be started can be summarised as follows:

1. Contractors would be informed when pricing for Phase 1 on a competitive basis that further work would be awarded to the successful tenderer providing the work is of the required standard and is completed within a reasonable time. Promise of continuity of work for perhaps two or three years ahead would be a very attractive proposition to contractors and a keen tender list would be anticipated with firms perhaps pricing at little more than net cost being anxious to secure not only the immediate contract but also the future work in the pipeline.

Obviously where future prices for the remaining phases are negotiated using low prices as a starting point, the client can be satisfied that he is obtaining good value for money, although where the original price is too low, an otherwise good relationship between contractor and client could be damaged where it becomes impossible tbe make a profit, despite the advantage of negotiation.

2. The security of continued production which the contractor enjoys under this system will encourage a good working relationship between himself and the client.

3. There will be a saving to the client in subsequent tender preparation costs since the original bill of quantities can be used where the future work is similar, using the prices contained in the bill as a basis for negotiating the value of the remaining phases.

4. Despite having to negotiate prices for the subsequent phases, the client may still expect a saving compared with formal competitive methods since the incumbent contractor should be able to carry out the second and third phases much more efficiently and quicker than a newcomer, being now familiar with the design and having learned from problems previously encountered. There may be savings on some preliminary items which can be utilised on future phases such as the site huts, compound, telephone etc., also items of formwork specially fabricated for the original contract could be re-used.

The extent of any savings thus achieved may be difficult to quantify, but they should at least serve as a useful tool to aid the client in his negotiations! The continuity contract is ideal for a 'one-off' situation where the likelihood of future work exists, but where no guarantees can be given, if the client is subsequently unable or unwilling to proceed with further plans.

2.6 Serial Contracts


A serial contract differs from a continuity contract in that at tender stage, rival contractors are informed that the successful firm will be called upon to carry out a number of future separate contracts each of which will be very similar if not identical to the original one being priced, the prices contained in the bills of quantities being used to value similar work on the future projects. The approximate extent of the `series' of contracts will be known at the initial tender stage even though the design work on some of them may as yet be incomplete.

Again the advantages to be gained from maintaining continuity of work with the same contractor are the same as outlined above, but serial tendering being in effect a standing offer to carry out a series of projects all based on the priced bills of quantities for the first project which becomes the `master' priced document. Rates contained in the original bill of quantities can be updated to account for inflation using either a `conventional' or `formula' method for assessing the amount of increased costs. The guaranteed workload to be enjoyed by the successful contractor should ensure that the client obtains keen tenders from competing contractors in the first instance.

2.7 Term Contracts


A term contract is a type of continuity contract, which has been adapted to suit situations where a continuous programmed of work is required on a particular site or within a certain defined area. This system is particularly applicable to Government establishments, bases for the armed forces, large-scale industrial sites and oil refineries etc., where there will be a constant need for maintenance and repairs together with small and medium-scale extension and alteration work.

When tendering, contractors are aware of the nature and approximate value of the work based on previous contracts, but at this stage the actual extent of the work cannot be known and tenders are submitted in the knowledge that the successful contractor will undertake to carry out all the work given to him over a certain period of time or `term', a typical period being perhaps two years. The tendering document will normally be a schedule of rates covering most of the work normally encountered with contractors quoting a single percentage addition or reduction on the schedule as a whole to cover preliminaries, overheads and profit.

The successful contractor will be the one quoting the lowest percentage and orders will be issued to him from time to time by the supervising officer or clerk of works and the work valued in accordance with the schedule rates amended by the percentage addition/reduction, each works order having a value of between say £10 and £30,000.

On expiry of the two-year term, the contract will be up for renewal and the contractor selection process adopted once more; however, it is not unusual for one contractor to secure the work time after time, having been established on site for perhaps twenty years or more and knowing from past experience the right level of percentage addition which will ensure a profit, it being extremely difficult for an `outsider' to judge this with any degree of accuracy.

2.8 Two-stage tendering


As the name suggests, prospective contractors take part in a selection procedure involving a process of elimination before the most suitable one for the job in hand is chosen. Such a system may be used by a client planning a complicated project where the type and scope of the work only is known at this early stage and where he would benefit from the advice and expert knowledge of a contractor experienced in that particular type of work and who could help in the design and planning of the contract.

A number of possible contenders would be selected initially and each would have the opportunity at pre-tender meetings to discuss with the client's professional advisers their individual ideas regarding approach, methods of tackling the work, programme, management and organisation etc. Having satisfied himself as to the suitability of some or all of the tenderers, the client can then introduce a further element of competition into the selection procedure by inviting them to price a schedule containing approximate quantities of some of the more common operations which will form a major part of the work.

If a bill of approximate quantities can be prepared for this task, so much the better. On the evidence of the preliminary pricing exercise, the lowest tenderer will then be invited to join the team planning the project and be expected to take an active part in giving advice on cost comparisons, programming and site organisation and generally assisting in the design which when finalised will enable accurate bills of quantities to be prepared and a value for the work determined based on the prices contained in the original schedule.

Care must be taken to ensure that the level of pricing in the final bill of quantities is consistent with that in the schedule, otherwise the final tender figure could be distorted out of all proportion. In order to achieve this, it is essential for the client's advisers to have a thorough knowledge of builders' estimating techniques and for the contractor to share his information willingly and where necessary showing how individual prices are built up indicating the location of overheads and profit.

However, set against this drawback is the likelihood of the contract running smoothly and finishing on time, with very few subsequent variations to impede progress. With regard to the contractor's contribution during the design stage, reimbursement for services rendered here could be made on a separate basis.

2.9 Design and Build (Package Deal)

With this type of arrangement, a client invites a number of selected contractors not only to price the work, but also to design, plan and organise the contract. The successful contractor would then provide an `all-in' service or `package deal' from sketch schemes, artists' impressions through the construction stage to handover, being fully responsible for all contract administration and planning.

The benefit to be gained from this approach is that by carefully choosing contractors who are especially experienced in the type of work envisaged, advantage can be taken of their expertise by allowing them the flexibility to produce their own schemes. In this way, in the early stages at least, the client need not necessarily be restricted to negotiation, but can encourage competition not only on the basis of price but also on the aesthetic qualities of the schemes put forward, contract period offered, costs in use etc., with each contractor trying to `sell' his own individual `product'.

Naturally, the client will pay for the contractor's design and planning costs which will be included in the lump sum 'all-in' price; however, a contractor well versed in large-scale traditional housing or industrial warehouse units can often produce a more cost-effective scheme than a client's own architects. This method of contractor selection should suit a client whose main concern is that certain minimum standards, in accordance with his own performance specification, are met by the contractor.

However, great care must be taken when preparing such a brief, and professional advice should be sought regarding not only its content but also to ensure that the tenderer's own schemes meet the requirements. The performance specification, whilst still giving contractors a relatively free hand in the design, may centre around the construction of, say, a given number of housing units each having a certain floor area, number of rooms and possessing all the usual amenities described in detail or it may relate to a warehouse where the provision of a specified storage area sufficient to carry a given loading is the central issue.

Once appointed, the successful contractor can be expected to make good progress working to his own well-tried and familiar design, thus virtually eliminating variations, delays and disputes with the work finishing on or before time.

2.10 Drawings and Specification

For small works involving mainly extensions and alterations, contractors are often asked to submit a price on the basis of one or maybe two drawings either with or without an accompanying specification. Tendering under this method presents contractors with additional problems and risks related mainly to lack of information both in a technical and contractual sense.

Drawings prepared for a client are often undertaken by inexperienced draughtsmen who do not fully appreciate the kind of information needed by a contractor for the purpose of preparing an accurate and realistic price. Builders subsequently pricing on the strength of inadequate or incomplete drawings will have to try and interpret the client's requirements as best he can with the result that each contractor is often pricing on a different basis, particularly if items are missed or wrongly measured.

In order to protect himself legally, the estimator would be advised to write his own detailed specification, including any assumptions made and stating clearly the terms upon which the tender is based such as fixed or fluctuating price, starting and completion dates, methods of payment, retention etc.

The two-fold exercise of taking off quantities and pricing them adds greatly to the cost of tendering, and so the estimator will have to try and gauge the genuineness of the enquiry. On occasions, would-be clients are simply interested in obtaining a budget figure with little or no real intention of entering into a contract for the work, having spent only the minimum amount of money in the preparation of a single drawing.

Clients often invite tenders using this system with no prior knowledge of building work and possessing little idea of the likely cost and inadequate financial resources for the scale of work proposed. However, for many small builders, this type of work will be the mainstay of their business and experience will hopefully give a contractor the ability to recognise the signs when the tendering circumstances and the client's intentions are not genuine.

2.11 Management Contracting

Management contracting is a method of managing a project where the main contractor assumes full responsibility for the organisation and carrying out of the work on site. In return, he is reimbursed on a percentage basis or lump sum fee for his expertise in this field and for his overheads and profit.

The main contractor in charge of the project, whilst working in conjunction with the other members of the design team (architect, Q.S., consultants etc.), does not undertake any work directly - except for the provision of such items as temporary buildings and services, attendance on subcontractors, certain plant, insurances etc.

A central feature of this system is that all the work to be carried out is specified in separate work packages, each of which is then tendered for on a competitive basis by specialist sub-contractors. The documents comprising the work packages may be bills of approximate quantities, drawings, schedules or any other information considered appropriate.

Subcontractors once appointed, work under the direction of the main contractor as normal. Management-contracting is used to good effect on larger, complex projects where the special skills and expertise of the main contractor can be utilised in the areas of design management and evaluation, cost planning, programming, project administration etc.

The specific tasks undertaken by the main (managing) contractor fall, therefore, into two principal categories namely, (i) Sub-contractor control and (ii) design team integration, with regular site meetings taking place in order to resolve potential problems and ensure the smooth running of the work.

The advantages of Management Contracting may be summarised as follows:

(a) The main contractor has an early involvement in the design work and is able to advise on construction method etc

(b) Client involvement is demanded all the way through the development process, thereby ensuring his satisfaction by accommodating his requirements with regard to design changes as the work progresses. Information regarding the current financial position of the contract can be related to the client quickly where a close integration of the building team exists.

(c) Savings, in time can be expected where a close co-operation exists between all parties.

(d) A high level of competition for the work may be achieved providing the client with good value for money. The main contractor can be selected by tendering on the basis of the fee and/or the provision of on site services and facilities. Sub-contract work (amounting to approximately 80% of the project) is tendered for competitively as suggested above.

(e) The system allows for flexibility. Design changes are easily accommodated since the `work packages' need not be prepared until actually needed.

However, as may be expected, management contracting is not without a number of drawbacks namely:

(a) No firm price can be obtained by the client before the work begins as a great deal of investigative and design work remains incomplete.

(b) An extra tier of management is introduced. In addition to the main contractor's management staff on site, each sub-contractor would require his own organising and supervisory staff. Apart from the extra cost, this could lead to difficulties in communication and administration of the contract.

(c) A great deal of faith is invested in the main contractor's success in the monitoring, evaluation and control of the work executed in the sub-contract work packages. The main contractor therefore needs to be selected with great care and must be fully competent and conversant with his legal and financial responsibilities.

(d) A large degree of success depends upon a much closer involvement by the quantity surveyor. With work being let in phases and the design evolving as the contract progresses, an up to date and accurate prediction of costs is continually required

Summary








Reference
Originally from: http://www.eng.upm.edu.my/webkaw/coursenotes/3714n/Chapter2.htm . Thanks a lot.