Which Building Contract is Best?

The Project Triangle

When you’re managing a project, some variables can change. Others can’t. The project triangle is a concept that illustrates the constraints that limit what you can change.

There are three key constraints:

  • Cost 

  • Scope

  • Time

Choice of the right contract for a project flows from the clients priorities but you can’t have all three. For example, if you’re tight for time you can either reduce the scope of the project or increase cost to get the job done faster. If cost is more important you can reduce the cost or increase the project time. It's really a balancing act and it takes experience to understand the constraints and assess how they impact on each other.

You can move the question mark anywhere within the triangle to reflect the best balance between the 3 constraints and then work out which contract best matches that assessment.

Changes To The Scope Of Work

 

If during the project the scope of work is likely to change, perhaps due to uncertainties about final design or unknown problem with an existing building, it is crucial to allow either extra time or extra cost to cover the increased scope. Cutting quality is also an option, but rarely one clients want to pursue. This is a significant factor where deciding which contract is best.

Competitive Tendering - Prioritise Cost and Quality

Competitive tendering based upon detailed drawings and specification has great advantages:

  • Most of the financial risk is taken by the contractor

  • The contractors bids are competitive and so the best bid, which may not be the cheapest, should represent best value tob the client

  • The scope and quality of the work is well defined and it’s clear what can be expected at completion

  • The tender bid includes the time needed by the contractor to carry out the work

  • Complex construction and changes to the scope of work can be accommodated

But also has disadvantages:

  • It takes time to prepare detailed drawings and specification, typically 4 weeks

  • It takes time for contractors to  prepare a detailed bid, typically 6-8 weeks

  • It costs contractors between 5 and 10k to prepare a detailed bid and because they may not get the job that can be a disincentive for contractors to price

  • Contractors may agree to be placed on the tender list and then decline to tender when they receive tender documents, often because they have received other tenders in the meantime and decide to prioritise other projects

Overall we find this to be best suited to most clients who wish to prioritise quality and lowest cost over time.

Negotiated Contract - Prioritise Quality and Time

 

If you wish to prioritise time and retain quality rather than lowest cost, then a negotiated price contract is useful. Typically we would shortlist a few contractors and establish their baseline costs for prelims and overheads. Prelims are costs related to the construction process such as site foreman, welfare facilities, scaffolding rather than actual construction.

 

The advantages of this approach are:

  • The pricing of the work can start early, even before full drawings are available and that cuts down the time taken for agreeing a final cost

  • The contractors are committed to agreeing a contract and are less likely to pull out due to other commitments 

  • The contractor can be involved as part of the team and can contribute to discussions about on construction techniques and materials specification to achieve best value

  • The scope and quality of the work is well defined and it’s clear what can be expected at completion

  • The final negotiated bid includes the time to carry out the work

  • Complex construction and uncertainty of final design can be accommodated

  • Changes to the scope of work are easily accommodated

There are disadvantages however:

  • Competitive pricing is limited to the contractors existing pool of suppliers and subcontractors

  • Where the contractors own workmen are to be used, the competitiveness of their pricing is difficult to establish and is largely taken on trust

  • The contractor may make a charge for their costs to prepare the negotiated bid in the event that the project does not go ahead

Design Build - Prioritise Cost and Time

 

If you wish to prioritise cost and time over quality, then a design-build contract could be right for you. Typically this would be used for commercial projects where quality can be offset against certainty of lowest cost.

 

The advantages are:

  • The drawings and specification can be less detailed because the detailed construction design is undertaken by the contractor. That passes the financial risk  to the contractor who may be able to arrange for that work to be done at a lower cost

  • The competitive tendering can be started earlier, typically based upon design drawings and an outline specification only

  • The contractor makes their own decisions about how to build at lowest cost

  • The contractor puts together their own design team and so the coordination of design and build is their sole responsibility 

 

The disadvantage are:

  • Once the contract is commenced, control passes to the contractor

  • The detailed design and quality tends to be pitched at the lowest level that meets the requirements

  • Making changes can be costly and in extreme cases may not be allowed at all

  • Complex construction and uncertainty of final design is not easy to accommodate

  • Changes to the scope of work are difficult to accommodate

Conclusion

 

  • Quality and best value - competitive tendering

  • Quality and speed - negotiated contract

  • Cost and speed - design-build

Overall our preference would be a negotiated contract because we can get the best contractor to give you best quality at a price that can represent best value for money.

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