Over the past five years, organisations contemplating investment into their property assets via construction and engineering projects have been forced to adapt to numerous significant market changes and challenges, including fluctuating economic and geopolitical conditions, legislative and regulatory changes including new building safety law and regulations, and shifting demands as organisations reassess their property needs.
How can you ensure that your construction and engineering projects deliver on your strategic imperatives as an organisation, be that price, programme, quality, or wider drivers from working collaboratively with your supply chain and stakeholders to sustainability or environmental, social and governance (ESG) goals?
This article outlines 10 essential procurement considerations to help you manage risk, ensure compliance and deliver value from your construction and engineering project.
1. Specialist support
Procurement of construction projects requires specialist support to advise on issues that are specific to the construction sector and to the project in question - does the procurement team have the project management, commercial, insurance, technical and legal expertise? This includes suitably qualified contract administrators, designers and quantity surveyors.
Preparing a statement of objectives / project vision outlining specific metrics, culture or environment, objectives, strategy and brief, existing relevant information regarding the site, known risks or constraints, etc may be helpful.
2. Quality
Thought needs to be given to what the organisation wants and needs to be built. Is the project team able to clearly set out its specification for the works? Who is going to design the works? Is the specification appropriate for procuring works that obtain best value and best suit the organisation's objectives and desired outcomes? Does the specification achieve the necessary sustainability and ESG credentials in the light of increasing regulatory obligations, societal expectations and, of course, high energy costs? Is part of the procurement process actually going to be contracting with a supplier to provide such a specification via two-stage contracting, for example?
Early supply chain engagement (ESCI) typically enables a better understanding of the project drivers (including cost, quality, programme, sustainability and other drivers such as carbon/waste reduction) from the outset and can ensure that the procurement and contractual arrangements reflect those goals.
3. Price
Historically most construction projects are carried out for a fixed price and even where this is the case contingencies are needed for risks that could increase the price. You also need to budget for the cost of third party advisers. Do you have sufficient knowledge about what risks an employer would normally need to allow for in its budgeting in the current market? Is the specification clear enough to reduce the need for suppliers to tender based on a myriad of assumptions? You may need to be prepared to include some form of price fluctuation provision or advance payment to reflect the uncertainties around availability of materials and the commercial challenges this can present to the supply chain. Another option maybe to consider guaranteed maximum prices or target costs for some elements.
4. Time
How time sensitive are the works? What impact would a delay in completion of the project have on the organisation? Do you have sufficient knowledge about what contingencies an employer would normally need to allow for in its programme in the current market? Do alternative, contingency accommodation arrangements need to be put in place?
5. Procurement strategy and route
Choosing the right procurement route and structure is fundamental. Making an informed decision about quality, price and time (see above) will enable effective decisions to be made about choice of procurement. Do you want the convenience and comfort of the contractor taking full single-point responsibility for the design and build of the works? Or are you comfortable with different parties being responsible for the design and workmanship (traditional contracting)? Is the organisation looking at some sort of 'package' contracting? Is two-stage contracting needed (see above, '2. Quality')? Do orders need to be placed prior to entering into the works contract? Does the organisation want or need to use specific suppliers?
6. Form of contract
The construction sector most commonly contracts using one of the standard form construction contracts (typically Joints Contracts Tribunal (JCT) or New Engineering Contract (NEC) as a base and it is key to make sure you choose the correct form for your project and the version that reflects current law (see item nine below). The JCT has recently published its 2024 suite of contracts, which we described in our previous insights including JCT publishes Design and Build 2024 and Essential Insights on JCTs Latest 2024 Contract Suites.
Reflecting the NEC suite, JCT 2024 places greater focus on collaborative working, elevating previously optional supplemental provisions relating to collaborative working, good faith, sustainable development and environmental considerations, and negotiation and dispute resolution, into the main provisions.
Choice of contract is driven primarily by the form of procurement selected. Organisations would be wise to consider issues one to five in collaboration with its project team (including its lawyers) before instructing the preparation of contracts for the project. It is also a feature of the construction sector that standard forms are often amended, and this is where legal advisers can support in enabling organisations to decide whether the standard form should be subject to a set of bespoke amendments. This will include considering what security may be required from the contractor: Parent Company Guarantees (PCGs), performance guarantees, advance payment bonds, collateral warranties, vesting certificates etc. This is key in the current market where unfortunately there continues to be a prevalence of supplier insolvencies.
7. Contract documents
Whilst legal advisers can draw-up the legal terms for the project, thought needs to be given to how the commercial and technical elements of the contract will be populated. Most, if not all, of the details needed will have been identified as part of a consideration of issues one to five above, and, in an ideal procurement, finalising technical/commercial aspects with your legal team will act as a check and balance to reveal any gaps/uncertainty as to position on quality/price/time before going out to tender.
8. Insurance
The contract will need to specify the insurance a contractor is to put in place and maintain. Does the project team have the expertise to make decisions about structure, type, level and basis of insurances? Insurance can be a challenging issue when it comes to works to existing structures, particularly if you do not own the building. Insurance arrangements should be discussed with your insurance consultant at tender stage and you should provide your lawyers with details as to what the proposed insurance arrangements are so that the contract terms align. Insurance is often dealt with at the last minute in negotiations but it is a key issue you should engage with as soon as possible, to make sure your interests are properly protected.
9. Statute
Organisations need to be mindful of the Housing Grants, Construction and Regeneration Act 1996 (as amended) (the HGCRA), the Construction (Design and Management) Regulations 2015 (the CDM Regulations) and the Building Safety Act 2022 (the BSA).
The HGCRA, amongst other requirements, mandates that contracts for the carrying out of "construction operations" include specific payment provisions. Failure to comply with these terms could result in onerous payment periods for the payer and an obligation on the payer to pay sums it does not consider to be due, which then may only be recoverable via dispute resolution. How you deal with payment for other supplies within the organisation may not be in line with the requirements of the HGCRA. It is important you understand what the requirements are, how these need to be dealt with in the construction contracts and the potential impact this may have on existing payment processes. It is also key that your organisation has the expertise to manage payments under the contract in line with the HGCRA's requirements (see issue one above), which includes the giving of various notices within set time periods.
The CDM Regulations' provisions concerning health and safety, whilst now well-known in the industry, need to be considered at the conception stage of a construction project, and the relevant dutyholder appointments made.
Much of the focus of the BSA is on "higher-risk
buildings" (HRBs) (i.e. buildings in England that are at least
18 metres in height or have at least seven storeys, and contain at
least two residential units). However, its reach is not just
limited to tall buildings: there are elements of the regime which
aim to improve safety and compliance across the industry and apply
to all buildings. The key change applicable to all new building
works is the new dutyholder and competence regime in Part 2A of the
Building Regulations 2010.
Importantly, this regime applies to all buildings requiring
building control approval in England (subject to minor exclusions).
This new regime:
- creates roles for specified dutyholders during design and construction;
- sets out the duties that they must comply with;
- sets out the competence requirements for individuals and organisations who may hold those roles; and
- identifies an additional 'layer' of duties and roles that the dutyholders will have on any project involving HRB work.
10. Third parties
Lastly, thought should be given to the relevance of third parties who have an interest in the works e.g. funders, landlords.
Early engagement with such parties (and their advisers) is key to ensuring your construction contracts adequately deal with their interests and concerns and that you are not faced with any last minute requests from such parties (or more likely their advisers).
Tackling these 10 issues early on in the procurement process will create solid foundations for any construction project and help to ensure the objectives of those involved in the project are aligned.
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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.
