While speaking to a client last week, I had an odd feeling of deja vu; I’m sure you have all experienced it at some point. I was listening to a client recalling a recent conversation with their construction director.
Currently at the end of the first stage of what they had hoped would be a two-stage design and build (DB) project, where the contractor would shoulder the bulk of the risk, they were now struggling to get the contractor to agree the price and terms for the main contract.
Feeling rather backed into a corner but reluctant to ditch the contractor at this stage and start again, the director had decided that the best way forward was to switch to construction management (CM).
Why the deja vu? In the last 12 months I have seen several projects move from two-stage DB to CM. So why are clients making the change now and what do they need to watch out for?
Why the sudden switch between DB and CM?
The DB/CM shift reminds me of that slightly bold fashion trend that just keeps coming back around no matter how many times you promise yourself you won’t wear it again. But what is it about CM that keeps the old guard coming back every few years and at the same time attracts the next generation?
In my view, this shift has a lot to do with the temperature of the property market which is cyclical in nature. Despite widespread predictions of the cooling effects of Brexit, coupled with the expected downward trend at some point in the not too distant future, the market remains strong with contractors in high demand.
It is a bit of a generalisation and obviously depends on the particular project set up, but the current heat of the market means that in many cases, contractors are in a stronger position to cherry pick projects and so have more negotiating power over the terms that they are prepared to accept. For example, they can insist on limitations of liability or be more risk averse.
There are a number of ways for savvy clients to manage contractors in such a market, but for sophisticated clients with development experience, switching to CM is one option.
Indeed, in each of the projects where I have seen a shift from two-stage DB to CM, the client has been faced with a contractor who is unwilling to take on the full risk of DB without the promise of a significant premium. In short, they can’t agree a lump sum price so rather than abandon the contractor and start again, the client decides it is better off continuing on a CM basis and then hoping for the best.
While CM is not a “better” procurement model than DB, it does provide a cost effective viable alternative and can offer a number of advantages:
- If used from the start of a project, CM allows design and construction phases to be progressed simultaneously. This allows the project to progress more quickly than other procurement routes. Although obviously this advantage does not extend to the DB/CM switch scenario where simultaneous progression of design and construction is no longer relevant.
- A good construction manager will maximise the benefit of having established contacts and regular trade contractors which will reduce time and expenditure in procurement.
- Provided the client has good decision making processes in place, the CM model means that it is easier to make changes (and so have greater flexibility) than under the DB model.
While CM may be one answer to navigating an overheated market for experienced clients, it does not come without its risks. Those considering CM as an alternative to DB procurement should be wary of the following:
- There will be no wrap of overall responsibility for the risk in design and workmanship. This means that the client needs to consider whether it (and, if applicable its funder) can get comfortable with this.
- CM does not provide initial cost and programme certainty. If certainty is of particular importance to the client, it needs to consider whether CM is the right route for it.
- Inexperience and lack of buying power can often be the thorn in the side of a novice CM client. Without proper coordination and a robust market presence, a client will find itself unable to gain the cost and programme savings it had anticipated. Alongside this, if a client cannot make decisions quickly it will find that the entire build may grind to a halt.
My view is that the shift from DB to CM is a passing trend. When the market cools and contractors need to more vigorously compete for projects and so be more accommodating in negotiations, the likelihood is that they will become less risk averse and so more willingly sign up to the DB model without demanding huge premiums.
However, we are where we are, and CM is currently on developers’ minds. In order to fully realise the benefits of CM it takes an experienced client combined with an experienced (and competent) construction manager. Together they need to create an organised approach that builds on (hopefully) existing relationships with the professional team and trade contractors.
Both control and efficiencies are a must. Without these, I have seen good projects get into trouble trying to fit square pegs into round holes. This is what worries me about projects switching route part way through. The question a client needs to ask is: is the shift worth the bother? Can true efficiencies really be made if existing relationships with the professional team and contractors alike have to be unpicked and remodelled?
This article first appeared on Practical Law Construction Blog on 22 February 2017.