Procurement, contractual relationships, and design

If you were unlucky enough to miss our webinar on procurement, contractual relationships and design, we have provided a short and sweet summary of everything covered.

Procurement

The first part of our webinar touched on procurement and the different routes that construction projects take, the most well-known being the ‘traditional’ and ‘design and build’ routes, with a third being a combination of these involving a contractor’s design portion.

1. Traditional

The client employs a set of design professionals, typically an architect, engineer, MEP consultant, and a set of non-design professionals.  The design professionals will carry out the design of the whole scheme. The client will appoint the contract administrator separately, which could be the architect or could be a quantity surveyor/project management practice. There will also be a CDM Principal Designer and Building Regulations Principal Designer.

Following the production of the design by the consultants, the client employs the building contractor to only carry out the work under the building contract, meaning they don’t take on any design responsibility. The building contractor will further employ subcontractors to carry out aspects of the work, but again there is no design.  That’s your traditional procurement route: all design kept on client side. It was much more common in the 80s and 90s than it is now.

2. Design and Build

The second option and the most common and is “pure design and build”.   The client, at least theoretically, passes all design responsibility onto the contractor. The contractor will normally take on full design responsibility for anything produced by the client team, meaning that the client has a single party to point the finger at in the event anything goes wrong – the contractor.

A contractor typically ‘novates’ the consultant team, so that if anything has gone wrong with the design, the contractor can in turn point the finger at the relevant consultant. A novation is the transfer of an interest from one party to another. Unlike assignment, novation transfers both the benefit and the burden to another – it is effectively the transfer of a contract between Party A and Party B to a contract between Party A and Party C. As such, the client initially appoints the design professionals who are then novated to the contractor.

This means the final position is that the design professionals are employed by the contractor, and by virtue of the novation all the rights are transferred to the contractor for anything that’s done both pre and post-novation.

3. Contractor’s Design Portion

There is a halfway house between the “pure traditional” and “pure design and build”, where the client keeps control of certain parts of the design and transfers other parts to the contractor.  These design elements are called the contractor’s designed portions (CDPs), which are typically the unseen bits, or where the sub-contract supply chain is better at it – lifts for example. Other examples include piling, precast type products, mechanical and syphonic drainage etc. What the Employer keeps on their side is typically the aesthetic bit, often the bits that can be seen. It’s quite common for an experienced client to go down this route because they can keep some control over the design that they’re particularly bothered about, and let the other elements that needs to be functional be designed by the contractor.

There are other procurement routes including but not limited to construction management, management contracting and framework agreements, but this article would be very long if we tried to deal with them all in this article – perhaps one for another day!

Contractual relationships

We then moved on to the types of contract and the contractual relationships specific to the relevant procurement route. Whichever route is taken, the client will initially appoint professional consultants, both for design elements and non-design elements of the project.  There may also be a funding agreement in place with a party providing finance for the project.  If there is a forward purchaser, there could be a sale agreement in place and if there is a tenant lined up, there will be an agreement for lease in place.  Each of these agreements will include obligations that will need to feed into the building contract. The Contractor will then be appointed and will in turn appoint sub-contractors and possibly sub-consultants.  There may also be novated consultants. As you can imagine there are a whole host of documents flying around that need to be agreed!

Following the agreement of the building contract, appointments, novation agreements, sub-contracts etc, there will then be a need for collateral warranties. This is because you can’t sue on a contract if you’re not a party to it – known as privity of contract. You have to be a party to the contract to be able to sue someone under it. A collateral warranty therefore bridges this gap, and creates a mini contract between the warrantor and the beneficiary – for example an architect may give a collateral warrant to a funder, tenant or purchaser.

A word of warning in relation to collateral warranties: the warranty is only as good as the underlying contract. So, if the warranty says that the warrantor can rely on any limitations in the appointment, sub-contract, main contract, or whatever the relevant underlying document is, you have to carefully review that document to make sure the warranty is of use to them. If the underlying contract caps the warrantor’s liability to a certain level, any subsequent warranty will be subject to that same level.

Design

Finally, we discussed some points to consider when taking on design under a contract. Starting off, it is important to be clear about the standards that apply for each part of construction works:

• The test for workmanship is whether the work has been carried out in a good and workmanlike manner;
• The test for the quality of materials is whether they are fit for purpose; and
• The test for design is whether the design has been carried out using the reasonable skill and care of a designer.

It is vital that the skill and care referred to for design is the reasonable skill and care of a designer, otherwise you may be found to have a fitness for purpose obligation. A 1980 case IBA v EMI and BICC – explains why. Here, it was found that because there was no express reference to the nature of the duty of care for EMI (the contractor) towards IBA (the Employer) the contractor guarantees that the finished product is fit for purpose, and this includes the obligation for design. That is a high hurdle, and was a different standard that EMI had with its design consultant BICC, leaving EMI stuck in the middle.

As well as the above case, there is the more recent case of MT Hojgaard a/s v E.ON Climate Renewables UK [2014]. Here, it was accepted that the design carried out at the time was to the recognised standards, just that the standards were not correct. The contract, however, had conflicting clauses: one saying the contractor was to use the reasonable skill and care of a designer – which it did – and another tucked in the specification saying the foundations would have a design life of 20 years. The court said the latter was a fitness for purpose obligation, and that higher standard applied.

Why does this matter? Put simply, a fitness for purpose obligation is harder to meet than an obligation to carry out works with reasonable skill and care – the Hojgaard case is a good example. Also, if you sign up to a fitness for purpose clause for design it is very likely that you will not be covered for this on your insurance.

Another key point to consider when taking on design responsibility is the form of contract and the amendments made to any such contract. Consider for example who takes the risk for the site boundary, errors, omissions and discrepancies between the documents. Some contracts have huge numbers of documents and inevitably there will be discrepancies between them. If you take on full design responsibility under a “pure design and build”, it will come as no surprise that the contractor will be taking on those risks. The standard form JCT Design & Build places the risk on the employer, however it is the market position for all of these clauses to be amended to reverse this risk on to the contractor. In summary, it is very important to get a good set of lawyers who can explain the risk of signing up to these clauses to you!

Conclusion

There are lots of risks involved in getting your contract set up wrong from the start – which is why being alive to these issues is so important. It will come as no surprise for us to say we can help – so do get in touch if you have any issues.