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Sunday, April 7, 2013
PPP and Strategic Alliances
Continuing the series of blogs on various forms of building contracts, today's topic is "Public Private Partnerships" and "Strategic Alliance" contracts.
Public Private Partnerships, also known as PPP's occur where one party owns a parcel of land and desires to have a specific facility constructed for them. The other party develops and maintains the facility over an agreed period of time whilst the first party operates within the facility. The second party is paid an annual fee for the facility. At the end of the term of the contract the facility reverts to the ownership of the first party.
Government are users of this form of contract as they do not need to find the capital to undertake the development or maintenance of the facility, they only need to pay an annual fee and will obtain an asset at the end of the contract term. Of course the value of the development and the end value of the asset being handed back to the first party are calculated by the development party when tendering on the project and are included in the annual fee payments.
Strategic Alliances are also favoured by government when there are projects that need to be delivered in a timely manner.
These types of contracts are, as the name suggests, an alliance between a client and a contractor where both parties come together to deliver a project jointly. The client party has a project that they need delivered for a budget value. The contractor party joins forces with the client party to create a team that will design and deliver the project for the agreed budget.
The parties work together to achieve the outcome. The contractor party is paid all its costs plus a margin or fee. The intention of these forms of contract are to bring together the expertise of the client team, the design team and the contractor team to ensure a timely and cost effective project delivery.
Trust is critical to the success of these forms of contract. Without trust a strategic alliance cannot succeed.
Quite often there is a profit share and a loss sharing provision in these contracts. Where the budget is achieved and a saving made, the contractor may receive half of the saving. Where the budget is exceeded, the contractor may share half of the loss, but most likely only up to the value of their margin or fee. In effect, if there is a cost blowout the contractor may undertake the project for nothing.
This blog concludes the series on the various forms of construction contracts. In upcoming posts I will discuss various property development related issues.
For more information on PPP or Strategic Alliances please visit the LEFTA Website
Public Private Partnerships, also known as PPP's occur where one party owns a parcel of land and desires to have a specific facility constructed for them. The other party develops and maintains the facility over an agreed period of time whilst the first party operates within the facility. The second party is paid an annual fee for the facility. At the end of the term of the contract the facility reverts to the ownership of the first party.
Government are users of this form of contract as they do not need to find the capital to undertake the development or maintenance of the facility, they only need to pay an annual fee and will obtain an asset at the end of the contract term. Of course the value of the development and the end value of the asset being handed back to the first party are calculated by the development party when tendering on the project and are included in the annual fee payments.
Strategic Alliances are also favoured by government when there are projects that need to be delivered in a timely manner.
These types of contracts are, as the name suggests, an alliance between a client and a contractor where both parties come together to deliver a project jointly. The client party has a project that they need delivered for a budget value. The contractor party joins forces with the client party to create a team that will design and deliver the project for the agreed budget.
The parties work together to achieve the outcome. The contractor party is paid all its costs plus a margin or fee. The intention of these forms of contract are to bring together the expertise of the client team, the design team and the contractor team to ensure a timely and cost effective project delivery.
Trust is critical to the success of these forms of contract. Without trust a strategic alliance cannot succeed.
Quite often there is a profit share and a loss sharing provision in these contracts. Where the budget is achieved and a saving made, the contractor may receive half of the saving. Where the budget is exceeded, the contractor may share half of the loss, but most likely only up to the value of their margin or fee. In effect, if there is a cost blowout the contractor may undertake the project for nothing.
This blog concludes the series on the various forms of construction contracts. In upcoming posts I will discuss various property development related issues.
For more information on PPP or Strategic Alliances please visit the LEFTA Website
Friday, January 25, 2013
Project Management Contracts
Continuing the series of blogs on various forms of building contracts, today's topic is "Project Management" contracts.
Project management can mean many different things to many people however it is most likely not to be a "construction contract" in its purest sense.
In effect a project management contract can be very similar to a construction management contract except the Project Manager ("PM") forms an additional layer in the project delivery process. The PM usually manages the entire project from inception to completion; engaging design consultants and contractors at various times as required.
Skills provided by the PM include detailed knowledge of the development process, design, authority approvals and construction. The PM will advise the client regarding the most appropriate form of construction contract to use for the type of project unless the intention is that the PM is to act as the construction manager also.
A client will engage a PM where they do not have the skills and/or time to dedicate to a project.
There are different ways to engage a PM. This could include a percentage fee for service, hourly rates or on a set fee basis.If the PM is also the construction manager then the PM's contract must be constructed to reflect the various scopes of work that the PM is required to do.
Selection of an appropriate PM is critical to the success of a project, particularly for projects with specialised requirements.
For more information on Project Management Contracts, please visit the LEFTA Website.
Project management can mean many different things to many people however it is most likely not to be a "construction contract" in its purest sense.
In effect a project management contract can be very similar to a construction management contract except the Project Manager ("PM") forms an additional layer in the project delivery process. The PM usually manages the entire project from inception to completion; engaging design consultants and contractors at various times as required.
Skills provided by the PM include detailed knowledge of the development process, design, authority approvals and construction. The PM will advise the client regarding the most appropriate form of construction contract to use for the type of project unless the intention is that the PM is to act as the construction manager also.
A client will engage a PM where they do not have the skills and/or time to dedicate to a project.
There are different ways to engage a PM. This could include a percentage fee for service, hourly rates or on a set fee basis.If the PM is also the construction manager then the PM's contract must be constructed to reflect the various scopes of work that the PM is required to do.
Selection of an appropriate PM is critical to the success of a project, particularly for projects with specialised requirements.
For more information on Project Management Contracts, please visit the LEFTA Website.
Thursday, October 11, 2012
Construction Management Contracts - What Are They?
Continuing the series of blogs on various forms of building contracts, today's topic is "Construction Management" contracts.
There are two main forms of Construction Management ("CM") contracts; Agency and Non-Agency. But before we dive into the differences between these, lets take a look at what CM actually is.
CM is where a builder delivers the building by managing a construction budget as opposed to delivering the building for a fixed lump sum (as per a traditional form of contract). Effectively the builder (or more appropriately termed "construction manager") simply manages the delivery of the built form without taking risk and without the opportunity to improve profits.
CM is regularly used throughout the building industry as a means of fast tracking construction delivery times.
Consider the process that a client must undertake for a building to be delivered under a traditional form of contract. First a client must fully design it, then they must tender the design and negotiate a contract, and finally they must administer the building contract to completion.
With CM the client selects a construction manager, negotiates a contract and budget for the proposed works based upon preliminary design documents and then the client and construction manager work together to complete the necessary design and deliver the building for the agreed budget or less where possible.
With CM a client has the opportunity to save cost through reduced design, through packaged trade tendering of building work and reduced holding costs due to fast track delivery methodology.
There are risks for the client if they select the wrong construction manager or fail to manage the design consultants. Further, if trade tenders do not meet expectations and the client is forced to accept the tendered sum to achieve a certain standard, then the client may exceed part of their budget.
There are ways of managing risk. A client can agree a guaranteed maximum price ("GMP") with the construction manager whereby they agree that the maximum the client will pay is limited to a certain value.
Usually this form of price ceiling is matched with a cost saving incentive such as a share of savings if the construction manager can deliver the project for under the agreed budget value. Perhaps the share of savings may be 50%.
A GMP with share of savings works well for both parties as it provides a ceiling for construction costs (which a financier may find more attractive), it provides an opportunity for the construction manager to make a reasonable profit increase, and it provides an incentive for the construction manager to save the client money.
As for which method of CM to use (i.e. Agency or Non-Agency) either is suitable. Agency simply means that the construction manager executes trade contracts on the client's behalf as their "Agent" where the Trade Contractor is engaged by the Client. The Non-Agency method requires the construction manager to engage the trade contractor directly.
Agency method results in risk for the client but not the construction manager whereas Non-Agency places risk on the construction manager.
When time is critical, CM is an excellent possibility for a client; it is less adversarial than a traditional form of contract and provides opportunities for all parties to profit.
My experience in business tells me that when everyone can make a profit there will be a successful outcome for all.
For more information please visit the LEFTA website.
There are two main forms of Construction Management ("CM") contracts; Agency and Non-Agency. But before we dive into the differences between these, lets take a look at what CM actually is.
CM is where a builder delivers the building by managing a construction budget as opposed to delivering the building for a fixed lump sum (as per a traditional form of contract). Effectively the builder (or more appropriately termed "construction manager") simply manages the delivery of the built form without taking risk and without the opportunity to improve profits.
CM is regularly used throughout the building industry as a means of fast tracking construction delivery times.
Consider the process that a client must undertake for a building to be delivered under a traditional form of contract. First a client must fully design it, then they must tender the design and negotiate a contract, and finally they must administer the building contract to completion.
With CM the client selects a construction manager, negotiates a contract and budget for the proposed works based upon preliminary design documents and then the client and construction manager work together to complete the necessary design and deliver the building for the agreed budget or less where possible.
With CM a client has the opportunity to save cost through reduced design, through packaged trade tendering of building work and reduced holding costs due to fast track delivery methodology.
There are risks for the client if they select the wrong construction manager or fail to manage the design consultants. Further, if trade tenders do not meet expectations and the client is forced to accept the tendered sum to achieve a certain standard, then the client may exceed part of their budget.
There are ways of managing risk. A client can agree a guaranteed maximum price ("GMP") with the construction manager whereby they agree that the maximum the client will pay is limited to a certain value.
Usually this form of price ceiling is matched with a cost saving incentive such as a share of savings if the construction manager can deliver the project for under the agreed budget value. Perhaps the share of savings may be 50%.
A GMP with share of savings works well for both parties as it provides a ceiling for construction costs (which a financier may find more attractive), it provides an opportunity for the construction manager to make a reasonable profit increase, and it provides an incentive for the construction manager to save the client money.
As for which method of CM to use (i.e. Agency or Non-Agency) either is suitable. Agency simply means that the construction manager executes trade contracts on the client's behalf as their "Agent" where the Trade Contractor is engaged by the Client. The Non-Agency method requires the construction manager to engage the trade contractor directly.
Agency method results in risk for the client but not the construction manager whereas Non-Agency places risk on the construction manager.
When time is critical, CM is an excellent possibility for a client; it is less adversarial than a traditional form of contract and provides opportunities for all parties to profit.
My experience in business tells me that when everyone can make a profit there will be a successful outcome for all.
For more information please visit the LEFTA website.
Saturday, September 15, 2012
Is A Design And Construct Building Contract Right For You?
My last post discussed the traditional form of building contract; the lump sum or fixed price contract (which is also called a "hard dollar" contract).
This post discusses the "Design and Construct" form of building contract ("D&C").
So what is a D&C? This form of building contract requires the builder/contractor to not only build the project, it also makes them responsible for the design of the building project.
This sounds quite simple but most people see risk in having their builder design their project. I agree to a certain extent however this is where commercial requirements and risk management must be applied.
First you must understand the benefits and risks associated with a D&C. The D&C contract is not for everyone but it is very useful in numerous circumstances.
Why would you consider using a D&C?
Time and cost are two major reasons why you should consider D&C. Let's discuss time first.
To undertake a traditional form of building contract tender, all your project documentation has to be complete (and error, omission and ambiguity free) and you must already have your authority approvals in place. To do all these things takes substantial time and the cost required to fully document a project is substantial.
For your project you must consider the value associated with time. If time is expensive (eg your holding costs are high) you may wish to consider a D&C for the time benefits.
If time is a risk to your project then a D&C may also be a worthwhile option for you to consider.
Cost is usually a substantial consideration for most people. When preparing documents for a project substantial cost can be incurred. Design costs vary between types of projects however these costs are always substantial.
The cost of time must also be considered when creating fully documented projects.
How does a D&C benefit time and cost?
To tender a D&C building contract you only need to have undertaken a preliminary design and created a design brief that nominates your design requirements.
You can make it the builder's obligation to obtain authority approvals too.
Essentially, instead of you having to create a fully documented design, you create preliminary design only and produce a design brief. You may also wish to nominate a similar building to what you wish to achieve as a "benchmark building" that the builder will need to use to benchmark their design from.
This takes you substantially less time and your design costs are minimal.
Once you have appointed a D&C contractor they become responsible for engaging the design consultants for the project. They design whilst they build, which saves time (and is known as "fast tracking") and they do not have to create as much documentation as you would have needed for a traditional contract as there is no requirement to prevent builder variations; if the builder's design has an error, ambiguity or omission then it is at the builder's own risk, not yours.
Last year I was involved in a $25 million building using a D&C which proves that this form of contract can be used for large projects. I have also been involved in smaller $4 million projects. The price versatility of the D&C is substantial.
But what about the risks?
In my view the single largest risk in D&C is getting your design brief wrong. If you do this you have created a substantial problem for yourself. It is essential that you get your design brief right.
The next largest risk is the selection of a suitably experienced D&C contractor to deliver your project.
If you select a builder that doesn't have experience in D&C delivery, who doesn't know how to manage design and design consultants, and how to build whilst designing, then this can end in real issues also. However if you find the right contractor you have the recipe for success.
If your project is complex and has a highly specialised end use then you may also feel that D&C is too high risk.
In circumstances such as this you may be correct however this does not mean that the traditional building contract is the appropriate contract for your project. There are many other forms of contract that you might like to use.
In upcoming blogs I will discuss the Construction Management form of building contract. This is another form of project delivery regularly utilised to deliver projects.
For more information and our contact details please visit the LEFTA Website.
This post discusses the "Design and Construct" form of building contract ("D&C").
So what is a D&C? This form of building contract requires the builder/contractor to not only build the project, it also makes them responsible for the design of the building project.
This sounds quite simple but most people see risk in having their builder design their project. I agree to a certain extent however this is where commercial requirements and risk management must be applied.
First you must understand the benefits and risks associated with a D&C. The D&C contract is not for everyone but it is very useful in numerous circumstances.
Why would you consider using a D&C?
Time and cost are two major reasons why you should consider D&C. Let's discuss time first.
To undertake a traditional form of building contract tender, all your project documentation has to be complete (and error, omission and ambiguity free) and you must already have your authority approvals in place. To do all these things takes substantial time and the cost required to fully document a project is substantial.
For your project you must consider the value associated with time. If time is expensive (eg your holding costs are high) you may wish to consider a D&C for the time benefits.
If time is a risk to your project then a D&C may also be a worthwhile option for you to consider.
Cost is usually a substantial consideration for most people. When preparing documents for a project substantial cost can be incurred. Design costs vary between types of projects however these costs are always substantial.
The cost of time must also be considered when creating fully documented projects.
How does a D&C benefit time and cost?
To tender a D&C building contract you only need to have undertaken a preliminary design and created a design brief that nominates your design requirements.
You can make it the builder's obligation to obtain authority approvals too.
Essentially, instead of you having to create a fully documented design, you create preliminary design only and produce a design brief. You may also wish to nominate a similar building to what you wish to achieve as a "benchmark building" that the builder will need to use to benchmark their design from.
This takes you substantially less time and your design costs are minimal.
Once you have appointed a D&C contractor they become responsible for engaging the design consultants for the project. They design whilst they build, which saves time (and is known as "fast tracking") and they do not have to create as much documentation as you would have needed for a traditional contract as there is no requirement to prevent builder variations; if the builder's design has an error, ambiguity or omission then it is at the builder's own risk, not yours.
Last year I was involved in a $25 million building using a D&C which proves that this form of contract can be used for large projects. I have also been involved in smaller $4 million projects. The price versatility of the D&C is substantial.
But what about the risks?
In my view the single largest risk in D&C is getting your design brief wrong. If you do this you have created a substantial problem for yourself. It is essential that you get your design brief right.
The next largest risk is the selection of a suitably experienced D&C contractor to deliver your project.
If you select a builder that doesn't have experience in D&C delivery, who doesn't know how to manage design and design consultants, and how to build whilst designing, then this can end in real issues also. However if you find the right contractor you have the recipe for success.
If your project is complex and has a highly specialised end use then you may also feel that D&C is too high risk.
In circumstances such as this you may be correct however this does not mean that the traditional building contract is the appropriate contract for your project. There are many other forms of contract that you might like to use.
In upcoming blogs I will discuss the Construction Management form of building contract. This is another form of project delivery regularly utilised to deliver projects.
For more information and our contact details please visit the LEFTA Website.
Sunday, September 2, 2012
Is a Fixed Price Building Contract Right for You?
For most people they only know one form of building contract, the fixed price. This is also known as a lump sum or hard dollar building contract.
But did you know there are many different forms of building contract that you can use?
In my 29 August 2012 blog I shared the different types of building contracts and said that I would elaborate on each type in upcoming blog posts. In this post I will discuss the fixed price building contract that most people use on their home renovations.
The fixed price contract is the traditional method of engaging building contractors; it requires the builder to provide a fixed lump sum price usually in a competitive tendering situation.
The highly competitive nature of a tender is likely to result in a good price result for the owner but what this means is that the builder has a very small profit margin. If the builder then makes a few mistakes as the project progresses and a couple of subcontractor or supplier prices are more than the builder's budget then there is limited scope for the builder to absorb cost blow-outs.
So where does that leave the owner? Assuming the builder does not liquidate, go bankrupt or some other form of arrangement with its creditors, the builder will become very active in seeking additional monies from the owner via variations and delays.
In short, this form of building contract is highly adversarial but gives good certainty of cost. But cost certainty will only come if the documents included in the building contract are good, appropriately describe the scope of works and do not have errors and omissions which would lead to delay and variations claims.
I have seen how a fixed price contract has gone very wrong due to poor documentation, wrong for the owner that is, not the builder.
But if the documents are good then there is limited scope for price change and the owner is able to have cost certainty for their budgets.
For a property owner the secret is to ensure that the documents are complete, do not have errors, ambiguities and omissions, and are properly coordinated between teh various consultant designers.
On the other hand, for the builders the secret is to go through the project documents "with a fine tooth comb" right at the outset to find out where the opportunities lie.
If the building contract has been well prepared the builder will have had appropriate documents to tender from and can only blame themselves if their pricing was wrong.
This is not my preferred form of building contract, but more on that in further upcoming posts.
LEFTA Website
But did you know there are many different forms of building contract that you can use?
In my 29 August 2012 blog I shared the different types of building contracts and said that I would elaborate on each type in upcoming blog posts. In this post I will discuss the fixed price building contract that most people use on their home renovations.
The fixed price contract is the traditional method of engaging building contractors; it requires the builder to provide a fixed lump sum price usually in a competitive tendering situation.
The highly competitive nature of a tender is likely to result in a good price result for the owner but what this means is that the builder has a very small profit margin. If the builder then makes a few mistakes as the project progresses and a couple of subcontractor or supplier prices are more than the builder's budget then there is limited scope for the builder to absorb cost blow-outs.
So where does that leave the owner? Assuming the builder does not liquidate, go bankrupt or some other form of arrangement with its creditors, the builder will become very active in seeking additional monies from the owner via variations and delays.
In short, this form of building contract is highly adversarial but gives good certainty of cost. But cost certainty will only come if the documents included in the building contract are good, appropriately describe the scope of works and do not have errors and omissions which would lead to delay and variations claims.
I have seen how a fixed price contract has gone very wrong due to poor documentation, wrong for the owner that is, not the builder.
But if the documents are good then there is limited scope for price change and the owner is able to have cost certainty for their budgets.
For a property owner the secret is to ensure that the documents are complete, do not have errors, ambiguities and omissions, and are properly coordinated between teh various consultant designers.
On the other hand, for the builders the secret is to go through the project documents "with a fine tooth comb" right at the outset to find out where the opportunities lie.
If the building contract has been well prepared the builder will have had appropriate documents to tender from and can only blame themselves if their pricing was wrong.
This is not my preferred form of building contract, but more on that in further upcoming posts.
LEFTA Website
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