Paul Thomas, “Optimisation of secondary electrospray ionisation (SESI) for the trace determination of gas-phase volatile organic compounds,” Analyst, vol

In the early 1960s the clients of the construction industry had only a limited choice of procurement methods which they might wish to use for the construction of a new building. The RIBA form of contract, although even then not used universally, had yet to experience extensive rivalry from elsewhere, or even from within its own organisation for a serious alternative. Contract bills were becoming the preferred document in place of the specification, and the mistrusted cost-plus type contracts which had been a necessity a few years earlier for the rapid repair of war-damaged property were already in decline.

Society is now a world of endless change. In recent years there have been many developments in the technologies that are used, in the types of societies in which we live, and amongst professional attitudes. The causes of these changes which have been experienced are not difficult to find. Society generally is on the lookout for something new, and the construction industry in a way mirrors that change to avoid being thought of as outdated or old-fashioned. The search is also for improvement, knowing that we have not as yet found the perfect system; even if one at all exists. In this context, largely due to improved geographical communications of the twentieth century, the construction industry has looked with interest to both East and West, to the way that others around the world arrange the procurement of capital works projects. Not surprisingly, it is the countries which appear to have been the most successful which have received most of the attention.

The methods adopted in the USA or Japan for their construction industries have been in the forefront of our ideas for change.

The apparent failure of the construction industry to satisfy the perceived needs of its customers, particularly in the way it organises and executes its projects, has been another catalyst for change. Various pressure groups too have evolved to champion the causes of the different organisations who perhaps have particular axes to grind. The 1970s oil price shocks, which had a massive influence on inflation and hence industries’

borrowing requirements, also motivated the construction industry to improve its own efficiency through the way it managed and organised its work. The depression of the 1970s, like previous slumps, encouraged firms of all kinds to attempt to persuade employers to build, by using what were then innovative approaches to contract procurement.

76

Contracts in Use Survey 77 INDUSTRY ANALYSIS

The construction industry can be measured in several different ways, e.g. turnover, profitability, number of firms, number of employees (see The construction industry of Great Britain by R C Harvey and A Ashworth, Butterworth-Heinemann, 1997). In 2005 its annual worth was about £80 billion. The construction industry at the start of the twenty-first century is buoyant. The construction industry is also diverse: about 60 per cent of the total output is repairs and maintenance, less than 25 per cent is public sector projects, and less than 20 per cent is civil engineering projects.

During the past decades, changes in the methods of construction procurement have been one of the most fundamental driving forces within the construction industry. Greater comparisons have been made with procurement methods used by other industries and in other countries around the world. Research has been undertaken to better inform clients, consultants and contractors. The different methods each have their own peculiar

advantages and disadvantages and there is still no panacea that applies across the whole industry. The choice of method depends upon the following characteristics:

■ Familiarity amongst parties

■ Type of client

■ Size of project

■ Type of project

■ Risk allocation

■ Form of contract to be used

■ Major objectives of the client

■ Status of the designer

■ Relationships with contractors and consultants

■ Type of contract documentation

CONTRACTS IN USE SURVEY

There are a number of different organisations in the UK construction industry who monitor trends in procurement systems. The Contracts in use survey, from which the information below has been extracted, is the ninth (2003) in a series to determine trends in the use of standard forms of contract and procurement methods. The survey is published by the RICS Construction Faculty. The information below is based on a survey carried out in 2001. A tenth report is due to be published towards the end of 2005. The survey is carried out by Davis, Langdon and Everest (now Davis Langdon in the UK, and Davis Langon and Seah International). The survey was first published in 1984.

The survey included projects that were started in 2001 and has sought to sample both new build and refurbishment, excluding overseas projects and civil and heavy engineering projects. In addition, term contracts and routine repair and maintenance projects were excluded.

78 Contract Strategy

Table 7.1 Trends in methods of procurement (by value of contracts)

Procurement Method 1985 1987 1989 1991 1993 1995 1998 2001

% % % % % % % %

Contract bills 59.3 52.1 52.3 48.3 41.6 43.7 28.4 20.3

Drawings/spec 10.2 17.7 10.2 7.0 8.3 12.2 10.0 20.2

Design and build 8.0 12.2 10.9 14.8 35.7 30.1 41.4 42.7

Approximate quantities 5.4 3.4 3.6 2.5 4.1 2.4 1.7 2.8

Prime cost 2.7 5.2 1.1 0.1 0.2 0.5 0.3 0.3

Management 14.4 9.4 15.0 7.9 6.2 6.9 10.4 2.3

Construction management 0.0 0.0 6.9 19.4 3.9 4.2 7.7 9.6

Partnering 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.7

Totals 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: Contracts in use, RICS Construction Faculty

Table 7.2 Trends in methods of procurement (by number of contracts)

Procurement Method 1985 1987 1989 1991 1993 1995 1998 2001

% % % % % % % %

Contract bills 42.8 35.6 39.7 29.0 34.5 39.2 30.8 19.6

Drawings/spec 47.1 55.4 49.7 59.2 45.6 43.7 43.9 62.9

Design and build 3.6 3.6 5.2 9.1 16.0 11.8 20.7 13.9

Approximate quantities 2.7 1.9 2.9 1.5 2.3 2.1 1.9 1.7

Prime cost 2.1 2.3 0.9 0.2 0.3 0.7 0.3 0.2

Management 1.7 1.2 1.4 0.8 0.9 1.2 1.5 0.6

Construction management 0.0 0.0 0.2 0.2 0.4 1.3 0.8 0.4

Partnering 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.6

Totals 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: Contracts in use, RICS Construction Faculty

Nearly 3,000 projects were captured by this survey. This was 20 per cent more than the previous survey but considerably fewer than the 1993 or 1995 surveys. Conversely the total value of projects captured was much lower than the 1998 survey. The average value of the projects was £1.13 billion in 2001. Statistics compiled by the Department of Trade and Industry showed that the total value of new orders was £24.50 billion. The survey therefore captured 13.6 per cent of all new construction orders.

Trends in methods of procurement

Tables 7.1 and 7.2 show the proportion by the value and number of contracts, respectively, since 1985.

Contracts in Use Survey 79 From the above tables the following conclusions may be drawn:

■ A considerable decline in both the value and number of projects using contract bills.

■ Conversely a significant increase in the number of projects relying on drawings and specifications.

■ Partnering contracts accounted for only a tiny proportion of the whole. They had not previously been monitored.

■ The use of design and build in terms of the number of contracts has declined and in terms of value only negligibly increased.

■ The use of some of the more adventurous methods of procurement, such as management contracts and construction management, represents only a small proportion, either by number or value.

■ Prime cost contracts that have never really represented a significant proportion have now declined to less than half of 1 per cent.

It is worth reflecting on these tables and identifying with them from our own experiences.

Had the survey been done 50 years ago, the picture would have been very different with a huge emphasis on bills of quantities, little in the way of design and build and virtually nothing on the more alternative and more recently introduced methods of procurement.

I well remember a colleague of mine in the 1970s believing that design and build would eventually become the norm with the designer and constructor under one roof. Well, he was partially correct in believing that this method would increase in popularity but not to the extent that he forecasted.

The apparent dislike with what might be termed the more traditional methods of procurement appear to have weathered the storms of what was assumed 15 years ago as the solution to the industry’s ills. There seems to be a declining appetite for management type contracts. Does this suggest that they have not really lived up to expectations? At their peak (1991), in terms of value they accounted for a quarter of the industry workload. Today they represent barely 10 per cent.

The figures are also slightly distorted since much of the private housing projects are not contract work as such and therefore are not a part of this analysis.

The tantalising question is, of course, what will the next survey produce? Speaking with a number of quantity surveyors, for example, suggests that there has been some revival in the use of bills of quantities. In fact bills have not gone away as such, although they are no longer a contract document under drawing and specification contract. Contractors being asked to price such projects often ask a surveying firm to produce bills for them. This seems like history repeating itself ! (See Added value in design and construction by Allan Ashworth and Keith Hogg, Pearson Education, 2000.) It also seems a waste of resources unless of course contractors are getting together, as they used to do, to employ one firm of surveyors to prepare one set of bills for pricing by all of the firms. It has always seemed odd to me that whilst the clients still pay for the bills (nothing is free) they cannot make the best use of them because supposedly they no longer exist. It should never be forgotten that on every construction project someone somewhere has to determine a budget and make payments for the work executed.

80 Contract Strategy

Table 7.3 Trend in use of JCT standard forms

1984 1985 1987 1989 1991 1993 1995 1998 2001

% % % % % % % % %

Number (%) 84 81 86 81 78 82 85 91 91

Value (%) 75 70 74 81 61 80 76 68 79

Table 7.4 Use of JCT standard forms

Form By number of contracts (%) By value of contracts (%)

1995 1998 2001 1995 1998 2001

JCT with quantities 22.4 17.5 8.5 32.3 23.3 12.7

JCT without quantities 5.2 7.8 4.6 3.6 6.2 10.4

JCT with approximate quantities 1.1 0.8 0.4 1.5 0.5 0.9

With contractor’s design 9.3 18.1 13.3 20.4 26.1 39.7

IF with quantities 12.0 11.9 9.4 7.0 3.1 5.2

IF without quantities 9.9 13.3 14.0 3.5 2.2 4.8

Minor works 22.7 20.1 40.0 2.3 1.0 2.9

Prime cost 0.5 0.3 0.2 0.3 0.3 0.3

Management 0.8 0.7 0.4 4.5 4.9 2.0

Total JCT forms 84.5 90.5 90.8 76.1 67.6 78.9

Use of JCT standard forms

Tables 7.3 and 7.4 show the proportion by the value and number of contracts, respectively.

It is not surprising that the JCT forms of contract continue to be used on the majority of building projects. The 91 per cent quoted in 1998 was the largest proportion, by number, since the survey was first introduced. In terms of the total value of projects, the 2001 survey shows that this proportion is unchanged, JCT is used on approximately three-quarters of all building projects. In 2001 the survey was pleased to report that 95 per cent of all building projects used a standard form of contract of one kind or another. The survey found only a very limited use of the ICE New Construction Contract on building projects:

■ JCT in all of its variants remains the most commonly used form of contract for the procurement of building contracts.

■ The use of JCT with quantities has declined considerably in line with the reduction in the use of bills of quantities shown in Table 7.1

■ One of the most dramatic changes in Table 7.4 is the fact that of the projects surveyed, 40 per cent were using the minor works form. This is partially reflected in the fact that 42 per cent of the projects in the current survey were worth less than £100,000, compared with only 28 per cent in the 1998 survey.

Source: Contracts in use, RICS Construction Faculty

Source: Contracts in use, RICS Construction Faculty

Contracts in Use Survey 81

Table 7.5 Design and build

Form Percentage by number Percentage by value

1995 1998 2001 1995 1998 2001

JCT with contractor’s design 10.0 18.9 13.8 21.0 27.1 42.7

GC/Works design and build 0.3 0.2 0.0 1.6 0.2 0.0

ICE design and build 0.1 0.4 0.0 0.3 9.6 0.0

Other design and build 1.4 1.3 0.0 7.2 4.6 0.0

Totals 11.8 20.7 13.9 30.1 41.4 42.7

■ Table 7.4 shows a considerable increase in the number of projects using the With Contractor’s Design option.

■ The use of IFC98 appears to have peaked in terms of the number of contracts on which it is used. In terms of the value of work using this form, the decline is more

pronounced where contract bills are used as a part of the contract.

The survey also revealed a number of other aspects:

■ The JCT advises that the Minor Works Agreement should only be used on projects below £100,000 (2001 prices). Whilst 82 per cent of projects in the survey fit within this limit, it needs to be noted that a not inconsiderable 18 per cent of projects were above this amount. In 1998 there were fourteen examples of it being used on projects in excess of £0.5 million but only five in the 2001 survey of its seemingly inappropriate use.

■ The use of prime cost contracting remains very small at less than 0.5 per cent by either number or value.

■ The With Contractor’s Design form declined in use in general, but was a more popular form to be used on projects between £1 million and £2 million.

■ Table 7.4 shows a marked fall in the use of the management contract. It is most commonly used on projects between £0.5 million and £1 million.

■ The number of instances of where the GC/Works forms are used was slightly up on the previous survey. Conversely there has been only limited use of the PC/Works suite of contracts that were designed for use by non-central government public employers.

■ This survey found no recorded use of the ACA Form.

■ Non-standard forms accounted for 4 per cent of all contracts identified by number and 9.1 per cent by value.

Design and build

Irrespective of the form of contract that is used, design and build as a procurement method has shown considerable increase in its use since the middle of the 1990s (Table 7.1).

Table 7.5 indicates the percentage by number and value of projects using this procurement method. Just over one-seventh (13.9 per cent) of the projects in the survey used this method and two-fifths (41.4 per cent) of the value of new buildings were built using a variant of design and build. This together with the significant increase in the use of contractor’s designed

Source: Contracts in use, RICS Construction Faculty

82 Contract Strategy

work indicates an increased level of activity by contractors in the design of building projects.

The survey indicated that all projects used the JCT form in preference to any other.

MAJOR ISSUES TO BE RESOLVED

Table 7.6 Developing a contract procurement strategy

■ Consultant or contractor

■ Price competition or negotiation

■ Measurement or reimbursement

■ Traditional or alternative procurement

Consultants versus contractors

The contracts survey referred to above underestimates the total amount of design and build (D&B) projects because it is almost entirely a survey of consultant organisations. The arguments for engaging a consultant rather than a contractor as the main employer’s adviser are inconclusive. The respective advantages and disadvantages may be summarised as follows. Advantages of a contractor-centred approach are said to be:

■ Better time management

■ Single-point responsibility

■ Inherent buildability

■ Certainty of price

■ Teamwork

■ Inclusive design fees Disadvantages may be:

■ Problems of contractor proposals matching with employer requirements

■ Payment clauses

■ Emphasis may be away from design towards other factors

■ Employers may still need to retain consultants for payments, inspections, etc.

Competition versus negotiation

There are a variety of ways in which a contractor may seek to secure business. These include speculation, invitation, reputation, rotation arrangement, recommendation and selection. Irrespective, however, of the final contractual arrangements which are made by the employer, the method of choosing the contractor must first be established. The alternatives which are available for this purpose are either competition or negotiation.

Some form of competition on price, time or quality is desirable. All of the evidence which is available suggests that the employer under the normal circumstances of contract procurement is likely to strike a better bargain if an element of competition exists. There are, however, a number of circumstances which can arise in which a negotiated approach may be more beneficial to the employer. Some of these include:

■ Business relationship

■ Early start on site

Major Issues to Be Resolved 83

■ Continuation contract

■ State of the market

■ Contractor specialisation

■ Financial arrangements

■ Geographical area

The above list is not exhaustive nor should it be assumed that negotiation would be preferable in all of these examples. Each individual project should be examined on its own merits, and a decision made bearing in mind the particular circumstances concerned and specific advantages to the employer.

Certain essential features are necessary if the negotiations are to proceed satisfactorily.

These include equality of the negotiators in either party, parity of information, agreement as to the basis of negotiation and a decision on how the main items of work will be priced.

Measurement versus reimbursement

There are essentially only two ways of calculating the costs of construction work. Either the contractor adopts some form of measurement and is paid for the work on the basis of quantity multiplied by a rate, or the contractor is reimbursed the actual costs. A drawing and specification contract, for example, relies upon the contractor measuring and pricing the work, even though only a single sum is disclosed to the employer. The measurement contract allows for the payment for risk to the contractor, the cost reimbursement approach does not. Many of the measurement contracts may include for a small proportion of the work to be paid for under dayworks (a form of cost reimbursement) but it is more unusual to find cost reimbursement contracts with any measurement aspects. Here are some points to bear in mind when choosing between measurement or cost reimbursement contracts:

■ Contract sum: this is not available with any form of cost reimbursement contract.

■ Final price forecast: this is not possible with any of the cost reimbursement methods or with measurement contracts which rely extensively on approximate quantities.

■ Incentive for contractor efficiency: cost reimbursement contracts can encourage wastage which must then be passed on to the employer.

■ Price risk: measurement contracts allow for this, employers may therefore pay for such non-events.

■ Cost control: the employer has little control over costs where any form of cost reimbursement contract is used.

■ Administration: cost reimbursement contracts require a large amount of clerical work.

Traditional versus alternatives

Until recently the majority of the major building projects were constructed using

single-stage selective tendering. This method of procurement has many flaws, so alternative procedures have been devised in an attempt to address them. The newer methods, or alternative procurement paths, overcame the failures of the traditional approach but they created their own particular problems. In fact, if a single method was able to be devised which addressed all of the problems then the remaining methods would quickly fall into

84 Contract Strategy

disuse. In choosing a method of procurement, therefore, the following issues are of importance. They are more fully described in Chapter 9.

■ Project size

■ Costs inclusive of the design

■ Time from brief to handover

■ Accountability

■ Design, function and aesthetics

■ Quality assurance

■ Organisation and responsibility

■ Project complexity

■ Risk placing

■ Market considerations

■ Financial provisions

THE FRAMEWORK OF SOCIETY

The correct application of contractual procurement systems is influenced by a number of factors which are present within any society. Such factors, although external to the construction industry, do have implications for the successful completion of each individual project. The appropriate recommendations today may also have different implications in the future, because the framework of society is a constantly evolving one. In selecting the right method, therefore, the following factors should be considered and evaluated:

■ Economic: interest rates, inflation, land costs, investment policies, market levels, taxation opportunities, opportunity costs.

■ Legal: contract law, case law, arbitration, discharge of contracts, remedies for breach of contract.

■ Technological: new techniques, off-site manufacture, production processes, use of computers.

■ Technological: new techniques, off-site manufacture, production processes, use of computers.

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