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Capital projects

Keeping to the critical path - Pre-Construction Services Agreements, by Huw Morgan, VWV

Posted by Hannah Oakman | October 31, 2016 | Finance, legal, HR

Capital Projects are fundamental to improving not only a University’s facilities but also to creating or reinforcing the right environment to complement its ethos and principles.  In many instances, the impact of a new building or a refurbishment can go further and influence the wider community in which it sits.  Some may even argue that Universities have a public duty to deliver inspiring additions to the built environment. However, delivery of the most appropriate building on time and on budget is an art as well as a science. Despite all our modern sophistication any project can be reduced to time, cost and quality. The balance between the essential ingredients is the project manager’s art. 

In recent years the increasing consolidation of the contractor market has led to project managers focussing upon a new weapon in their armoury, the Pre-Construction Services Agreement (PCSA). An understanding of the context in which these agreements operate is important if building owners and their lawyers are to prepare documents that produce best value for the project.       

Design and build

The popularity of 'design and build' as a procurement route keeps on increasing at the expense of the more traditional methods.  It means that the contractor will be responsible for both the design and construction of a new building and is widely applauded for creating savings in both time and cost. 

The contractor can design the building in such a way as to make it cheaper to construct: buildability.  If the contractor carries all the risk that the design will be constructed for the agreed price this can eliminate, or greatly reduce, the opportunity for costly variations. 

The criticism of this method of procurement is that the building owner does not have sufficient control and influence over the design detail.  Partly in response to this criticism and partly to create further savings in time the design and build route is often accompanied by a two-stage tender process. 

Two-stage tendering

Two-stage tendering brings the contractor into the project much earlier than a single-stage tender and allows him further scope to add value to the project by being involved in the cost plans, procurement of specialist sub-contract packages and programming as well as the final designs. (The National Construction Contracts and Law Survey 2013 found that whilst single-stage tendering is still the dominant choice in the market, 70% of respondents to the enquiry favoured it, more than 42% have been involved in a two-stage competitive tender).

In the first stage of the tender, the objective is to select a contractor with whom to negotiate. The competition is typically based upon the programme, method statements, overheads, profit and  detailed pricing of preliminaries. The first stage often concludes with the appointment of the preferred contractor under a Pre-Construction Services Agreement (PCSA). 

PCSA

During the second stage the relationship between the building owner and the contractor is governed by the initial tender submission and the terms of the PCSA. 

The danger of two stage tendering is that the building owner becomes over committed to its preferred contractor and compromises his commercial position.  

In the opinion of many commentators the success of the two stage process will depend upon the quality of the design information and the post contract relationships. This puts the terms of the PCSA firmly in the spotlight. 

As a minimum the purpose of the PCSA is to engage a contractor to assist with the final development of the design and the preparation of tender documents for the specialist sub-contractors to take part in the second stage bid. However, it needs to do more. 

Although the second stage tender takes place in accordance with the cost plans and other criteria established by the initial tender documentation there is nothing to compel the contractor to deliver a competitive second stage bid. This is only achieved by the project manager’s art. He needs to maintain an exit strategy which is sufficient to encourage genuine negotiation: he needs a credible plan B. If properly drafted the PCSA can assist. The PCSA will need to clarify the contractor’s role in respect of design development, management of the design team and the targets to be achieved to complete the second stage. The agreement will need to set out the basis upon which the building owner is entitled to revert to plan B.

Specific duties

The contractor’s principal obligation under the PCSA is to carry out the pre-construction services and these are best summarised into the following categories:

  • Programme preparation
  • Construction advice
  • Cost advice
  • Procurement and specialist design delivery
  • Establishment of management and communication systems.

The detail of the services within these categories will depend upon the particulars of each project.  The advantages that can be derived from having the contractor on board at the pre-construction phase will differ from project to project and a poorly drafted PCSA will simply adopt a template set of services without proper consideration of the peculiarities of an individual project. 

The building owner may also specifically identify which key personnel he expects to be involved in the delivery of the services from the contractor.  He may also go further and request that the contractor’s supply chain be obliged to attend project meetings and in effect, become part of his consultant team.  This helps create familiarity with the project, an understanding of the risks and a sense of ownership which is at the heart of good team working.   

Performance

The contractor is expected to exercise reasonable skill and care in delivery of the pre-construction services in the same way as an architect or engineer would under the terms of their professional appointments.

The building owner will want to maintain the ability to add additional services to the PCSA if issues arise  and the mechanism for pricing these additional services needs to be unambiguous.

There needs to be the ability to sanction the contractor if his performance falls short of what is expected and the 'payment notice' and 'payless notice' mechanism established by the Housing, Grants, Construction and Regeneration Act 1996 will apply to the PCSA as it does any other construction contract. 

Risk and delivery 

The contractor will be expected to carry professional indemnity insurance and public liability insurance to protect against the risk involved in the performance of the services.  The parties may specifically agree the extent to which any information that is exchanged as part of the performance of the services needs to be kept confidential.

The contractor’s ultimate responsibility under the PCSA is the preparation and submission of a second stage tender bid.  For the reasons mentioned above, the timescale and requirements for the second stage tender are best set out specifically in the PCSA.  

Some bespoke PCSAs oblige the contractor to enter into a pre-agreed form of main contract once the second stage tender has been accepted. Whether this is necessary is often determined by the commercial relationship between the parties and the duration of the pre-construction period. It becomes more important if there is no long term connection between the parties, for example, if there is no overarching framework agreement between them.  

The advantages of a properly considered PCSA are that the building owner is able to: keep to his critical path for the delivery of the project; have more visibility of the value engineering exercise; build a strong delivery team before construction begins on site whilst exercising more overall control of the design and the price. After all, it’s only a matter of time, cost and quality, what could be difficult about that!

Huw Morgan is a Partner at leading law firm Veale Wasbrough Vizards and can be contacted on 0117 314 5293 or at hmorgan@vwv.co.uk

Huw is a member of the Technology and Construction Court Solicitors’ Association, a CEDR Accredited Mediator and a Member of the Chartered Institute of Arbitrators. Veale Wasbrough Vizards LLP is a Corporate member of the Association for Project Management (APM).

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