A better way to manage contractors? The world of management contracting

Although the JCT has published a management contract as a part of its suite for many years, it is fair to say that it is not winning any popularity contests!  So, what is the management contract and why is it one of the least used forms of JCT contract?

What is management contracting?

Management contracting works on the basis that the Employer appoints a “Management Contractor” and a team of professional consultants, the “Consultant Team”.  As with the other forms of JCT contract, part of the Consultant Team includes a contract administrator who has responsibility for administering the management contract on the Employer’s behalf.

The Management Contractor is responsible for the overall management of the Project and the site set up and is responsible for directly entering into and administering “Works Contracts” (essentially sub-contracts) for each of the work packages during the construction phase. There are two key stages: (1) the pre-construction stage, whereby the design is developed by the Consultant Team in conjunction with the Management Contractor; and (2) the construction phase, which starts with the Employer issuing a Notice to Proceed to the Management Contractor.

Once the Notice to Proceed has been issued, the Management Contractor has the authority to put the Works Contracts in place as and when required.  The Employer does (quite unusually for JCT) retain the right throughout to terminate at will (albeit if they choose to exercise this right, they will be at risk of paying the Management Contractor’s direct losses). This does, however, mean that the Employer maintains a degree of control over the whole process as the Employer can put a stop to the project at any point, and reflects one of the key benefits of the management contract – its flexibility. The Employer can commence the works on site without all elements having been designed allowing the design to develop over time, while retaining control over it, all the while getting on with the elements of the works that can begin.

The management contract generally includes all of the elements that you would expect from a JCT contract, with the key difference between the management contract and other forms being that the Management Contractor is involved at a very early stage and works closely with the Consultant Team to develop the project and decide on how the works will be split down into the various Works Contracts.  For this reason, it is important that care is taken over the appointment of the Management Contractor, who is usually an experienced contractor.

Why isn’t it used more?

All sounds good so far, so why the reluctance to use it?  Well, from the Management Contractor’s perspective there are some significant risks as to how extensions of time and claims for loss and expense are managed.  In terms of delay, the Management Contractor is potentially required to grant an extension of time to one Works Contractor, due to delays caused by another Works Contractor. This seems sensible, but in situations where the Management Contractor has caused or contributed to any default they will not be entitled to an extension of time.

This means that the Management Contractor could find themselves in a situation where they are obliged to grant an extension of time, without obtaining one themselves.  Given that the Management Contractor is paid by way of a fee (and liable for liquidated damages in the event that the project has not achieved practical completion by the stated completion date), this is unlikely to be satisfactory to many contractors.

Further, in relation to claims made by a Works Contractor for a breach by the Management Contractor, the Management Contractor may, at the Employer’s option, be required to either settle the claim (and pay any settlement figure) or defend it in proceedings.  The Employer is not required to reimburse the Management Contractor for their costs in defending a claim, or any settlement figure in circumstances where the Management Contractor is in breach of contract or has acted negligently. Although again this seems reasonable, the issue for the Management Contractor is that for the Works Contractor to have made a claim against the Management Contractor, it is likely that there has been a breach.  This is clearly an problematic position for the Management Contractor.

The future…

Although the construction management contract remains a good option for the right project, it is fair to say that it is not suitable in many situations.  If it is the right approach for the project, care must be taken with the appointment of the Construction Manager and the Consultant Team, who will need to be suitably experienced to ensure the smooth running of the project (for all concerned).

So although there are definitely benefits, and some contractors are becoming more prepared to work as Management Contractors, don’t expect to suddenly see the contract rivalling the D&B or SBC for popularity among the JCT ranks!

This article originally featured in July 2022’s edition of our Aggregate newsletter: to read the complete edition, click here.