UK: Two Stage Tenders On The Rise

Last Updated: 21 April 2015
Article by Paul Freeman

As many public figures have found out too late it is often the short, seemingly less significant tweets and blogs that often get people into real trouble. And so it can be with construction documents. People often seem to focus their attention on the big documents, such as building contracts and overlook those smaller but frequently more troublesome ones.

Pleasingly, letters of intent have in the last few years started to receive the bad press they so completely deserve and the number of last minute requests for us to 'print off the standard form letter of intent' has diminished as people become more wary of them.

What we have seen an increase of over the last few years, a trend which seems to have accelerated, is the increased use of two-stage tendering. In the absence of hard data, I am going to speculate that this is partly due to the perceived benefits to an employer of early contractor design involvement, such as an earlier start on site and 'an approach to contracting that supports improved team working and planning to deliver value for money' (government wording in respect of HS2), and partly due to increasingly busy and confident contractors in some areas rejecting single stage tender processes.

Deployment of two-stage tendering typically requires use of a 'pre-construction services agreement or "PCSA"'. Although longer and more complex than a letter of intent, and always intended to be a contract, PCSAs do share some practical similarities: bespoke forms have predominated (despite the relatively recent introduction of two standard form JCT PCSAs); and they are often assumed to be 'standard' documents, whereas in reality they often require substantial negotiation and amendment.

The basic rationale

It is probably helpful at this stage to revisit the basic rationale of two-stage tendering, namely to achieve the early engagement of a contractor:

  • As the contractor is typically paid for the services performed during this second stage, and can influence the direction the development the project is taking, there can be a substantive shift in power to the contractor once the second stage has begun. Employers therefore enter into PCSAs to seek to control this second stage. From the contractor's point of view, it wants to get paid for its services and put itself in the best position for securing the eventual contract.
  • Given the aim of arriving at a construction contract of sufficient certainty in time, cost and content to be executed, I find it helps to categorise them either as (a) provisions that further the overall intention of arriving at a sufficiently certain contract for it to be executed; or (b) provisions that deal with the aftermath if agreement cannot be reached.

PCSA services

At its heart a PCSA is an appointment to carry out services, like a consultancy agreement. Therefore, there is usually the typical wording requiring the services to be carried out with reasonable skill and care, and in compliance with laws and third party agreements, and provisions relating to payment and the management of claims for additional services. However, there are a couple of nuances relating to PCSA services worth taking into account:

  • First, the obligations under a consultancy agreement regarding programme, brief and budget take on a particular significance under the PCSA, where the failure to complete the services and provide the second stage tender on time could result in the employer having a contract sum containing too high a percentage of uncertainty at the point where it wants to, or needs to, make a decision whether to proceed with entering into a building contract. Therefore, attempts are usually made to tie the contractor down as firmly as possible to provide a definite end date.
  • Second, there can be some variation as to what the services are. The JCT PCSA does not contain sample services, which is something of a shame as putting together the list of services for a PCSA is an important task and having a published template to work from would be extremely useful. The sorts of things that you would expect to find however are: (1) provisions governing procurement, such as the process by which packages will be tendered and sub-contractors selected, and therefore the contract price built up (often on an open book basis), which is at the heart of a PCSA; (2) provisions relating to project management and progression; and (3) provisions regarding design -- keeping control of the impact of any design development can be key.

Clearly day-to-day financial reward for carrying out the services under a PCSA is a key issue for a contractor and needs to be balanced against the aim of winning the tender. From an employer's point of view, structuring the payments to incentivise progression of the services, or convincing the contractor to accept some or all of the pre-contract costs, can be useful tools to try to obtain a successful second stage outcome. Sometimes however employers provide a further 'carrot and stick' by providing formal gain share mechanisms in the PCSA linked to a target price, although the additional effort in drafting and monitoring this, and agreeing an appropriate target, should be balanced against the potential upside.

Often the proposed main building contract form, and key commercial terms (such as liquidated damages rates), are included as an appendix to the PCSA, sometimes with 'notice to proceed' provisions which purport to make the contractor automatically obliged to enter into the building contract as soon as the price is finalised. Just how realistic such provisions really are from a practical point of view is open to question. However, having the building contract forms agreed, whilst having cost and time implications, certainly makes progression to full contract much quicker and more straightforward for practical purposes.

Even with all the incentives in the world, often matters do not progress to an agreed, priced construction contract. From an employer's point of view, it will want to have the ability to terminate at any time (not just when the price is returned), subject to having only to pay fees for services properly carried out. On the other hand, where a contractor has been shouldering the costs to date, understandably provisions relating to compensation on termination can be highly contentious.

It is not just about fee recovery though. Where fees have been paid for services performed, thought needs to be given to the work carried out. For example:

  • The employer may desire novation of consultants to another contractor (the contractor may not!).
  • In addition to (a), if design is carried out, the employer will want the normal provisions to be included allowing use of and reliance on the designs. The general JCT PCSA is noticeably lacking in this respect.
  • Sometimes two-stage tenders envisage works being carried out on site during the PCSA period. Aside from whether this is desirable in the first place, the status of this work if the PCSA is terminated needs to be dealt with.

Conclusion

The arguments in respect of building contracts have been rehearsed many times, and the widespread acceptance of standard forms as a starting point for their drafting in some ways makes their negotiation easier than PCSAs where the commercial positions can be fluid and undeveloped. Some PCSAs will be easy to finalise -- others (especially where the building contract must be negotiated) less so. Two-stage tender processes have numerous positives and negatives. This is another one to be taken into account.

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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