Australia: Construction Management Contracting – how would you like yours?

Critical Path
Last Updated: 8 December 2010

By Matthew Frazer


Welcome to the December 2010 edition of Critical Path.

In this edition we:

  • consider the effect of amending contract documents during contractual negotiations without drawing the amendments to the attention of the other party to the transaction
  • investigate various models for construction management contracting
  • report on recent case law from the Queensland Supreme Court which suggests that a claimant can now deliver two identical payment claims in certain circumstances under the Building and Construction Industry Payments Act 2004, and
  • examine a decision of the New South Wales Court of Appeal which discusses the grounds upon which an adjudicator's decision can be challenged.

We hope you find these articles interesting as well as informative. If you have any questions regarding their content, please contact us.

James Morgan-Payler

Partner and Editor of Critical Path

Construction Management Contracting – how would you like yours?

The construction management contracting model can be an appropriate procurement method for particular projects. What is increasingly noticed in this area is the potential variance and adaptability of the model to the very specific or unusual requirements of certain projects.

The traditional construction management model (such as reflected in AS4916–2002) is well understood. The Principal engages the Construction Manager as a consultant to manage the trade contractors and usually also engages the trade contractors directly after a competitive tendering process. The Principal gains the benefit of greater control and flexibility in the construction process, the ability to commence works on site early and also to modify the trade packages to keep within budget. The Construction Manager provides the necessary management expertise and advice but otherwise is not liable for the time or costs on the project. In essence, not one contractor is responsible for the entire works and the Principal must, with the assistance of the Construction Manager, attempt to have recourse under the trade contracts in respect of any time or cost overruns.

Modifications to the traditional model often include the Construction Manager directly engaging trade contractors after the Principal's approval and bearing full responsibility for the entire works. This transfer of risk to the Construction Manager usually comes at a premium to the contract price and often where the Principal has also provided the Construction Manager with a chance to earn a bonus or fee increase. This fee adjustment may take the form of a pain share and gain share regime that applies to a portion of or the entire Construction Manager's fee ("at risk amount"). The at risk amount is adjusted up or down after assessing the Construction Manager's performance against agreed key performance indicators. The Construction Manager gains the chance to earn more (but also risks the chance of earning less) while the Principal is able to drive effective management behaviour.

Other hybrid models may include the Construction Manager accepting design responsibility and being involved in the pre-construction phase. A hybrid model may also allow the Principal to convert the contract from pure construction management into a lump sum construction contract after the tendering of trade packages. With all these variations, the more the model moves away from traditional pure construction management, the greater the need to engage experienced contractors in the role of Construction Manager.

These modified construction management contracts sometimes come about because organisations need a solution to outsource their construction management functions where the traditional model is not suitable. The incorporation of program management into the hybrid model takes the model further and allows an organisation to outsource its annual program of construction work to one Construction Manager but still have the benefit of competitive trade package tendering. In this model, the Construction Manager is required to manage the delivery of the Principal's program of construction work but also deliver each individual project. Each project is procured under an individual contract between the Principal and Construction Manager with the price, scope and completion requirements having been agreed in accordance with the construction management contract processes.

This program and construction management model may also be incorporated within an umbrella agreement where a suite of standardised terms can be matched to projects in the program of work. The key to this program and construction management model is the Principal providing key inputs such as annual budgets, project lists, preliminary scopes of work, possibly budget expenditure curves and the Principal and Construction Manager having a detailed and robust reporting arrangement. For these reasons, the model is more appropriate for circumstances such as the construction and maintenance of significant services infrastructure or facilities management work, where a 'guarantee of supply' of construction services is crucial to a Principal's business. For this model to be appropriate the program of construction work would need to be significant, whether because of a combination of the number of projects involved, the projects' repetitive nature, engineered nature or otherwise.

Principals should draw from this article the potential adaptability of construction management models to specific or unusual organisational requirements while Contractors should be aware that each construction management arrangement and their role under it may be substantially different.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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This article is part of a series: Click You can now pursue identical payment claims under the Queensland Security of Payment Act for the next article.
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