There are a number of different firms and organisations in the UK construc- tion industry who monitor trends in procurement systems. The Contracts in Use survey, from which the information below has been extracted, is the eleventh (RICS, 2007) in a series to determine trends in the use of standard forms of contract and procurement methods that are used in the construction industry. This survey remains the single most authoritative survey of construction contracts used in the UK market. The survey was carried out by the construc- tion consultants Davis Langdon and published by the RICS Construction Faculty. As with any other survey it is meant to provide a representation of practice. Construction consultancies will reflect their own client base and these
may present a different picture to this survey. The first Contracts in Use survey was published in 1985.
This latest survey was taken during the relative boom years of 2007, albeit during a recession, and makes interesting reading. The survey provides evidence of what was happening in a year in a boom period, but it also fits in with the evidence of previous years’ surveys and this helps point out possible trends in the way the future might behave.
While smaller projects continue to be dominated by plan and specification pro- curement routes and lump sum contracts, larger projects show a preference for construction management or a version of design and build. There is therefore a distinctive difference between the way in which smaller and large projects are procured. This difference is probably also reflected in the size of firms that under- take such work.
Calculating the costs of construction
It is worth reminding ourselves briefly about the origins of the quantity sur- veyor and construction costs. Historically, architects were responsible for both the design and construction of the project. They employed a number of master craftsmen who carried out the work in each trade. Drawings were very sketchy and much of the design evolved as the job was being constructed. The crafts- men submitted accounts to the architect for the work that was carried out. Over time the craftsmen employed measurers or surveyor to prepare these accounts. Some of the accounts appeared to be excessive and the architect began to employ their own surveyors to contest such claims. When general contractors became established, during the industrial revolution, they submitted estimates to cover all trades. They engaged their own quantity surveyors to prepare bills of quan- tities for labour and materials. When competitive tendering became more com- mon, instead of each firm employing a quantity surveyor to prepare a set of bills, contractors tendering for a project employed a single firm of quantity sur- veyors and the successful tenderer then paid the quantity surveyor’s fees. The fees were included and recouped through the contractor’s tender. Architects, on realising that the costs of the quantity surveyor were really being paid for by the client, persuaded clients to employ the quantity surveyor directly on their behalf and to use them for calculating the costs of interim payments and final accounts. Contractors themselves employed quantity surveyors to contest the amount of such payments in order to arrive at a fair sum for the work that they carried out. Today, calculating the costs of construction has almost gone full circle in the context of the history of quantity surveying.
Lump sum design and build v. bills of quantities
In 1985, the use of bills of quantities was the preferred method for obtaining tenders in the UK construction industry. There was only a relatively small use of other methods (Table 7.1 and Table 7.2). Design and build was less than
10 per cent of the total value of all contracts and even then this method was more used on larger projects. In terms of the total number of contracts, design and build represented less than 5 per cent. Over the next 20 years there would be a rapid increase in the use of design and build across all sizes of project. This shift in practices was largely due to the transfer of risk, where clients wanted more certainty of risk transfer. The 2007 survey reinforces the dominance of design and build as a preferred procurement strategy along with a continued decline in the use of bills of quantities. However, this is only part of the picture since the use of bills or measured quantities refuse to die. It is recognised that someone somewhere in the supply chain needs to measure quantities since it is largely on these that price is determined. Whilst the use of the ‘with quantities forms’ have declined there are still SMM7 (see page 100), bills being measured, often by professional quantity surveying practices. However, instead of prepar- ing these for the client they are prepared on behalf of contractors in support of design and build tenders. In the knowledge of this, the RICS has recently pub- lished its New Rules of Measurement (RICS, 2009), and it will be interesting to observe in future years how the market responds to this suite of documents. These new rules will be introduced as a replacement for SMM7 in 2012. Negotiation and two-stage tendering
The use of negotiation and two-stage tendering methods both showed an increase in use over the earlier surveys. This reflects a market that, at the time of the survey, was booming. It may, from other anecdotal evidence at the time, possibly underestimate what was actually happening in the construction indus- try. It has often been suggested that, in times of boom, two-stage tendering often increases when contractors are reluctant to price single-stage tenders. A new survey that was carried out in 2009, but is still to be published, is likely to show very little use of two-stage tendering. Contractors looking for any kind of work in a recession are keen to price work on any kind of basis.
Drawings and specification
The use of drawings and specifications as a procurement route has a long history. Initially it was used largely for minor or small works projects where the level of complexity was minimal. In terms of the number of contracts issued in the construction industry this method remains the most popular, at approximately 50 per cent (Table 7.2). Table 7.1 indicates that its use on larger projects is much less in evidence although its use on these types of project has almost doubled over the past 20 years. There used to be a rule that contractors should not ten- der for large projects under this method due to the duplication of effort in meas- uring quantities. The costs of tendering under any method is not free. Drawings and specifications are the third most popular procurement method and when considering the value of projects. Table 7.2 indicates that it continues to dom- inate the smaller projects market.
Guaranteed maximum price (GMP)
This is often a client-driven contractual amendment to standard forms. The use of GMP remains a fundamental part of the UK Health Service Procure 21 system for awarding contracts. It is possible that this survey analysed very few hospital and other health service projects.
Management contracting/construction management
The use of management contracting, which was a procurement method that showed real promise in the 1980s, peaked in 1989 and has declined ever since. The use of this now represents only a very small amount of work that is carried out in the construction industry. It is viewed by some as a blip in procurement history. Some argued in the 1980s this was to be the panacea and model for procurement in the future. Construction management was viewed in a similar way but now remains in use only on larger and more complex projects.
Electronic tendering
The use of electronic tendering through EDI (electronic data interchange) was being developed in the early 1980s. However, there appears to be only limited evidence of its primary use almost 30 years later. This may be partially due to data being collected for the survey, although it must be assumed that the authors of the survey (a major quantity surveying practice) would have found the evidence from their own activities. During this period it may be the case that paper-based and electronic-based tendering were being used simultaneously. Extranet-based tendering is the logical next step in the market, using such ex- amples as the RCIS e-tendering service. Future Contracts in Use surveys are expected to show an increase in the use of e-tendering.
JCT v. NEC
The Contracts in Use survey continues to record the dominance of the use of the JCT suite of contracts on construction projects. There has been some decline in relation to previous years as the NEC (New Engineering Contract) contracts are seeing an increase in usage. Some evidence suggests that NEC is gaining greater use and recognition on the larger construction projects. The NEC users forum suggests that the data from the survey does not fully reflect the wider use of NEC in practice. Of the JCT forms of contract, the Design and Build form remains the most widely used, followed by the Standard Form with Quantities. The Intermediate Form is widely represented on lower-value projects, as is the Minor Works form.
The NEC was strongly supported and recommended in the Latham (1994) and Egan (1998) reports because of its non-adversarial features. Some
lawyers dislike the NEC form for this reason! However, this form of contract has taken a long time to make any impact amongst many of the clients who were surveyed. Whilst it has a strong recommendation from the two reports above, it needs to be recognised that these reports were written some con- siderable time ago.
Partnering
Partnering contracts were recorded for the first time in the 2001 Contracts in Use survey. The 2004 survey recorded only a small increase in the use of part- nering agreements and then only for larger-value projects. More importantly, the 2007 Contracts in Use survey shows no increase in the number of contracts on which partnering was used. There is a significant increase in terms of value, but even so this only represents 15 per cent by value. There is a somewhat similar feeling to that of management contracting, which preceded it. Partnering as a contractual arrangement, however good its intentions and ideas, is not making the impact that was either predicted or expected.
PFI/PPP
There was no information in the Contracts in Use survey about the use of PFI/PPP. Apparently questions were asked about these but no responses were forthcoming. This may suggest that the organisations returning the survey forms were not working in this field. Perhaps, and more likely, lawyers were dealing with these contractual arrangements and these do not complete this survey. Whilst the value of these arrangements is not inconsiderable (see Chapter 14) their overall proportion in respect of total industry turnover remains small but not insignificant. Now PPP/PFI contracts are in use in many countries it will be interesting to observe how their use develops in the future. These processes are being evaluated by many different bodies who sometimes come to conflicting views about the benefits of PPP/PFI. It is widely recognised that many of these projects would never have been built without these practices, but the question remains the same – at what cost?
Characteristics of the survey
The number of responses to this Contracts in Use survey were much lower than responses to previous surveys. Conversely, the value of projects captured in the survey was considerably higher than previously. The average project value was therefore much higher than in all the previous surveys. The higher value of proj- ects captured means that the sample represents 17.4 per cent of the total value of new orders received in Great Britain in 2007.
It needs to be remembered when extracting information from any survey like this, that whilst it is meant to be representative of the whole it sometimes does not capture everything. In 2004, the survey only captured four projects with a
value over £50 million. By comparison, the 2007 survey included 28 projects with values in excess of £50 million. This might be expected as construction costs and tender prices continue their upward trend. At the opposite end of the scale the survey included 404 schemes (29 per cent) below £250,000 in value compared to 1,157 schemes (50 per cent) in the 2004 survey.
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 89
Table 7.1 Trends in methods of procurement (by value of contracts)
Procurement method 1985 1991 1995 2001 2004 2007
% % % % % %
Contract bills 59.3 48.3 43.7 20.3 23.6 13.2 Drawings/spec 10.2 7.0 12.2 20.2 10.7 18.2 Design and build 8.0 14.8 30.1 42.7 43.2 23.6 Target contracts 0.0 0.0 0.0 0.0 11.6 7.6 Approx. quantities 5.4 2.5 2.4 2.8 2.5 2.0 Prime cost 2.7 0.1 0.5 0.3 0.1 0.2 Management 14.4 7.9 6.9 2.3 0.8 1.0 Construction management 0.0 19.4 4.2 9.6 0.9 9.6 Partnering 0.0 0.0 0.0 1.7 6.6 15.6 Totals 100.0 100.0 100.0 100.0 100.0 100.0
Source: RICS Construction Faculty (2007) Contracts in Use.
Table 7.2 Trends in methods of procurement (by number of contracts)
Procurement method 1985 1991 1995 2001 2004 2007
% % % % % %
Contract bills 42.8 29.0 39.2 19.6 31.1 20.0 Drawings/spec 47.1 59.2 43.7 62.9 42.7 47.2 Design and build 3.6 9.1 11.8 13.9 13.3 21.9 Target cost 0.0 0.0 0.0 0.0 6.0 4.5 Approx. quantities 2.7 1.5 2.1 1.7 2.9 1.7 Prime cost 2.1 0.2 0.7 0.2 0.2 0.5 Management 1.7 0.8 1.2 0.6 0.2 0.7 Construction management 0.0 0.2 1.3 0.4 0.9 1.1 Partnering 0.0 0.0 0.0 0.6 2.7 2.4 Totals 100.0 100.0 100.0 100.0 100.0 100.0
It is important to reflect on the data included in these tables and to compare the results with our own experiences. Had the survey been done 50 years ago, the picture would have been vastly different with a huge emphasis on bills of quantities as a contract document, a limited use of design and build and virtually nothing on the more alternative and more recently introduced meth- ods of procurement. A former colleague of mine in the 1970s predicted that design and build would eventually become the norm in the construction indus- try. He was clearly a good judge of the future although only partially correct. Design and build has increased in its popularity but not to the extent nor speed that he forecasted.
Conversely, despite the apparent dislike of some of the more traditional methods of procurement, these appear to have survived better than other modern meth- ods that have been introduced and then discarded. Neither the various types of management methods or partnering have made the impact that many expected. Management contracts reached their peak 20 years ago (in 1991), where in terms of value they accounted for over a quarter of the construction industry work- load. Today they barely represent 10 per cent and even then only amongst the larger contracts.
It is worth remembering that for the construction industry as a whole the figures are also slightly distorted. A majority of housing projects are not, by definition, contract work and thus are excluded from this analysis.
Use of JCT Standard forms
Tables 7.3 and 7.4 show the proportion by the value and number of contracts respectively.
Variants of 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 propor- tion, by number, since the survey was first introduced. Since then its use, accord- ing to the survey, has declined, although still represents a large proportion. In respect of the value of projects, it is now used on almost two-thirds of the contracts from this survey. In the 2001 survey, it was reported that 95 per cent of all building projects used a standard form of contract of one kind or another.
Table 7.3 Trend in use of JCT standard forms
1984 1991 1993 1995 1998 2001 2004 2007
% % % % % % % %
Number (%) 84 78 82 85 91 91 78 79 Value (%) 75 61 80 76 68 79 70 62
The following are the main findings of the current Contracts in Use survey regarding forms of contract (see Table 7.5).
• JCT in all of its variants remains the most commonly used form of contract for the procurement of building contracts, although it shows a decline in use over other forms.
• The use of JCT with quantities has declined considerably in line with the reduc- tion in the use of bills of quantities, as shown in Table 7.1.
• There is a high use of the design and build form.
• The use of IFC 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 vast majority of construction contracts continue to use one of the stan-
dard forms of contract, albeit sometimes with client or consultant amendments.
Contracts in Use survey 91 Table 7.4 Use of JCT standard forms
Form By number of contracts (%) By value of contracts (%) 1995 2004 2007 1995 2004 2007
JCT with quantities 22.4 14.9 11.7 32.3 18.4 10.2 JCT without quantities 5.2 5.3 6.2 3.6 3.6 7.8 JCT with approx. quantities 1.1 2.6 0.9 1.5 2.5 1.5 Design and build 9.3 11.2 19.4 20.4 35.6 25.3 IF with quantities 12.0 11.8 6.7 7.0 3.5 1.1 IF without quantities 9.9 8.1 8.5 3.5 2.4 1.4 Minor works 22.7 23.5 23.5 2.3 2.4 0.9 Prime cost 0.5 0.1 0.4 0.3 0.1 0.1 Management 0.8 0.2 0.6 4.5 0.7 0.6 Total JCT forms 84.5 77.9 79.3 76.1 70.0 61.5
Source: RICS Construction Faculty (2007) Contracts in Use.
Table 7.5 Use of standard forms of contract on building contracts
By number By value
Prime contracting agreement 0.1% 9.4%
ACA 2.2% 5.5%
GC/Works/1 6.1% 2.9%
NEC 7.7% 14.0%
ICE 1.2% 2.1%
Other standard forms 0.9% 2.8% Other contracts 2.5% 1.8%
JCT 79.3% 61.5%
• Only 2.5 per cent by number and 1.8 per cent by value have used a non-standard form of contract, down from the figures recorded in the previous two surveys. Within the survey sample, 79 per cent of all contracts by number employed a JCT standard form, an almost identical figure to the last survey, though not quite as dominant as in 1998 or 2001. By value, the proportion of contracts employ- ing one of the JCT family of contracts dropped to 62 per cent, its second lowest figure in the 22 year history of the survey.
The latest suite of JCT forms was introduced in 2005. However, a significant number of contracts employed on projects that started on site during 2007 still used the 1998 editions of the JCT forms. Of the 2005 suite of contracts for which a 1998 edition existed, 76 per cent of contracts used the later 2005 version but 24 per cent still used the 1998 edition. Similarly, 3 out of 15 examples of use of construction management used the 2002 documentation rather than the 2005 Construction Management Agreement, while two out of five projects used the 2003 Major Project Form rather than the 2005 Major Project Construction Contract.
T
Taabbllee 77..66 Developing a contract procurement strategy
• Consultant or contractor
• Price competition or negotiation
• Measurement or reimbursement
• Traditional or alternative procurement