How To Set Up And Control A Major (or Mega) Design And Construction Contract?

There are many ways of arranging a major or mega design and construction Contract or Contracts, and the issue can be approached from many different starting points; for example, having in mind the end objective of the asset(s) you would like to create, and what purpose it will fulfill, and then tendering to achieve the most economic and lowest possible price from a Main Contractor.

Alternatively, you could start from the point of view that you have a certain budget available, and then ascertain what can be achieved by the most effective deployment of that limited or scarce monetary resource, to create a sort of footprint so as to achieve a critical mass for future expansion.

Client Representative And Project Manager Or Controller

Normally at an early stage a Client or Owner will appoint a representative to manage the project on their behalf, someone to make things happen and control the things that are planned to happen on the project and on the site design and construction.

Such a party usually has some technical as well as budgetary and time control responsibilities, and a track record of similar roles for other clients.

Where To Start On Contract Definition?

In this article we propose to start from the fundamentals and discuss the principles that need to be applied and decided, without going into the technicalities about which suite of contracts should be used, for example FIDIC, JCT, AIA, NEC etc. These more technical aspects are discussed in other articles.

Here is the indicative process starting from a blank page.

The Client Or Owner/Customer Defines A Remit Reflecting Their Idea or Vision

Usually, a Client or Owner has in mind a project or an asset that they would like to create and a vision of what they would like to achieve. It may not be a fully costed feasible project yet, but it is the germ of an idea that may evolve into a future project, or it could evolve into an unfulfilled vision, a white elephant.

Ideally, it will generate revenue and be profitable, so from the outset, this should be part of the brief, how much return on the investment is required to create the asset?

Design And Construction Concept To Reflect The Vision

A second step could be the creation of a conceptual Design And Construction to represent the Client´s vision, and this may form the basis for further discussion and business modeling of what may be the desired outcome, which could be one of a number of possible options for consideration.

Usually, a concept architect is appointed in order to prepare a suitable representation of the facility that the client has in mind. Several iterations may be required before the client accepts and confirms the conceptual design reflects his vision for the project.

An example of just such a project is the Crescent Development Project n Baku, Azerbaijan.

Consideration of Alternative Ways Of Fulfilling The Client´s Remit Or Vision

Usually, a Client or their trusted advisor may jointly consider different ways in which the Client´s Remit or Vision may be realized. At the earliest possible time, there needs to be costings done and a budget established for the project.

The Client needs to confirm the affordability of the project and an agreement needs to be reached about how long is necessary to construct the project design and construction.

A key consideration at this early stage is how to import or attract the most suitable expertise for the progression of the design and construction in the most efficient and exciting manner and thereafter the delivery or execution of that design and construction, bringing it from concept to reality.

Sometimes, in certain countries´ design and construction markets, there is not the level of experience or expertise available in contractors and subcontractors to carry out sophisticated projects using complex modern materials design and construction, simply because they have never been used before.

Contractor Selection & Prequalification Before & Tendering

Usually, expressions of interest are invited from suitably qualified and experienced contractors usually who have operated successfully in that country, but it may be that they have operated internationally so the rules may need to be refined in order to attract suitable candidate design and construction with the financial muscle and track record to be able to perform capably.

The client and the contractor should agree on the project objectives so that both parties are talking about the agreed scope and quality of the works and budget and timescale. If any of these fundamentals are not agreed it may be pointless to go further as the parties are not aligned on their objectives.

Selection criteria are established and contractors’ prequalification submissions are reviewed and analyzed by the Client design and construction and his representatives, so as to select a short list of suitable tenderers for the works.

The basis of tendering must be prepared, so these are usually a preliminary set of drawings and specifications which reasonably reflect the design and construction intention of the Client, even though they are not detailed design and construction drawings.

The scope of work of the contractor may include the preparation of all works drawings, that is for design and construction purposes including all shop and fabrication drawings that may be necessary.

The contract may include an obligation to prepare and submit these working drawings to design and construction for their approval, as well as to obtain the local building control approval as part of the design and construction process.

The Tender Process – A Management Contractor?
A client may decide to involve their chosen Contractor design and construction in the process of managing the contract design and construction, so that he is part of the Client´s team, acting as their Management Contractor.

Or they could start from the point of view that they know like and trust a suitably qualified and experienced joint venture partner and would like them to be involved in managing your project to become a reality.

The competitive tendering process then may apply at one level down from the main contract, ie at subcontractor level, so effectively the client is engaging the Main Contractor as a Management Contractor on their behalf (ie on their team) to procure specialist trades for the execution of the necessary project works.

Sometimes, Clients do not have all the funding available for the completion of a project design and construction, but they would like to make a start on their pet project. This may be because it is a “Vanity Project”, and there is not a clear business case that proves its feasibility, nevertheless it is important to the sponsors in order to make a statement. It may be a politically motivated project.

A Management Contractor can then manage the subcontract procurement on behalf of the Client and their trusted advisors, and can carry out the project in a staged or phased way to suit budget availability and funding.

The Main Contractor is not obliged therefore to price the risk of a competitive fixed-price tender. And this may be good for the Client as well, because the higher the risks involved in the project design and construction, then the higher the bid levels will be if you are asking for a fixed price for any length of time. Can you imagine trying to price fixed price contracts during the last 2-3 years when we have seen the effects of the Covid pandemic actually shutting down some projects, and then rampant inflation during the following period as a result of the russian invasion of Ukraine, and the dramatic effects on energy prices and also basic commodity prices worldwide.

So appointing a Management Contractor may be a good risk mitigation measure.

Additionally, with more complex projects design and construction, especially what may be termed Major or even Mega Projects design and construction, there is a valid concern that they may spiral out of control and end up costing much more than was ever envisaged, and or taking far longer than was ever imagined.

Claims Risks And Delays On Major international Projects.

If you have read our article about claims and delays to international projects, you can see that this is a real concern to any client considering commissioning any sort of major project.

Construction Contracts In A Changing World

There is also the example of the Cable Beach Redevelopment in the Bahamas, where the Armenian developer actually went bankrupt, as a result of additional costs from the Main Contractor (China State Construction Co.), who ended up acquiring the site and all the assets they had been paid to create.

https://www.globalconstructionreview.com/baha-mar-developer-launches-225bn-lawsuit-against/

You definitely do not want to end up with this sort of outcome for your project, so you need to carefully set up your project for success and to maintain control at all times.

Preliminary Agreement Or Memorandum Of Understanding

In some cases, clients and contractors may enter into what can be called a Preliminary Agreement Or Memorandum Of Understanding before entering into a formal contract to execute the whole of the scope of works.

This is so that the parties may explore what may be possible in terms of methodology and how the parties can work together, so it is a precursor to a formal contract to execute a particular preliminary scope of work.

Such an arrangement may follow a period of contractor prequalification, and may even follow a tender process.

The Preliminary Agreement or Memorandum of Understanding usually sets out the terms and conditions of the preliminary scope of works, and what may be a clarification of the future main contract or agreement.

For example, the Preliminary Agreement or Memorandum of Understanding may include an objective of clarifying the scope of works of the main contract in more detail, because often major complex projects can have a lot of uncertainty that arises because of their lack of clarity on scope of works. Because of the lack clarity of the scope of works, then the budget and timescale may also be uncertain. Preliminary contracts are often used for site exploration and to uncover further topographical and geotechnical information, thus reducing uncertainty and risk.

The author has been party to such a Memorandum Of Understanding in connection with the Crescent Development Project in Baku, Azerbaijan. In that particular example, there was a tender process that involved 3 major international contractors, who had each participated in bids for 3 major parts of a massive mixed-use development near the port of Baku.

In that particular instance, the client decided not to proceed with the contractor with whom he undertook a preliminary contract, instead, he chose a completely different contractor with whom he had been negotiating in the background, whilst evaluating the performance of the contractor he had under the preliminary contract (and clearly found unsatisfactory).

The Client And The Contractor Should Agree On The Project Objectives, Schedule, And Budget

It is always desirable to reach an indicative agreement about what the objectives of the project are as a starting point, even though the schedule and the budget may be a second step so that the remit is clear and understood.

Fundamentally there needs to be a discussion and agreement about what it is that a Client or future building owner actually requires as the end product, and the contractor needs to be competent and capable to deliver that output or result.

This could be something small such as an extension to an existing building, or it could be something extremely large such as creating a City for a particular purpose.

The Client must have confidence that the contractors design and construction he is talking to have the experience and capability to deliver such a project, and their track record often forms the basis of the reason they are prequalified.

Sometimes with existing buildings, there may be operational processes that must not be interrupted, and therefore the Management Contractor is required to be cognizant of these, and ensure there is no disruption whatsoever. The costs of process interruption may be enormous, and such restrictions can greatly increase the costs associated with development.

Railway projects are examples of projects where upgrades usually have to be carried out outside normal operational hours, at night, on weekends and during public holiday periods when operations are not run on the railway.

The contractor will provide a proposal that includes a description of the work, the design methodology that he proposes, the materials proposed to be used, the time schedule, and the payment terms.

The client will sign to accept the contractor’s proposed terms and conditions or modify the contract where he deems appropriate and return the agreed contract to the contractor

The contractor will order materials and begin work once the signed contract or a suitably worded letter of intent is received.

The client should inspect the work regularly to ensure that it meets their expectations, rather than wait until the end of the project before the inspection.

The Client usually engages their own representatives to oversee and supervise and inspect the works, although this is not essential.

Upon completion of the project, there should be a handover of the completed assets and an inspection to ensure satisfactory quality and operational functionality and both parties should sign off on the final payment.

It is normal for there to be some retention held by the Client which is released after the satisfactory performance for a year or other agreed period of guarantee or warranty.

How To Maintain Control Over The Project?

Often with major projects and large amounts of expenditure in short periods of time, there is the opportunity for lucrative money-making deals to be set up. What we mean by this is that with temporary works, particularly, there can be unmeasured or unregulated works where it is difficult to establish what is the real or justifiable cost. One example of this would be scaffolding contracts or temporary work platforms where it is difficult to define exactly what is required, how to measure it and how to ensure. Similarly, how many prints of drawings are needed for a massive project, Can anyone actually foresee this figure, so control of the costs is vital. Or site services such as canteen costs and temporary buildings all present an opportunity for manipulation of the final costs.

The Contract Form And Different Types Of Contract

As indicated above, the type of contract could be a secondary consideration. Nevertheless, at some stage the type and form of contract need to be discussed since it is of material consideration to understand the terms and conditions of the agreement, and the contractor´s remuneration would reflect the terms and conditions of the contract design and construction.

If the scope of work includes design and construction then a suitable form of contract needs to be chosen to reflect the obligations of both parties, ie design and construction and build or a Turnkey package or design and construction only.

Agreement needs to be reached about how to establish the form and type of contract sum, what laws should apply for administration of the contract, what should happen in the event of disputes or disagreements. How to instruct and evaluate variations to the contract, the payment terms and conditions, and collateral warranties. All of the things that you expect to find in a normal suite of contracts such as the FIDIC or NEC suites of contracts.

Also there needs to be agreement about what happens in the event of nonpayment and the contractor’s entitlement to interest payments on overdue payments.

Incentives for the contractor to save money and share savings are a good way to incentivise the contractor and also bonuses for achivement of milestones may be approproiate and hel to ensure the project keeps momentum.

Ideally what you are looking for is a collaborative contractual arrangement, rather than the traditional FIDIC which is quite an adversarial contractual arrangement, although it is well tried and tested and has much case law from previous projects internationally.

Supervision And Acceptance

The rights of the client to supervise the works and what they can and cannot do is important. Who has the right to stop the work and under what circumstances? What rights does the client have to reject or condemn works that have been carried out by the contractor unsatisfactorily?

Advice About Major Project Setup

If you are considering setting up a major project then call Alan from Alpus group on +447539 141257 or +443332241257 or you can schedule a call with Alan on https://calendly.com/alanje or drop an email to alan@alpusgroup.com. We may be able to help you save time and money on your project setup using our experience of setting up many UK and International projects.