contract strategy for construction proje
DESCRIPTION
contractTRANSCRIPT
CONTRACT STRATEGY FOR CONSTRUCTION
PROJECTS
A dissertation submitted to The University of Manchester for
the degree of
MSc Construction Project Management
In the Faculty of Engineering and Physical Sciences
2012
UNMESH DHANUSHKODI
SCHOOL OF MECHANICAL, AEROSPACE AND CIVIL
ENGINEERING
(MACE)
2
TABLE OF CONTENT
TABLE OF CONTENT ...................................................................................................................... 2
LIST OF FIGURES ............................................................................................................................ 5
LIST OF TABLES .............................................................................................................................. 6
ABSTRACT ...................................................................................................................................... 7
DECLARATION ............................................................................................................................... 8
INTELLECTUAL PROPERTY STATEMENT......................................................................................... 9
ACKNOWLEDGEMENTS ............................................................................................................... 10
1. INTRODUCTION ....................................................................................................................... 11
1.1OVERVIEW .......................................................................................................................... 11
1.2 AIM & OBJECTIVES ............................................................................................................ 12
1.3 SCOPE AND LIMITATIONS ................................................................................................. 12
1.4 DEFINITIONS ...................................................................................................................... 13
1.5 GUIDE TO CONTENTS ........................................................................................................ 14
2. RESEARCH METHODOLOGIES.................................................................................................. 16
2.1 INTRODUCTION ................................................................................................................. 16
2.2 KEY WORDS ....................................................................................................................... 16
2.3 ONLINE SEARCH PROCEDURE ........................................................................................... 16
2.4 RESEARCH FOR CASE STUDY ............................................................................................. 18
2.5 SUMMARY ......................................................................................................................... 18
3. LITERATURE REVIEW ............................................................................................................... 19
3.1 INTRODUCTION ................................................................................................................. 19
3.2 DEFINITONS OF CONTRACT STRATEGY ............................................................................. 19
3.3 IMPORTANCE OF CONTRACT STRATEGY ........................................................................... 20
3.4 ROLE OF THE CLIENT ......................................................................................................... 26
3.5 CONTRACT STRATEGY AND PROJECT MANAGEMENT ...................................................... 28
3.6 CONTRACT STRATEGY AND RISK MANAGEMENT ............................................................. 30
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3.7 SUMMARY ......................................................................................................................... 33
4. BACK GROUND TO CONTRACT STRATEGY: EXISTING PRACTICE ............................................. 34
4.1 INTRODUCTION ................................................................................................................. 34
4.2 PROCUREMENT ................................................................................................................. 34
4.3 PROCUREMENT SELECTION CRITERIA ............................................................................... 34
4.4 TYPES OF PROCUREMENT METHODS ............................................................................... 35
4.6 SUMMARY ......................................................................................................................... 43
5. REVIEWS OF CONDITIONS OF CONTRACT ............................................................................... 44
5.1 INTRODUCTION ................................................................................................................. 44
5.2 STANDARD FORMS OF CONTRACT .................................................................................... 44
5.3 TRADITIONAL CONTRACT .................................................................................................. 45
5.4 NEED FOR ALTERNATIVE CONTRACTING APPROACHES ................................................... 46
5.4.1 Reducing Construction Time ...................................................................................... 46
5.4.2 Reducing Construction Cost ....................................................................................... 46
5.4.3 Applying Improved Technology and Techniques ....................................................... 47
5.4.4 Deploying Contractor Innovation ............................................................................... 47
5.4.5 Reducing Impacts on the Public ................................................................................. 47
5.5 DIFFERENT FORMS OF CONTRACT .................................................................................... 47
5.5.1 FIDIC ........................................................................................................................... 47
5.5.2 GENERAL CONDITIONS ............................................................................................... 51
5.5.2 JCT .............................................................................................................................. 54
5.5.3NEC .............................................................................................................................. 56
5.6 SUMMARY ......................................................................................................................... 62
6. CASE STUDIES .......................................................................................................................... 63
6.1 INTRODUCTION ................................................................................................................. 63
6.2 CASE STUDY – 1: Gateshead Millennium Bridge—an eye-opener for engineering .......... 63
6.3 CASE STUDY – 2: Hungerford Bridge ................................................................................. 66
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6.4 CASE STUDY – 3: Delivering of London Olympic Park 2012 .............................................. 69
6.5 CASE STUDY - 4: The Montreal Olympic Complex ............................................................ 74
6.6 CASE STUDY – 5: Construction of an Industrial Building .................................................. 77
6.6.1 EXERCISE .................................................................................................................... 77
6.6.2 Changes in contract price using Traditional method ................................................. 80
6.6.3 General Lessons ......................................................................................................... 81
6.6.4 Evaluation of BOQ with the separation of method-related charges ......................... 81
6.6.5 Evaluation using NEC forms of contract..................................................................... 82
6.7 COMPARISON OF TRADITIONAL CONTRACTS WITH NEC ................................................. 83
6.8 SUMMARY ......................................................................................................................... 85
7. GENERAL DISCUSSIONS ........................................................................................................... 86
7.1 INTRODUCTION ................................................................................................................. 86
7.2 LESSONS LEARNT ............................................................................................................... 86
7.3 RECOMMENDATIONS FOR THE MANAGEMENT OF FUTURE PROJECTS ........................... 90
7.3.1 High risk factors involved in future complex projects ............................................... 91
7.4 SUMMARY ......................................................................................................................... 91
8. CONCLUSIONS ......................................................................................................................... 92
REFERENCE .................................................................................................................................. 95
Final word count: 2020
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LIST OF FIGURES
Figure 1: Organisational choices for project and construction management
Figure 2: Contractual procedure involved in Traditional Procurement Method
Figure 3: Contractual procedure involved in Design and Built Procurement Method
Figure 4: Contractual procedure involved in Management Contracting
Procurement Method
Figure 5: Nature of various Payment Terms
Figure 6: Flow chart for mechanism to be follwed while a Compensation Event
Figure 7: Gateshead Millennium Bridge
Figure 8: Crane used for Gateshead Millennium Bridge
Figure 9: Before the construction of Hungerford Bridge
Figure 10: The new Hungerford Bridge
Figure 11: Graphical Representation of key factors involved in Management of
London Olympic Park
Figure 12: Pie chart representing the distribution of Management Authority
involved in London Olympic Park
Figure 13: A complete view of London Olympic Park 2012
Figure 14: A complete view of The Montreal Olympic Complex 1976
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LIST OF TABLES
Table 1: List of data source used for search strategy
Table 2: Main features of the FIDIC “Red”, “Yellow” and “Silver” books
Table 3: Various NEC options along with their Incentives, Financial and other Risks
Table 4: Various NEC options used in London Olympic Park along with their Usage
and Rationale
Table 5: A Comparison of physical Condition of clauses in Traditional and NEC
form of Contract
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ABSTRACT
There are many numbers of projects taking place around the world and contracts
are signed for each project comprising of major firms in action. The client parties
shall quote their title objective in the contract and expect the contractor to abide
by their agreement for mutual benefits. This shows the importance of contract
strategy. This research is aimed at exploring the different types of contract
strategy in construction industry to determine their time of application. A
comparison of Traditional method of contracting with the modern form of
contracting will be executed as a part of research.
The research will be carried out with the help of several journal articles and books
by major contract and project management authors. The author’s intention is to
first enlighten the importance of contract strategy to the readers by reviewing
different authors view on role of various project participants and project
management in contracts. The second part of this research explores the different
types of contracts and case studies are conducted based on them which reflect the
different trends of contract options considered over a period of time. The later
parts of the research consist of a comparison between the Traditional form and
NEC form of contracts with the concept derived from project records.
It is concluded the NEC contracts prove to be more efficient when it comes to
complex and high risk projects and client’s role plays a major part in the project
success. It is considered that the findings will be of interest to project managers for
larger and complex engineering and construction projects in any country.
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DECLARATION
No portion of the work referred to in the dissertation has been submitted in
support of an application for another degree or qualification of this or any other
university or other institute of learning.
9
INTELLECTUAL PROPERTY STATEMENT
i. The author of this dissertation (including any appendices and/or schedules to
this dissertation) owns certain copyright or related rights in it (the “Copyright”)
and s/he has given The University of Manchester certain rights to use such
Copyright, including for administrative purposes.
ii. Copies of this dissertation, either in full or in extracts and whether in hard or
electronic copy, may be made only in accordance with the Copyright, Designs and
Patents Act 1988 (as amended) and regulations issued under it or, where
appropriate, in accordance with licensing agreements which the University has
entered into. This page must form part of any such copies made.
iii. The ownership of certain Copyright, patents, designs, trademarks and other
intellectual property (the “Intellectual Property”) and any reproductions of
copyright works in the dissertation, for example graphs
and tables (“Reproductions”), which may be described in this dissertation, may not
be owned by the author and may be owned by third parties. Such Intellectual
Property and Reproductions cannot and must not be made available for use
without the prior written permission of the owner(s) of the relevant Intellectual
Property and/or Reproductions.
iv. Further information on the conditions under which disclosure, publication and
commercialisation of this dissertation, the Copyright and any Intellectual Property
and/or Reproductions described in it may take place is available in the University
IP Policy (see http://documents.manchester.ac.uk/display.aspx?DocID=487), in
any relevant Dissertation restriction declarations deposited in the University
Library, The University Library’s regulations (see
http://www.manchester.ac.uk/library/aboutus/regulations) and in The
University’s Guidance for the Presentation of Dissertations.
10
ACKNOWLEDGEMENTS
I consider my obligation to acknowledge and express my gratitude to my
supervisor Mr. Peter Thompson for his guidance, assistance and invaluable
support throughout the dissertation.
I would like to thank the University of Manchester for providing me this
opportunity for submitting this research by providing me essential resources.
I would also like to thank my family and all my friends who were helpful in
completing this dissertation by motivating me and supporting me whenever I
needed them.
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1. INTRODUCTION
1.1 OVERVIEW
The recent development around us shows us that the world is fast growing. For
these developments to take place it requires more than just one field in operation.
For instance, in a construction process there are so many groups of entrepreneurs
involved like suppliers, buyers and builders. The relationships among these parties
are maintained by forming contract. A contract is a legal agreement made between
two or more parties for a delivery of certain services in return for money or any
other value. In past, promises were made in place of contract where in several
disputes arose; due to which the legal entities are made in modern times. The
study taken into consideration here belongs to the construction industry sector
however there may also be certain sections relating to other industrial sectors.
This shall be due to the fact that the latest trend in carrying out any project entails
integration of various engineering sectors.
In a civil engineering construction contracts the Contractor obligates to carry out
works of construction and other ancillary obligations. Majority of the civil
engineering works are performed under the contract which requires the
Contractor to finish the work and the Client to pay for it. The main functions of a
contract are:
1) To specify the work to be done,
2) The amount to be paid,
3) To assign responsibility to the concerned parties to finish the work and
4) Decide who takes charge for the unexpected events if they occur.
Based on these, there are different types of contracts used in the construction
industry; this research is focussed to explore them.
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1.2 AIM & OBJECTIVES
AIM
The aim of the research would be to investigate different types of contract strategy
in construction industry and factors that are considered for the use of appropriate
ones for the given project situations.
OBJECTIVES
To examine the concept of contract strategy.
To investigate the different contract strategies used in construction industries.
To interrogate the role of contract strategy in project management.
To examine the implications of contractual variations in construction
industries.
To compare and evaluate changes in a project by applying the Traditional
contract strategy with the new engineering contract systems.
To look into the merits and demerits of various contract procedures for the
given situation.
1.3 SCOPE AND LIMITATIONS
A contract is an agreement made between two or more parties with an intention of
executing a work such that the parties involved get agreed benefits. A proper
contract makes a good business sense and provides motivation to encourage high-
quality Contractor performance. In this research the author helps to develop and
implement an effective procurement strategy for a given situation. He proposes to
analyse the best practise process for the management of contracts and the supply
chain and its management techniques to achieve maximum value at minimum cost.
The comparing of the New Engineering Contract with the Traditional contracts are
focussed to help choosing the best type of contract and compensation terms which
results in both the Contractor and the Client satisfaction. The study will also be
examining the various risk management techniques involved in procurement or
contracting strategies.
This research is aimed at personnel at all levels who are responsible and involved
in the procurement process. This refers mainly to the Organisations or the Clients
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who are on the verge of pursuing an engineering project and Contractors intending
to catch the Employer’s attention. The study will also be helpful to other parties
such as, project management representatives (employed by the Client) for signing
lucrative deals by examining the results.
The civil engineering contracts existing within a procurement and legal
environment may affect them in their interpretation and operation. The study may
not necessarily be effective to all the problems in contracting world. The research
work for this study is limited to a set of peer reviewed journal articles and
interpretation and conclusion will revolve around the paper works only. Due to the
time constraints no site works are done and no construction professionals are to
be approached.
1.4 DEFINITIONS
Project
A project is an investment of resources to produce goods and services. A project
can be any new structure, plant, process, system or software, large or small, or
replacement, refurbishing, renewal or removal of an existing one. It is a one-off
investment.
Programme
A programme of projects means a set of related projects. A project programme
means a list of activities for a project showing the dates for starting and finishing
them. It is also called a Schedule.
Project Management
Project management is the planning, organisation, monitoring, and control of all
aspects of a project and the motivation of all involved to achieve project objectives
safely and within a defined time, cost and performance. (Association of Project
Managers, 1995)
Project Manager
The (NEC, 2005) states “the Project Manager is appointed by the Employer, either
from his own staff or from outside. His role within the ECC is to manage the
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contract for the Employer with the intention of achieving the Employer’s
objectives for the completed project”.
The Client and Contractor
The Client is the natural or legal person/individual who carries out a construction
project for him or another person/organisation that took the initiative of the
construction.
The Contractor is the one responsible for day-to-day oversight of
a construction site, management of trades and vendors, and communication of
information to involved parties throughout the course of a construction project.
Contract Strategy
Contract terms should be designed to motivate all parties to try to achieve the
objectives of the project and to provide a basis for project management.
Cost and Price
Cost is “the cost directly attributable to completion of an element of work,
including direct overheads, for example – supervision” (Smith, 1995).
Smith (1995) defines Price as “the charge for completing an element of work; it is
the cost plus allowances for general overheads, insurances, taxes, finance (i.e.
interest charges) and profit”.
Conditions of contract
The conditions of contract are defined as “sets of terms which state the general
responsibilities, risks and liabilities of the parties to the contract and establish
procedures between them, including terms of payment” (Smith, 1995). The
structure of each forms of contracts along with their applications are discussed.
1.5 GUIDE TO CONTENTS
This research further includes seven chapters and each chapter is briefly described
below.
Chapter 2 reveals the methods, procedures and processes that were used to
accomplish the aims and objectives of this research. It showcases the methodology
for the selection of resources and the reason behind the author’s choice. The data
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collection methods applied by the author for selection of the resources are
mentioned.
Chapter 3 reviews the importance of contract strategy into the construction
industry. It explains the need for introducing the project management into the
contract strategies. The roles played by the Client and Project Manager are
depicted and their impacts are analysed.
Chapter 4 provides an outline of the various procurement strategies used in the
construction industry. It offers background information of the Client’s choice of
procurement for various situations and the terms of payment involved in the
contract.
Chapter 5 describes the different forms of contracts employed in general industrial
purposes. It explains about the standard conditions of contract and their
applications towards the construction industry. The forms of contracts such as
Traditional, FIDIC, JCT and NEC are explained in detail in this chapter.
Chapter 6 analyses the different projects which took place in recent times for
drawing out a comparison between the forms of contracts. The main differences
between the Traditional form of contracts and NEC form of contracts are compared
and contrasted stating the most effective one of them for the future use.
Chapter 7 focuses on the author’s comments about this entire research. It
comprises of two parts the first one being the findings throughout this dissertation
emphasising the trends being followed by the Clients/Contractors along with their
scope and limitations. The second part consists of the author’s recommendations
for the future use and applicability of project management in construction
industry.
Chapter 8 concludes the research by listing the objectives met by the author and
other key findings achieved en route to meeting the objectives.
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2. RESEARCH METHODOLOGIES
2.1 INTRODUCTION
This chapter deals with the selection criteria for the various articles present in this
dissertation. This section describes various procedures followed and the selection
criteria of the author in choosing the sources. The different key words used along
with their application in online search engines are listed in this chapter.
The search was conducted to extract the study materials used for the topic
Contract Strategy for Construction Projects in the course Management of Projects.
There are several journal articles selected for the purpose of conducting this
research. The author's interest in the field of study played a major role in the
selection. The search strategies applied to find the relevant articles are given
below.
2.2 KEY WORDS
The search was initiated after consulting with the dissertation supervisor. The
supervisor assisted in outlining the key concepts for the topic. Further with the
help of the topic brief manual, the key words for the study were drawn out. The
following are the Key-Words around which the search was based.
Procurement strategies used in construction industries
Evaluation and management of contacts
Conditions of contract
Planning and scheduling in project management
Contracting and management techniques used in construction projects.
Forms of contract used in Construction Industry
Comparison of Traditional Contract with NEC
Role of Client and Project Manager in Contract strategies
2.3 ONLINE SEARCH PROCEDURE
With these Key-words as the basis of reference, the search was conducted in
various online search engines. The journal articles and thesis present in the
university library were also explored for discovering any related articles. The
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following tools were useful in conducting the search and detecting the relevant
sources for the study.
Search Engines Journal Names
University of Manchester Library
Catalogue
Google Scholar
ScienceDirect
1
Internet Public Library
Virtual Learning Resource Centre
ERIC (Education Resources Information
Centre)
Directory of Open Access Journals
Google Scholar
Google Books
Peer Reviewed Open Access Journals
Open Access Journals Search Engine
Open Science Directory
Digital Librarian: Magazines and
Journals
Open Thesis
Construction Innovation
Construction Management & Economics
International Journal of Construction
Education and Research
Journal of Civil Engineering and
Construction Technology
Journal of Construction Engineering and
Management
Journal of Construction in Developing
Countries (JCDC)
Journal of Performance of Constructed
Facilities
New Civil Engineer International
Civil Engineering Innovation
Civil Engineering Practice
Construction Management & Economics
Engineering Construction and
Architectural Management
ICE Proceedings
ICE Proceedings: Engineering Divisions
ICE Selected Engineering Papers
International Journal on Recent Trends in
Engineering & Technology
Journal of the ICE
New Civil Engineer (NCE)
Proceedings of ICE - Civil Engineering
Table 1: List of data source used for search strategy
By accessing the above tools several papers were found in relation to the key-
words search applied. However the majority of sources selected were books
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written by the project management theorists. The selected books and other articles
were produced to the supervisor and with his acceptance and guidance the
research was moved forward.
2.4 RESEARCH FOR CASE STUDY
There are five projects selected for the case study and they are chosen for
their magnum opus value of construction. The uniqueness of the project structures
also makes a stand out point in the selection of the respective source articles.
Although the projects taken into consideration belong to the construction sector,
there may also be certain sections relating to other industrial sectors. This is done
due to the fact that the latest trend in carrying out any project entails integration of
various engineering sectors. The case studies reflect the change in trend of the
contract strategies in a considerable period of time. Great efforts were made to
select the projects and acquire their sources. The selected Journals not only
emphasis about the contract strategies applied but they also consider several
project management aspects involved in the Project Life Cycle of constructing a
mega structure. All the projects reviewed in the articles are of massive value and
considered as most challenging projects in the world.
2.5 SUMMARY
The selection of resources used for carrying out this research was depicted in this
section. The list of different journal names and the methods applied to find the
related articles were explained. Finally the work was started with the aim of
learning important lessons in the field of project management by reviewing the
articles. The usage of sources acquired can be seen in the upcoming chapters.
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3. LITERATURE REVIEW
3.1 INTRODUCTION
The importance of contract strategies will be reviewed in this chapter. The author
discusses about the contract strategy and their effective application in
construction field with the help of different author’s comments. This literature
review highlights the role Project Management can play in execution of contracts
3.2 DEFINITONS OF CONTRACT STRATEGY
A contract is a key component of a procurement system and it is an essential
element required between two parties collaborating for a work. A contract
impresses upon the parties the solemnity of the occasion. It requires the parties to
seriously consider the effects of performance and non-performance upon
themselves. Contract as defined by Veld & Peeters (1989) is “an agreement
between two parties, whereby one party commits itself to deliver goods, software
or services to a second party within a certain delivery time and for an agreed
price”. He defines ‘The Client’ as “The party ordering goods” and ‘Contractor’ as
“The party delivering goods”. Section 104(1) of the HOUSING GRANTS
CONSTRUCTION AND REGENERATION ACT 1996 PART II (2010) states that a
‘construction contract’ includes:
• The carrying out of construction operations
• Arranging for the carrying out of construction operations by others, whether
under a subcontract to him or otherwise
• providing his own labour, or the labour of others, for carrying out construction
operations.
The contracts used by the Client can be of different types and different strategies.
“Contract strategy is the main components of the process used to determine how
the project will be procured” (Wearne, 1995). He says that different contract
strategy must be applied for every project. The author feels that this definition is
vague in nature and does not fully outcast the nature of the contract strategy. For
enforcing a better strategy Cooke & Williams (2004) inferred that one must fully
understand what the contract strategy is, for no one can effectively plan and
control a construction project without fully understanding the cultures and
20
methodologies of the industry carrying out the work. There is a lot clearer
statement when compared to the above one stated by Perry (1985), who goes by
saying that: “The organisational and contractual policies which are chosen for the
execution of a specific project”. Though it can be considered as the better one when
compared with its predecessor the author still feels awkward to move forward
with the available concepts. Both the definitions do not adequately explain the
features of the contract strategies. However there is a definition provided by
Procurement Guide: Procurement and contract strategies (2003) in Procurement
and contract strategies achieving excellence in construction procurement guide.
The definition states that “The contract strategy determines the level of integration
of design, construction and on-going maintenance for a given project and should
support the main project objectives in terms of risk allocation, delivery, and
incentivisation and so on”. The author feels this is by far the best definition
available about the contract strategy. This version of the definition proves to be
more descriptive, the organisation structure provided in the book explains well
about the strategy adopted and its significance with the level of integration of
design and construction for a given project. Accessing a good definition for a
contract strategy is necessary since it would help in developing and implementing
a highly effective procurement strategy and plan for an organisation which would
reduce overall cost of purchasing along with a better supply chain management.
3.3 IMPORTANCE OF CONTRACT STRATEGY
Selecting an appropriate contract strategy is as much important as selecting other
major characteristics of project. A contract strategy is important as it impacts in
the progress of the project through a right direction, when a good strategy is
applied it improves the supply management in order to deliver maximum value at
minimum cost, and how to develop and implement a best-practice process for the
management of contracts. Bower (2003) has stated his view on the importance of
contract strategy as “Contract strategy has a major impact on the timescale and
ultimate cost of the project”. He further emphasizes the negative effects on the
project outcomes over an inappropriate selection of a contract strategy for a
project. Bower (2003) says that when a wrong contract strategy is selected it may
21
cause over budget of project and delay in completion time. Perry (1985) in his
study outlines the key decisions for contract strategy:
a) The project characteristics
b) Organisational structure for design and construction
c) Types of contracts
d) Tendering process including conditions of contract, contract selection and
tender analysis.
These are key decisions the Client must consider while selecting a contract
strategy for carrying out a project, the above points highlight the areas which build
the contract strategy and are regarded as a subsystem of a contract strategy. Perry
(1985) has also given his views on the nature of an effective contract strategy. He
quotes “Optimal contract strategy will be one which displays a consistent
integration of the selection within each of these strategic areas”. However he also
reacts to his own quotes that the optimal strategy will not be truly known until the
project is fully finished. And the best Contractor strategy need not necessarily be
the most feasible one.
The author suggests that the Client must thoroughly enquire about the various
choices available before zeroing on a single contract strategy. The contract strategy
chosen must be able to fulfil the primary objectives of the project. The Client sets
the primary objectives of a project along with Contractor and other parties. In
accordance to the Client’s dilemma of setting the objectives there are different
choices available, as Bower (2003) traces “Due to the diversity of both
construction and the Client’s requirements there are different types of strategies
available and no single uniform approach to contractual arrangements shall be
advocated”. With so many options available the Client certainly has an upper hand
in selecting one of them but it isn’t an easy job as it seems to be. Within those
several options the Contractor has to select out a single contract which meets the
necessity of the Contractor. While deriving information from the past projects it
must be noted that the contracts used in those projects may not suit the current
needs. If needed the Client must be bold enough to amend the contracts as per the
requirements for effective project outcomes.
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Smith (1995) outlines some main topics to be taken into consideration for setting
up a contracting strategy. They are:
a) Project objectives
b) Organisation system for design and implementation
c) Risk allocation
d) Terms of payment
e) The conditions of contract and
f) Tendering procedure
Haswell & De Silva (1989) has stated in his book that it is not well appreciated by
many people (the Clients) the importance for the correct type of contract to be
selected and one is always in demand for obtaining value of money. Opposing the
Client’s mentality from Haswell & De Silva (1989) book and in favour of Smith
(1995), Aboushiwa & Bower (2000) has stressed the importance of contract
strategy and describes it as an amalgam of activities that runs from defining the
Client’s:
a) Project objectives
b) Priorities
c) Responsibilities
d) Organisational structure
e) Types of contract
f) Conditions of contract
g) Contractor selection
h) Tender procedures, and
i) Risk allocations to the selection of most appropriate contract strategy.
The author reiterates the importance of the contract strategy and its process which
is carried out in order to reach the required end products. “A contract strategy
should be established at an early stage to meet the cost, programme and quality
objectives of a particular project” Aboushiwa & Bower (2000). He urges the
introduction of contract strategy as early as possible into the project for its
betterment. The author supports this point by saying that the contract strategy is
the most important aspect of a project because it forms the foundation on which
23
everything else is built. Therefore earlier the contract strategy is decided and the
works are planned the better will be the project outcomes.
In order to select a correct procurement procedure Masterman (1992) suggests
the Clients must first understand that there is no standard solution among the
procurement systems and the construction projects vary so considerably that a
single procurement method does not suit for all projects. For making a decision
about selecting a contract strategy it is essential that the Client’s primary and
secondary objectives are analysed and these objectives are to be compared with
the characteristics of all available procurement methods and the most logical
method is to be chosen out of it. The author agrees with this point stating the
difficulty involved in the selection process. The selection must be carried out with
a substantial amount of attention. “It is evident that no unambiguous solution can
be found for each specific project each contract type should be tailored to the
specific requirements of the project” (Veld & Peeters, 1989). Not only the
procurement types are to be analysed but also the different conditions of contract
to be used must also be considered. This paper further investigates the different
types of contracting strategy used in construction industry.
Contract strategy is an important factor concerning the successfulness of a project.
However Venters (2005) expresses his view that nevertheless its importance, it
won’t be the sole dependent for the success of the project. He argues “Successful
project must also require a solid work scope commitment of a project team and a
realistic budget to support a successful project.” The author is not fully satisfied
with Venters (2005) comments as he feels the contract strategy is the foundation
for everything in a project. When an inappropriate strategy is chosen then the
whole project may fail and no solid work scope no project team and no budget can
be of any use. In the support of Venters (2005) another author named Langdon &
Rawlinson (2006) has cashed in his view that “It is the performance of the team
that is at the root of project success not the strategy per se”. The author is staying
firm in his decision that whatever it may be, contract strategy is the prime
necessity for a project and it’s above everything else for its success and outcomes.
In a research work carried out by Perry (1985) he revealed that ‘Decision taken
before the sanctions have the most significant impact’. It means that the decisions
24
which are made before the selection of contracts or even beginning the project are
the most significant ones which decide the flow of the project. These decisions
have their direct effects on the project outcomes and will encompass on the
procurement strategy that has to be chosen. For this purpose Aboushiwa & Bower
(2000) has advised on the meticulous effort to be taken by the Client on deciding
the parameters of the project. He quotes “It is evident that no unambiguous
solution can be found for each specific project; each contract type should be
tailored to the specific requirements of the project”. It is bizarre that, usually very
big things start with small beginnings; such is in this case where the least budget
allocated stage of the project makes most of the impacts on the outcomes of
project. Therefore each and everything needs to be put under scrutiny in these
phases because it may affect the clarity of project definitions and incomplete
tenders if something goes wrong. When these stages are disturbed they deeply
harm the project outcomes and result in over budget and delay in time.
25
Figure 1: Organisational choices for project and construction management
Source: Perry (1985)
26
3.4 ROLE OF THE CLIENT
The Client according to Rowlinon & Mcdermott (1999) can be regarded as the
sponsor of the building process. He is the one who initiates the building process
and appoints the team. The Client is the ultimate owner of a project and he is the
one gets affected by the results more than anyone. As Bower (2003) illustrates, the
Client has the highest responsibility of a project and he is the chief decision maker.
He must be careful on the things he is deciding. His responsibilities include:
a) Setting parameters of project
b) Provide finance
c) Make key decisions
d) Give approval and
e) Guidance
Langdon & Rawlinson (2006) has emphasised the role of the Client in selecting a
procurement strategy by saying that “The Clients should always devise their
strategy on the basis of their project priorities, management capabilities and the
extent of risk that they are prepared to accept”. He says the strategic decisions
made at the outset of the project are the most crucial so they must be critically
reviewed and examined by the Client.
The author appreciates the point made by Aboushiwa & Bower (2000) that the
improved understanding of the project by the Client and contract as well as better
contract strategy can lead to the reduction of unnecessary expenses. In recent
years most of the unnecessary expenses are caused by disputes and litigation. One
of the important points to be taken care by the Clients is the objectives. The Client
must be very specific and clear on his objectives i.e. what he needs. Giving
attention to this part can save the Client from many other troubles that are to come
in future such as variation because some contracts do not flexibly allow the Clients
to bring in variations. However there are some contracts which give rooms for
changes, the contracts must be selected wisely according to this. This dissertation
has researched on the variations in a project and the case study will be dealt later.
In order to convey what they require first the Clients must truly know what they
27
actually want. For this purpose the Clients must understand the contract strategy
that is the reason why the importance of contract was explained in the earlier part
of this dissertation.
The attitude of the Client towards a project is a matter of consideration. This
means the levels of involvement in the building and contracting process. For the
Clients with little or no experience, they shall wish to stay away from the internal
affairs of the project. For the Clients who are well aware of the work culture would
like to have a closer look at the construction process. The level of involvement
must be specified at the beginning of the contract. Next comes the funding of the
project, whether the project is going to be funded by private or public sector. The
funding shall also be in form of instalments or whole sum paid. This funding choice
will be considered while selecting the contract strategy. Depending upon the
Clients funding choice, liabilities during the crunch situations are decided
beforehand. For instance, in case of a cost overrun the contract strategy must
clearly specify the party responsible for it. All these details decide the costing
adjustments such as whether the incentives are required, will the Client reimburse
the Contractor for inflation or not.
The next factor that needs consideration is the risk. The type of contract and the
clauses used in the contract will be determined using the preferred choice of the
Client on the amount of risk he is willing to share with the Contractor. Taking into
account both the management and effect of risks occurring Bower (2003) has
stated it is essential that the risk should be shared between both the Client and
Contractor in a ‘realistic and equitable manner’. With the transfer of risks to the
Contractors, the Clients may lift their burden from exposing themselves to any
major threats. On the other hand contracts can charge money from the Client with
respect to the amount of risk they are facing. Hence the risk faced by the Clients
and Contractors are related to the preferred contract type and specified at the start
itself.
In a case study illustrated by Masterman (1992), he found that for majority of the
Clients it meant ‘certainty of completion date’ more important rather than
‘shortest design and construction period’. The author agrees with this point that
the trend has been changing and the Clients have started giving attention to time
rather than money. For the effective completion within time a type of contract
28
strategy can be selected where the construction process begins before the
completion of design stage. For an efficient working of the Contractor the Clients
may employ the services of incentives. The Client can also wish to control the
presence of the number of the sub-Contractors involved in the project.
Bennett & Flanagan (1983) researched about the various the Clients expectations
and produced a list of typical the Client requirements comprising of the following:
1) Functional building at the right price
2) Quality at the right price, i.e. value for money
3) Speed of construction
4) Balance between capital cost and long term ownership costs
5) Recognition of the risks and uncertainty associated with the project
6) Accountability in the public sector
7) Innovative design, high-technology building
8) Maximizing taxation benefits
9) Flexibility to change the design during construction
10) The building should reflect the Client’s activities and image
11) Minimizing future maintenance
12) Need to keep any existing buildings operational during building work
13) A desire to be actively involved in and kept informed about the project
throughout its life.
Just how the Client wishes that the Contractor he appoints must be an efficient
worker as well as good, the construction industry too will judge the performance
of the Client. Rowlinon & Mcdermott (1999) emphasises the role of the Client
impacts heavily on the Contractor’s mentality and this factor plays a major role in
the performance of the character. The Client will be judged on his behaviours such
as: prompt payment, fair and open tendering system, the experience and
knowledge to understand the implication of design changes and the ability to
provide prompt, timely decisions. Therefore it is clear that the role of the Client
plays a major factor in the success of the project.
3.5 CONTRACT STRATEGY AND PROJECT MANAGEMENT
The project management is very useful in the contract strategy. “The primary task
of project management is to deliver the maximum value in return for the resources
29
employed… delivering a project to an agreed quality, safety, time and cost” (Spring
& Wearne, 2003). The author accepts with this point and feels the significance of
project management in contract strategy. Perry (1985) talks about the importance
of positive effects the project management can bring into the contract strategies.
He concludes “Contract strategy is an integral part of the project management
decision making process because the development of a contract strategy for any
project should comprise a thorough assessment of the choices available for the
implementation and management of design and construction”. Both Spring &
Wearne (2003) and Perry (1985) mention the use of the Project Manager in the
entire project. They encourage the appointment of the Project Manager at the very
start of project. Spring & Wearne (2003) describes the role of the Project Manager
as the one who provides essential direction, discipline and drive to a project and
“The Project Manager with experience, enthusiasm and energy for the project is a
good starting point”.
In support of them Haswell & De Silva (1989) illustrates the roles of an engineer in
a project. The first role is to ensure the work for the Client that it is viable and the
Employer is given due value for money. Another equally important role is that he
must act impartial and be fair to each of two parties i.e. to the Employer and
Contractor. The use of the Project Manager will definitely assist the Client when it
comes to get the job done. It is becoming increasingly popular that most the Clients
starting major projects have started using one of their own staff or an independent
project management organisation to carry out the management of the works to
exercise more control over project (CIRIA, 1991). There are several case studies
researched and reviewed in the later sections of this dissertation where the
applications of project management in contracting strategies are extensively used.
Therefore it is suggested that the use of the Project Manager is advantageous not
only to the Client and Contractor but for project itself as it helps in deriving better
outcomes. Especially when a complex project is being undertaken the appointment
of the Project Manager in a project as soon as possible is suggested. Admitting to
this Bower (2003) has also derived some qualifications for the Project Manager. He
opts for an experienced Project Manager for the effective function of the project
team and completion of work in a time. He believes only experienced managers
could help in progress of the projects even during the crunch situations. A Project
30
Manager’s role would be to control the changes and execution of project on behalf
of the Client and execute authority if activities are to be effective. He concludes by
saying that the Project Manager’s role would be to control the changes and
execution of project on behalf of the Client and execute authority if activities are to
be effective.
3.6 CONTRACT STRATEGY AND RISK MANAGEMENT
All projects comprise of a substantial amount of risks. Risks are the most common
reason for projects to finish late and cost more than they should. When deciding
about the contract strategy for any project it must be done in a manner that it
effectively tackles the risks. “A prime function of contract is to allocate risk” (Smith,
1995). He further says that the identification and allocation of risk is a lengthy
process that will need to be carried on for multiple times for the best possible
results. The author has nothing to say against the above interpretations of risk. The
identification of risks has never been a piece of cake for the analysts. No matter
what, even after several examinations and processing the risks still remain in any
project and can never be gotten rid of. However there can be some arrangements
made to tackle these risks in the project. Even after much mitigation some of the
uncertainties may still remain even after a contract is chosen and this is where the
tender should have a contingency for it.
The risks in a project cannot be avoided completely but they can be dealt with
contracts. Haswell & De Silva (1989) points out that “Proper consideration of
contract risk and contract responsibility leads to better documentation of a civil
engineering contract”. What he means is that the risks must be considered in the
earlier stages of project itself. A well-considered contract on the various risks
involved will be a much better contract. Kalvet & Lember (2010) in his study have
stated that order to successfully implement an effective procurement the Clients
have to be capable of dealing with all possible process risks. This is illustrated by
the identification and management of:
1. Technology risks
2. Market risks
3. Financial
31
4. Organizational risks
5. Societal risks
6. Turbulence risks
Bower (2003) & Smith et al., (2006) list the following common questions to
consider while forming a contract:
a) Which party can best control events
b) Which party can best manage risks
c) Which party should carry the risks if it cannot be controlled
d) What is the cost of transferring the risk
If the Client thinks he does not want to bear risks then he can transfer his risk to
the Contractor as per his wish. “The Contractor can be motivated to control and
possibly reduce construction costs by making him bear some risk” (Olsen &
Osmundsen, 2005). However for trading the risks the Client needs to pay money to
the Contractor and the money may depend on the amount of risks being
transferred. He adds on "Trading off risk bearing and incentives, the buyer will
offer more incentive based compensation (less cost sharing) in cases where the
remaining project risk is low”. He reckons financial incentives aim to increase the
efficiency and effectiveness of projects by stimulating the motivation to work
harder and smarter in pursuit of such goals. All these details on incentives must be
put forth in the start of the project while framing the contract itself. Bower &
Merna (2002) has listed the main types of financial incentives used on
construction contracts:
1. Share of savings incentives, where cost savings are shared between the Client
and the Contractor based on an agreed formula;
2. Schedule incentives, where a premium is offered to the Contractor for the early
completion of the project; and
3. Technical performance bonuses for meeting performance targets, other than
cost and schedule. A performance bonus arrangement can be applied to a wide
range of performance areas such as quality and functionality.
Assaf & Al-Hejji (2006) feels that the common cause of risk by increasing the cost
and time of the project is ‘Change’. This point is totally agreeable by the author.
32
The variation in a project is the main cause for any effects in the project outcomes.
Variation could also be considered as a risk in a project and must be foreseen.
Enough arrangements must be made in the contract strategy to deal with the
variation like mentioned in the earlier part of this dissertation. The time period of
the change occurring in a project also impacts the project performance. “Changes
that occur near the end of the project are likely to be particularly disruptive and
expensive. Conversely, changes near the start of project, unless they affect the
contracted project specification and scope of work will probably cost only time in
design office” (Lock, 2007). Therefore it is assumed that sooner the changes occurs
lesser the disruption in the project performance.
Risk management is not a onetime process rather it should continue throughout
the Project Life Cycle (PLC). However the risk management has not been
considered seriously by many firms as Barnes (2006) mentions that risk
management is a new entrant to the project management techniques and it has yet
to achieve the penetration it should. The author too encourages the consideration
of risk management in construction industry and into contract strategy for
complex projects. The risks cannot be controlled by everyone and it is a wrong
approach to do so. Griffiths (1989) explains “The contract establishes the risk to be
carried by each party. The general principle suggested is that risks should be
carried by the party best able to either control the risk or estimate the risk”. He
illustrates the work of the Contractor must be intense to reduce the risk. He has
advised certain duties to Contractor for reducing the risks. His studies reveal that
the contract should:
Recognise areas of significant risks
Identify who is to carry the risk and to what extent and
Attempt to include adequate incentives to meet the Employer’s/main
Contractor’s objectives, preferably by attempting to align the objectives of the
Employer with those of the Contractor and sub-Contractor.
A risk free project is almost impossible but a project with a maximum number of
mitigated risks is always the better option. A contract strategy helping in effective
risk mitigation is a good one indeed. Therefore good projects are derived from the
33
good contract strategies implemented. Thus the necessities of better contract
strategies are effectively explained in this chapter.
3.7 SUMMARY
This literature review fully focussed on the views of various project management
expert authors about the contract strategies and role of different project
participants played in it. The need for Project Management and Risk Management
were also analysed in detail with several evidence suggesting their significance for
effective outcomes. The theories discussed in this section can be contrasted with
the procedures practiced in the industry in the coming chapters.
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4. BACK GROUND TO CONTRACT STRATEGY: EXISTING PRACTICE
4.1 INTRODUCTION
This chapter describes the general contracting procedure practiced in the
construction industry. The different types of procurement methods and the
payment terms are explained in detail along with the place of their employability.
4.2 PROCUREMENT
Procurement is a process of obtaining goods and services. It is involved in every
industry for all sorts of acquisitions and there are many methods of procurement
available. The selection of an ideal procurement method according to the situation
is mandatory since the procurement methods play a major role in defining as well
as shaping contractual and work relationships between parties involved. In a MOP
– Commercial Contract Management: Lecture 1 by Mr Alan. F. Comish states that
the purpose of contract strategy by listing its purpose. He states that the
procurement types cover various aspects including (Comish, 2012):
How are the funds to be obtained
How is design to be carried out
How is construction/production to be arranged
Who is to have the managerial role to oversee or supervise the project
Who is to use the finished building/product
4.3 PROCUREMENT SELECTION CRITERIA
Before selecting an appropriate procurement method the Clients must analyse
their objectives of the project and based on their needs the procurement choice
might differ. JCT (2011) offers few external factors that may influence the choice of
procurement method adopted. The external factors that need to be taken into
consideration are:
a. The nature of the project
b. The scope of the works
c. Measure of control by the Client
d. Accountability
35
e. Appointment of the Contractor
f. Certainty of final cost
g. Start and completion times
h. Restrictions
i. Changes during construction
j. Assessment of risks
k. Building relationships with the supply chain
The choice of procurement should never be made on some arbitrary basis. The
Clients must always come to conclusion only after a careful analysis of the
situation.
4.4 TYPES OF PROCUREMENT METHODS
The different types of procurement procedures commonly used are explained
below:
1. Traditional
In the Traditional method, the Client appoints the Contractor to build to a defined
scope of works for a fixed price lump sum. And the responsibility for the design
and the project team is held by the Client.
According to Wearne (1989) the advantage of the Traditional system is that the
competition between the Contractors results in the offering of the lowest prices in
order to be selected by the Client and hence the Client only needs to pay the
tendered value. Another advantage scripted by Cooke & Williams (2004) is that the
design stage is completed before the tender stage ensuring the cost certainty for
the Client. He also appreciates the simplicity of this method.
One of the major disadvantages of this method as described by Wearne (1989) can
be the poor state of clarity existing between the design and construction team as
they are separately dealt. Masterman (1992) too has quoted some demerits on the
conventional techniques of the procurement. He blames them for their sequential,
fragmented and confrontational nature since they cause lengthy design and
construction periods along with poor communication residing in between the
Client and Contractor.
36
Figure 2: Contractual procedure involved in Traditional Procurement Method
Source: (Rashid et al., 2007)
2. Design and Build
Here the Contractor provides a completed building to an agreed cost and
programme. The Contractor is responsible for design and construction. There are
three types of design and build arrangements. ‘The Employer-led design’,
‘Contractor-led design’ and ‘other design and build options’. One of the merits of
this type of contract is the undivided responsibility for both design and
construction Wearne (1989). However he says design and build could also be a
potential threat when the Client does not clearly specify his needs, the Contractors
tend to build in their own way when not specified accurately. Nevertheless when
accurately specified, Masterman (1992) points out a merit in this method in the
form of cost savings. This method could be the cheapest of all methods. The
disadvantage is that the Client cannot exercise much of the control in the project.
Figure 3: Contractual procedure involved in Design and Built Procurement Method
Source: (Rashid et al., 2007)
37
3. Two Stage Tendering
As the name suggests there are two stages involved in this method, the first being
the appointment of the Contractor based on the tender and the second stage
involves the Contractor working with a project team for preparing designs and
cost estimates for each and every process of PLC. The Client then enters into a
contract on a fixed price basis after having a close look and proposing changes at
the various design strategies involved.
Wearne (1989) describes the potential benefits of a promoter employing this type
of procurement are cost certainty and time saving. This procurement type
encourages early engagement of the Contractor to the work. Masterman (1992)
too agrees with the view of Wearne (1989). However he draws out the ill-effects
on the two stages tendering as they may cause problems to the Client as the
Contractor may take advantage after the first stage since he comes to know that
the Client needs to carry on the work for second stage with the same Contractor
only.
4. Public Private Partnerships / Private Finance Initiative
This procedure is mainly used for public sector infrastructure projects where
private sector capacity and public resources are utilized. In this method, the
contract is given to a consortium for the building and operating. The capital is
derived from the taxes paid by the public for usage of property. The asset may or
may not be returned back at the end of the contract.
While opting for a Public Private Partnership Wearne (1989) asks the the Client; it
should be noted that the tendering process shall be expensive and requires
negotiation rather than competitive tendering. When compared to other
procurement methods the time from inception of the project to attaining a start on
site is substantially longer. Some general merits and demerits given by Cooke &
Williams (2004) are listed below:
Advantages:
a) Potential for high returns
b) Continuity of work
c) More control over the program
38
Dis-Advantages:
a) Very high bidding costs
b) High level of resource required
c) Complex and demanding
d) Tough contract terms
5. Management Contracting
a) Management Contracting
This is a fast track strategy where certain elements of construction process starts
even before the completion of the design. The management Contractor is given
charge of whole of the project including the design and build ability in return of a
fee. Here the management Contractor assigns work packages to the individual sub-
Contractors
b) Construction Management
This is the same as the Management Contracting except that here the work
packages and the individual sub-Contractors are assigned by the Client.
In this method there are maximum overlap between design and construction.
Cooke & Williams (2004) see’s this feature as a potential benefit. Other advantages
of the management contracts cited by Wearne (1989) are that the Contractor’s
project team is enriched with the contracting and construction expertise, the
service of which could be hired or fired. As per Cooke & Williams (2004) the
disadvantage these methods possess is the risk carrying threat for the Client; this
threat mainly applies to the construction management arrangement.
39
Figure 4: Contractual procedure involved in Management Contracting
Procurement Method
Source: (Rashid et al., 2007)
6. Cost – Reimbursable and Target- Cost Contracts
a) Cost-Reimbursable contract
It is a type of contract where the Contractor is paid on the basis of actual costs of
‘time and materials’ plus agreed amount to cover profits and overheads.
b) Target-cost contracts
These are the type of contracts where the Contractor is paid based upon its
established costs. To make sure that costs are not allowed to exceed a target, the
cost is fixed at the outset. The target is adjusted to take care of any changes and
other price risks allocated to the Employer under the initial terms of the contract.
There are also incentives provided to all parties involved such that costs and time
are controlled.
The advantages of the cost-reimbursable contracts can be seen well as Masterman
(1992) reclaims that when there is insufficient definition of work in tender, during
high inflation, when the project is extremely complex and unquantifiable amount
of risks involved. This method may prove to be effective at those times. He also
shares his views on the drawbacks involved with this method by stating the lack of
contractual commitment by the Contractor to the final cost and absence of
financial incentive to be used.
40
7. Framework Agreements
This is a form of a contractual agreement which allow suppliers to be brought
together with the relevant expertise and experience resulting in savings to both
the parties where a number of projects are involved. Cooke & Williams (2004)
explain the main difference between other contracts is that with framework
contract there will be no ‘main Contractor’. These agreements also cover different
forms of procurement including Design and Build, Traditional, etc.
4.5 TERMS OF PAYMENT
While planning a contract the promoter must consider the type of payment that
shall motivate the Contractor and fulfil the objectives of the Client. Wearne (1989)
says that when it comes to cost the Employer gets to choose between two types of
payment, either by price or by cost. The payment by price is preferred by most of
the promoters since it carries less risk on promoter and more on the Contractor
when compared to the actual cost. The different terms of payment shall be
discussed below.
1. Lump sum payment
In the lump sum contract the payment is settled at the end when all the works are
complete. Here the payment is of a single type and to a single Contractor who is
responsible for both design and construction as mentioned in the signing of
contract. Wearne (1989) says that this method proves advantageous to the Client
since the Contractor gets to take the risks of actual costs being greater than the
contract prices. The potential disadvantage is that it costs extra time and money to
the Client if needs to make any changes from the agreed plan.
Lump sum contract is a quite simple one provided only a single payment is due for
completion of performance. This method is usual in employing contracts for the
design and supply of mechanical, electrical and process plant.
2. Milestone and planned progress payment systems
The payment in this type is based on the milestones achieved by the Contractor i.e.,
the stages of the project finished. Wearne (1989) explains the advantages and
limitations of this method. The promoter gains in this by providing incentive to the
41
Contractor for proceeding with his work and also Contractor benefits by getting
paid sooner. The demerit in this method shall be the lack in clarity and resulting
disputes when the milestones are not defined properly at the start.
3. Bill of Quantities (BOQ)
In the bill of quantities the work agreed to be done under the contract are listed as
each item along with the quantity of material needed and quality specified for the
work. The Contractor is usually paid according to the quantities of items completed
each month. One of the advantages of this method is that it induces performance. It
can be effective because the Contractor is paid as soon as possible after incurring
costs and the Client gains in by reducing the total cost of the construction. The
disadvantage is that this method is more complex and expensive for all parties
when compared to the basic lump sum contract.
4. Schedule of Rates
This method is similar to the BOQ in listing the work to be performed, however the
rates are more related to the total quantity of work done rather than the amounts
expected. The basis of payment is considered to be a more flexible form of bill of
quantities. Wearne (1989) says that this method can be useful when the work type
is certain but the quantity of work is not clear enough. The risk for the Client is that
sometimes it causes very uneconomic use of resources. Schedule of rates are used
in civil engineering for preparatory and site exploration work, contracts for design,
demolition, repairs and maintenance.
5. Cost-reimbursable payment
This method is different from all other cost based terms of payment. In the
simplest form of a Cost-reimbursable contract the Employer reimburses the
Contractor’s costs of work on a project, plus usually a fixed sum or percentage for
financing, overheads and profit. Wearne (1989) feels this type of contract is used
for design studies, development, some repair, demolition and emergency work.
The advantage of this method is that the work is started as the changes are defined
and the Contractor won’t incur any prices avoiding the disputes. On the other hand
the Client has to deal with the demerit that Contractor may not be responsible for
the economic use of his resources and cost control.
42
6. Target incentive contracts
This is the development of the Cost-reimbursable method where the Client and the
Contractor agree prior to the initiation of the work regarding the cost for an
uncertain scope of work. It is agreed that the Contractor shall share his savings in
cost related to the target but when the target is exceeded the Contractor may
reimbursed less. Wearne (1989) lists the advantage as both the parties shall get
incentive to limit costs and Contractor benefits by his cost being reimbursed.
Problems shall arise if the target is not precise or changed.
7. Liquidated damages terms
In most of the engineering contracts certain terms are agreed under which the
Contractor is liable to pay liquidated damages to the Client for a breach of contract
for instance if the promoter delays the completion of work than the agreed time.
The main intention of introducing liquidated damages is to induce Contractors to
perform their contractual obligations. Wearne (1989) feels advantage of this
agreed terms are that the results are more predictable and quicker.
43
Figure 5: Nature of various Payment Terms
Source: (Corrie, 1991)
4.6 SUMMARY
This chapter explained the various types of procurement methods along with their
advantages and disadvantages. The procurement selection criteria from the
Client’s perspective were listed. The author has managed to show the procurement
procedures and their time of usability with respect to situation to the readers. The
natures of the payment terms were graphically explained. The application of the
above procurement types and terms of payment can be seen in the forms of
contract which is discussed in the next chapter.
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5. REVIEWS OF CONDITIONS OF CONTRACT
5.1 INTRODUCTION
This chapter deals with the various forms of contract and their applications. The
various conditions of contracts are analysed in the chapter. The conditions of
contract are defined as “sets of terms which state the general responsibilities, risks
and liabilities of the parties to the contract and establish procedures between
them, including terms of payment” Smith (1995). The structure of each forms of
contracts along with their applications are discussed.
5.2 STANDARD FORMS OF CONTRACT
Smith (1995) defines “Model or standard forms of contract are Conditions of
Contract which have been prepared for general use in a particular industrial sector
by an appropriate or representative authority”. The terms of the contract shall be
negotiated between the parties and amended accordingly. Comish (2012) states
that for large, complex or risky engineering projects; usually contract is formed by
a set of documents:
1. The form of agreement
2. The conditions of contract
3. The contract specification
4. The contract drawings
And if required the contract will often comprise of following items:
a. Bill of quantities or schedule of rates
b. Programme
The Nature of Construction (2007) insists there are advantages that can be gained
by using standard form of contracts. Smith (1995) too lauds the application of
these contracts as they are tried and tested. The various advantages and
disadvantages are illustrated in The Nature of Construction (2007) are given
below:
45
Advantages Smith (1995)
The risks are shared equitably.
a) With the help of a standard form of contract the cost and time of individually
negotiated contracts are avoided.
b) Tender comparisons are made easier since the risk allocation is same for each
tenderer.
Disadvantages The Nature of Construction (2007)
The forms are cumbersome, complex and often hard to understand.
a) Often the resulting contract will be a compromise and they are very resilient
towards change. It takes quite a time to bring a change.
Traditional forms of contract are described below.
5.3 TRADITIONAL CONTRACT
In the Traditional contract, the Client employs an architect or Consulting Engineer
for carrying out the design work and the Contractor enters into a contract with the
Client for constructing the design work. . However there is no guarantee that the
designed works given by the Employer to the Contractor can be built. For carrying
out the work, the Contractor seeks services of both sub-Contractors and suppliers
for goods and equipment.
[NOTE: The Architect or Engineer is also employed to manage the contract on
behalf of the Employer. The Client is called as the Employer in most Contract
Conditions.]
The Nature of Construction (2007) summarises the main features of Traditional
form of contracts as:
There is no contractual relationship between the Employer and sub-Contractors
a) In the absence of a warranty there is no contractual relationship between the
Employer and sub-Contractors and suppliers.
b) Third parties have no contractual rights.
Lewendon (2003) in his study has demonstrated that “Traditionally the
procurement of civil engineering construction projects has used one of the editions
46
of the ICE or FIDIC Conditions of Contract or similar”. He explains their advantages
as legally tried and tested. He further adds on “a custom of usage has developed by
their extensive and successful use over the years”. In this form of procurement the
designer does not have direct link with the specialist and hence all the
communications need to pass through the main Contractor. This is a drawback
since the main Contractor won’t be obligatory towards the specialist’s
requirements. Lewendon (2003) too supports this point. In his book he has
literally backed this view; he has said “when all work can be identified, a project
can be completely designed and detailed and a Bill of Quantities produced then
these standard Conditions are a very capable form to use”. However in case of
uncertainties of scope he reports, the flaw in Traditional form will reveal itself. The
over reliance of Traditional form of contracts on the ‘Bill of Quantities’ to give a
contract price will cause inflexibility which is a major flaw.
5.4 NEED FOR ALTERNATIVE CONTRACTING APPROACHES
Innovative contracting mechanisms as explained by Carpenter, et al. (2003) offer
the opportunity to reduce the negative impacts often associated with construction.
He feels that the agreement of a programme is not a normal requirement in the ICE
or FIDIC contract. The following are major potential reasons for using innovative
contracting methods listed in his report:
5.4.1 Reducing Construction Time
One of the major reasons for the use of innovative contracting methods is to
reduce the construction time. In construction industries the need to finish the
project on time is becoming a major issue nowadays. In the areas of high traffic
congestion for the low-bid contracting projects, the cost and time overruns are
frequently experienced. To improve this situation use of an alternative contracting
procedures and specifications are recommended.
5.4.2 Reducing Construction Cost
The time and cost overruns over the allocated schedule and budget are one of the
major concerns experienced with the Traditional method. Although certain
overruns are inevitable, with the help of a better planning and project
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management techniques some of them could be avoided or prevented by
forecasting.
5.4.3 Applying Improved Technology and Techniques
To improve the efficiency of a project and for improved project outcome
innovative techniques need to be used. Therefore to take advantage of advances in
technology and techniques relating to construction materials, equipment, and
methods a departure must be made from the Traditional approach.
5.4.4 Deploying Contractor Innovation
The incentives provided in innovative contracting methods tempt the Contractor
to accept more risk and responsibility for providing project performance for lower
costs and that too in a shorter period of time.
5.4.5 Reducing Impacts on the Public
Certain construction projects such as highway projects have an impact on the
public. Innovative contracting methods reduce construction time, which means
shorter times driving through and around work zones enhancing safety and
productivity. In addition, the use of technologies, materials, and techniques that
reduce noise and other environmental impacts invariably reduce the public
impacts of highway construction.
5.5DIFFERENT FORMS OF CONTRACT
5.5.1 FIDIC
FIDIC is an abbreviated form of Federation Internaionale des Ingenieurs-Conseils
was founded in 1913; FIDIC claimed by its official website (FIDIC, n.d.) “Is charged
with promoting and implementing the consulting engineering industry’s strategic
goals on behalf of its Member Associations, and to disseminate information and
resources of interest to its members”. The FIDIC forms of contracts are known for
its standard conditions for construction and design industries. FIDIC (n.d.) regards
the FIDIC forms of contract as the most widely used forms of contract
internationally.
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Totterdill (2006) states that the FIDIC conditions of contract include:
1. The general conditions and
2. The particular conditions
The ‘General conditions’ are planned to be used as such without any modification
i.e., unchanged for all projects, whereas the ‘Particular conditions’ is modified for
every project based on the Client’s requirements or Contractor’s terms or due to
the project situations (Totterdill, 2006).
In 1999, FIDIC released a new edition of family of contracts consisting of four new
standard forms of contracts (CIDB, 2005).
1. Conditions of Contract for Construction (“Red Book”)
2. Conditions of Contract for Plant and Design-Build (“Yellow Book”)
3. Conditions of Contract for EPC/Turnkey Projects (“Silver Book”)
4. Short Form of Contract (“Green Book”)
The above forms of contracts are advised for common use where tenders are
invited. For the preparation of particular conditions guidance is provided into each
book. Masons (2011) points out that one of the common principles dealt with the
FIDIC forms are that it recommends a fair allocation of risks among the parties to a
contract. It calls for the best possible team to control the risk.
All the books in the FIDIC contracts specify roles for the Employers and
Contractors they ought to follow. Their respective roles are listed by Masons
(2011) as follows:
5.5.1.1 Role of the Engineer:
a) Issues instructions and notices
b) Monitors the works
c) Acts as certifier.
5.5.1.2 Role of the Contractor:
Fitness for purpose – make sure that the design will meet the Employer's
needs;
Design responsibility – for temporary works necessary for construction
Carrying out the works in a proper and workmanlike manner with properly
equipped facilities
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Providing those facilities and choosing those materials
Accountability for method of working.
Along with these roles the Contractor also needs to perform certain administrative
functions to facilitate performance. The functions include providing information
for carrying out works and delivering notices for events increasing cost and
completion time.
For ensuring the protection of time and money it is important that an effective
administration of FIDIC contract is carried out. It is essential to write notices in
clear and unequivocal terms.
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Table 2: Main features of the FIDIC “Red”, “Yellow” and “Silver” books
Source: (CIDB, 2005)
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5.5.2 GENERAL CONDITIONS
Summary of clauses in the FIDIC conditions of contract for construction (1999),
related to measurement, valuation & payment as per given in Haswell & De Silva
(1989) are:
Clause 1.1.4 Contract Price
Cost includes site & H.O. overheads
Clause 1.9 Disruption of Progress/ Delay & Delay of Drawings
Can lead to extension of time under Clause 8.4 and/or to additional
cost under Clause 20
Clause 3.3 Instructions from the Engineer
Clause 4.11 Sufficiency of Tender
Clause 4.12 Unforeseeable Physical Conditions or artificial obstructions – can
lead to extension of time (Clause 8.4) and/or additional cost (Clause
20).
Giving of notice by the Contractor and response to that notice by the
engineer
Clause 8.3 Programme to be furnished by the Contractor together method of
construction and resource forecasts.
Revision of programme
Early warning of adverse circumstances
Engineer’s consent
Clause 8.4 Extension of Time for Completion – arising from delay, variation
and exceptional circumstances
Contractor to provide notification in accordance with Clause 20
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Clause 8.7 Delay Damages payable by the Contractor to the Employer. The
limit of these damages is stated in the Appendix to the tender, and
these are the only damages for delay due to default by the
Contractor.
Clause 12 Measurement and Method of Measurement
Clause 12.3 Evaluation using tendered rates.
New rates are appropriate –
When the measured quantity of an item is changed by more than
10% from the billed quantity, etc...
The work is instructed under Clause 13 and/or no appropriate rate
exists.
Clause 13 Right to introduce Variations
Clause 13.2 Value Engineering
Contractor can be paid a fee related to the saving.
Clause 13.3 Variations Procedure
Instructions
Evaluation in accordance with Clause 12
Payment in appropriate currencies
Clause 13.5 Provisional sums
Clause 13.6 Dayworks
Clause 13.8 Adjustments for changes in cost
Clause 14.1 Contract Price to be determined under Clause 12.3
Certificates & Payment
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Clause 14.2 Advance Payment
Contractor to provide Guarantee
Clause 14.8 Delayed payment
Clause 14.9 Payment of Retention Money
Clause 20.1 Contractor’s Claims
Contractor to give notice
Claim to be determined in accordance with Clauses 3.5 & 8.4
Clause 20.2 Dispute Adjudication Board
Amicable settlement
Clause 20.6 Arbitration
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5.5.2 JCT
The Joint Contracts Tribunal commonly known as JCT form of contracts was first
established in 1931. In her study about the JCT contracts Taylor (2008) claims JCT
provides a range of building contracts, subcontracts, warranties and associated
guidance notes. Masons (2012) reports the JCT is made up of seven members
representing a wide range of interests in construction industries. It also regards
the JCT as the most common form of contracts used in UK with 70% of the
construction projects employing this form of contract.
The main contracts in the JCT suite are listed below (Masons, 2012):
Standard Building Contract (SBC)
Design & Build (DB)
One of the main principles of JCT as stated by Ensom (1998) is that, all the design
works are to be carried out by the Employer. The main task of the Contractor is to
carry out the works according to the design provided to him. If this routine is
disturbed for instance if incomplete design is provided by the Employer then this
in itself will cause problems. In JCT contracts there is someone referred as
‘Contract Administrator’ whose duties and functions are set out in the contract
Ensom (1998), He lists the role of a ‘Contract Administrator’ as:
1. Administrative functions
2. Functions performed as an agent of the Employer
3. Certifying functions
5.5.2.1 Format and structure
The standard format of a JCT contract document consists of (Fellows, 1991):
A. Contract drawings
B. Contract bills
C. Articles of agreement
D. Conditions of contract
E. Appendix to the conditions
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5.5.2.2 Main Provisions
There are nine main sections to the JCT suite of contracts specified by (Masons,
2012). They cover:
Definitions
Carrying out the works
Control of the works;
Payment;
Variations;
Injury, damage and insurance;
Assignment, third party rights and collateral warranties;
Termination;
Settlement of disputes.
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5.5.3NEC
The NEC Engineering and Construction Contracts (ECC) previously known as the
New Engineering Contracts are created by the Institution of Civil Engineers. The
purpose of developing this form of contract as explained by The Institution of Civil
Engineers (1995) is to meet the current and future needs. The application of NEC
in construction projects is becoming increasingly common, and it is the contract of
choice for the 2012 Olympics.
5.5.3.1 Objectives
The objectives for the design of NEC contracts were to improve the following
characteristics (Lewendon, 2003):
Flexibility - in accord with a multi-disciplined approach
Clarity and Simplicity - to be exportable and understandable and lead to
fewer disputes
To be a stimulus for good management by all parties
5.5.3.2 Intent
The intent of the NEC forms of contracts is the effective collaboration of all the
project participants in order to deliver efficient project outcomes. The
collaboration helps in the speedy processing of the projects by reducing the
decision making time and avoiding conflicts and disputes among the various
project participants.
5.5.3.3 Structure of the NEC
Eggleston (1996) provides an outline structure for the NEC contract. He describes
that each contract is distinctively put together to meet the Employer’s
requirements. The structure defined by him is given below:
The contract documents
Eggleston (1996) claims that the written contracts are intended to bring certainty
to the objectives of the parties. He lists the following as the essential documents in
NEC contracts:
a) Contract data (by the Employer)
b) The Contractor’s pricing document
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c) Conditions of contract with main options and secondary options
d) Work information from the Employer and Contractor
e) Site information (by the Employer)
f) Contract data (by Contractor)
g) Form of tender
h) Letter of acceptance
Contract data:
This section is a very important one since it contains all the contract-specific
necessary information. In the contract data the part one should be issued by the
Employer, and Part two by the Contractor. Masons (2011) explains that it
comprises of the Works Information and Site Information, for example; scope of
work and design responsibility.
Broome (1997) in his findings has stressed in importance of preparing the contract
documents in a scrutinised manner as they are considered to be the primary cause
of delays and inefficiencies and thereby causing claims and disputes.
1. The key players
The main parties involved in the NEC contracts are: the Employer, Contractor,
Project Manager, supervisor and adjudicator (Eggleston, 1996).
The Employer:
The Employer is the sole owner of the project and he has the liberty to opt for the
type of contract strategy he wishes. Therefore his job includes:
1. Makes a selection from the six main options to decide the type of pricing
mechanism he wants
2. Includes the nine sections of core clauses in the contract
3. Includes any section from 14 detailed secondary option clauses if required.
1. The Project Manager
The Project Manager’s role is a more demanding one and has several duties to take
care of. The Project Manager is envisioned to work with the Client till the end of
the project. He must make sure the contract goes well by progressing towards an
effective completion. Eggleston (1996) states the Project Manager’s reputation is
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significant to the project since for the Employer the project success is dependent
on the competence of the Project Manager.
2. General core clauses
These nine sections listed by the Masons (2011), are the similar in every form.
They cover the basics that are applicable for all contracts. The clauses are:
1. General - includes defined terms, interpretation, communications, ambiguities;
2. Contractor's main responsibilities – provision of works, design, people,
subcontracting;
3. Time – starting, completion dates, key dates, programme, access, takeover,
acceleration;
4. Testing and defects – tests and inspections, notifying defects, correcting
defects, accepting defects, uncorrected defects;
5. Payment – assessing amounts due, payment provisions, pain share/gain share
where appropriate;
6. Compensation events – events which will give rise to time and money and
procedures for dealing with these;
7. Title – for example, to plant and materials;
8. Risks and insurance – Contractor and the Employer risks, insurance
requirements;
9. Termination – grounds, procedures and payments on/for termination.
Main options:
These relate to contract structure and pricing mechanism. The Client shall opt for
any option from A to F. The options are (Eggleston, 1996):
A: Priced Contract with Activity Schedule;
B: Priced Contract with Bill of Quantities;
C: Target Contract with Activity Schedule;
D: Target Contract with Bill of Quantities;
E: Cost Reimbursable Contract;
F: Management Contract
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Secondary options:
There are seventeen additional clauses for certain matters, for example; changes in
law, modification of pricing for inflation and provision of performance bonds.
These options can be selected as suitable.
3. Time (The Programme)
Hide (2007) beholds from his study that NEC helps the Contractors to produce and
maintain; Project Managers to accept a ‘live’ programme. (Davis, n.d.) Compliments
the role of programme stating its significance in
Outlining the role in management of works
Setting out the work to be executed
Requirements to carry out that work, and
The periods and dates in which to accomplish it.
With the help of the programme and by proper maintenance Davis (n.d.) feels the
Employer will have better opportunities in minimising the effects of delays in
project and cost overruns. Broome (1997) acknowledges the higher priority of ‘the
programme’ in ECC than in other contracts. Overall with the programme in the
hand of the Client and the Contractor will have a tool by which, they can manage
the entire construction process.
4. Compensation events
NEC (2005) defines the compensation events as “events which, if they occur and do
not arise from the Contractor’s fault, entitle the Contractor to be compensated for
any effect the event may have on the Prices. A compensation event will normally
result in additional payment to the Contractor but in a few cases may result in
reduced payment”. Broome (1997) reports in his study that in a NEC contract
when a compensation event occurs, the Project Manager has a liberty to ask the
Contractor to submit a quotation in best interests of keeping the completion date
and price of the project close to the originally planned. But in order to make an
appropriate decision from the available options Broome (1997) insists, the Project
Manager must be aware of the Client’s objectives concerning time, cost and quality.
The Project Manager must also have considered the Employer’s attitude towards
risk.
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The following diagram shows the mechanism being followed in case of a
compensation event.
Figure 6: Flow chart for mechanism to be follwed while a Compensation Event
Source: (Contract & Construction Consultant , 2011)
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The various NEC options along with their incentives, financial and other risks they
bear are tabled below as per given by Lewendon (2003):
Table 3: Various NEC options along with their Incentives, Financial and other Risks
Source: (Lewendon, 2003)
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The advantages and disadvantages of the NEC type of contracts are analysed by
Boulding (2006).
Advantages
a. It employs a user friendly language.
b. NEC places a laudable emphasis on endorsing good project management
practice.
c. NEC is considered an appropriate choice for partnering as well as other
collaborative arrangements (Gould, 2007).
d. In NEC it is possible for an early identification of risks.
Disadvantages
a. Use of narrative and descriptive present tense causes distress to the legal
advisers who have to interpret its consequence.
b. It places the Project Manager in an extremely challenging role which demands
an intense use of resources and it also involves certain amount of uncertainty
(Broome, 1997).
c. It causes concerns that it may sway in the Contractor’s favour.
5.6 SUMMARY
This chapter described about the improvements in the contracts from the
traditionally followed forms. The NEC forms of contracts were examined in detail
with its merits and demerits. In the next chapter case studies based on the
Traditional form and NEC will be carried out. With the help of an exercise, the
Traditional and NEC contracts will be compared and their characteristics will be
discussed.
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6. CASE STUDIES
6.1 INTRODUCTION
This chapter analyses different projects based on the forms of contracts studied in
the previous sections of this dissertation. The nature of the projects selected, the
problems faced by them and the contract solutions for solving the obstacles will be
reviewed in this part. At the end of this chapter a comparison of Traditional forms
of contract and NEC forms of contract will be carried out as inference to the case
studies.
6.2 CASE STUDY – 1: Gateshead Millennium Bridge—an eye-opener for
engineering (Johnson & Curran , 2003 )
This study describes about the construction of a pedestrian and cyclist Tilt Bridge
opened at 2002 spanning the River Tyne in Great Britain between Gateshead's
Quays arts quarter on the south bank, and the Quayside of Newcastle upon Tyne on
the north bank. This bridge while construction surpassed several milestones of
creativity and spectacles which thrusts for an in-depth research of its edifice. One
such milestone which turned several heads towards this project was that the
bridge was carried by one of the world's largest floating cranes for about 10 km
before laying it on its supports.
The bridge had to be an opening bridge such that it accommodates shipping
since a straight one could not afford it; therefore the concept of the double-arch
structure was then introduced with bridge curved on plan in a way that the whole
bridge form rotating about a common pivot point mounted on each end support.
This feature of the bridge made it a unique structure and won several accolades
nationwide. The management of this project was an absolute marvel as the work
from start to its final stages was carried out in a glamorous fashion. For
encouraging a local interest in this project, design competitions were conducted
and best out of it was selected with the help of public's choice as well as a judiciary
of senior professors. After several adjustments of the target cost on continual
additional works and agreed compensation events the bridge was finally
completed at a budget of £ 22 million.
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Figure 7: Gateshead Millennium Bridge
Source: (Johnson & Curran , 2003 )
This project is an important contribution to the ‘Management of Projects’ course
with its effective management of construction lifecycle involving various
challenges and constraints. The funding of the project was a major highlight in this
project; the bidding was supposed to be made in such a way that, It would have to
be capable enough of attaining credit as a new millennium landmark; secondly it
would have to be completed by year 2000 and, lastly, the council would have to
provide assurance for 50% of projected cost as well as 100% of any overspend and
also potentially bear the full expense of an unsuccessful bid. The contract type
used in this Bridge construction is 'Target Cost contract with bill of quantities'
which is one of the options of NEC3. As per NEC3 (2007), in this option the
Contractor tenders (or negotiates) a target price established by means of a bill of
quantities. Each activity is priced as a lump sum and a Fee is also tendered as a
percentage for subcontract work. The initial target price is the sum of the activity
prices and the fee. During the course of the contract, the target price is adjusted to
allow for changes of quantities as well as for compensation events. Thus, the
Employer carries a greater risk. Here an unusual form of contract strategy was
applied where the position of Project Manager was shared between the Client,
Contractor, architect and Engineer, this action was very helpful in the site as the
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conflicts and disputes were effectively resolved and the construction works
progressed in a quick manner. The Contractors work was highly satisfactory that
the accounts were finalised even before the works were finished.
Figure 8: Crane used for Gateshead Millennium Bridge
Source: (Johnson & Curran , 2003 )
The project was completed and this unique structure was officially opened by Her
Majesty Queen Elizabeth II on 7 May 2002 as part of her Golden Jubilee
celebrations. This bridge was critically acclaimed as a worthy addition to the
bridges in UK.
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6.3 CASE STUDY – 2: Hungerford Bridge (Parker et al., 2003)
The project is situated in London. At those times pedestrians faced
difficulties in crossing the Thames between Charing Cross station and the South
Bank Centre. The walkway was bridge was narrow, noisy, frequently wet and
somewhat unsafe underfoot since it was near a railway bridge.
Figure 9: Before the construction of Hungerford Bridge
Source: (Parker et al., 2003)
For the design work to construct the bridge over 40 entrants were invited and the
judges chose six finalists to submit more detailed proposals. The final design was
selected following a public consultation exercise and exhibitions around London.
The funding was properly organized for this project as the Westminster City
Council took the lead in management as well as providing a substantial share of
capital along with other members of the cross river partnership promising to join
hands. Several innovative methods of constructing the bridge were proposed by
the design engineers and Contractors. In particular the foundation designs shared
a significant part in contributing to the uniqueness of the bridge.
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One of the most significant concerns during the design stage was the ship impact.
The design work required a significant effort for producing a substructure that was
capable of resisting these forces without being visually obstructive.
The Client decided to seek help from a consultant called Halcrow for helping the
Client with the critical decisions on the progress of the project. Several innovative
construction methods were proposed by the Contractor and its designer
concentrating mainly on the foundations. Initially the contract was based on the
ICE’s Design and Build form but the consultant recommended a change in the
contract form accommodating more changes in the design features if needed in
future. The resulting contract called as ‘adopt and build’ was sensed that it was no
longer suitable as the Client’s engineer had to infiltrate changes to the design
before starting the contract. The resultant of this move shall cause additional delay
and unnecessary extra cost. Hence for this purpose a new contract was negotiated,
NEC Engineering and Construction Contracts were brought in for a more equitable
allocation of cost and risk as well. The contract with option C was selected which
was target contract with activity schedule. This move was helpful in allocating all
the design responsibility to the Contractor and the designer. To reduce additional
costs a value-engineering exercise was also carried out. This involved close
cooperation of the whole project team and identified significant cost savings.
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Figure 10: The new Hungerford Bridge
Source: (Parker et al., 2003)
Finally the bridge was successfully constructed and opened. The upstream bridge
opened in May 2002 and the downstream in September 2002. It has proved
popular and also gained a structural achievement award in 2004 institution of
structural engineer’s awards. The new Hungerford Bridge has become a favourite
spot for tourist photographs.
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6.4 CASE STUDY – 3: Delivering of London Olympic Park 2012 (Cornelius
et al., 2011)
The project is situated in London, United Kingdom. The situation of the project is a
tight schedule and a on time delivery was needed. Therefore a better contracting
method was needed. This paper describes the work of ODA (Olympic delivery
authority) organization and its delivery partner’s program management deployed
to keep the works on track for successful delivery.
Mission
The mission of the ODA was to deliver venues, facilities, infrastructure and
transport for the London 2012 Olympic Games on time to budget.
Objectives
To create infrastructure and facilities associated with games venues to agreed
time and budget.
To deliver necessary transport infrastructure for the games and devise an
effective plan for a smooth transport flow.
To assist London development agency (LDA) in the finalisation of sustainable
legacy plans for all Olympic venues.
Priority themes
Along with the delivering of construction projects on the right time, cost and
quality, the ODA is also committed to provide sustainable economic, social and
environmental benefits. The Olympic park had to open on 27th July 2012 with
following features:
a. An extremely noticeable public profile.
b. A large investment from the public purse (taxes), with attendant scrutiny from
government bodies, the media and the public.
c. Dual goals of delivering both functional venues for the games and a long-lasting
legacy thereafter.
d. Multiple the Clients.
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Figure 11: Graphical Representation of key factors involved in Management of
London Olympic Park
Source: (Cornelius et al., 2011)
Once ODA was formed, a delivery partner with loads of experience was decided to
be employed for helping the ODA with delivery and manage the construction
programme. After an intense discussion, NEC3 Engineering and Construction
Contract was employed to hire the consortium called CLM. CLM was appointed
both as ODA’s overall programme management partner and as Project Manager for
the major construction projects. With the objective of guaranteeing constant
alignment of the Employer and delivery partner organisational models, skills and
resources, combined reviews by ODA and CLM of organisational design took place
during the programme.
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Figure 12: Pie chart representing the distribution of Management Authority
involved in London Olympic Park
Source: (Cornelius et al., 2011)
Procurement using NEC3 contracts
To ensure transparency of costs and to boost a cooperative approach with the
suppliers as the project progressed ODA decided to use the NEC3 suite of contracts
for most of its procurement activity. The believed to provide following attributes:
a. A flexible approach, offering a contract solution with the design information
available
b. A pro-active risk management technique as a fundamental element of the
entire contract forms
c. A collaborative approach supporting timely delivery
d. Complete visibility of costs for an effective programme budget management
Table 4: Various NEC options used in London Olympic Park along with their Usage
and Rationale
Source: (Cornelius et al., 2011)
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Design, construction and management of this massive project have been rightly
praised. Completion within time and budget without a single fatality is an
outstanding achievement. The programme for the £7 billion project included to
years of planning followed by four years of implementation with a final one year of
testing and rehearsals. NEC was the best contract which offered a prescribed
project management methodology of processes and procedures to manage
delivery as expected. Finally the Olympic delivery authority with the help of NEC
established a clear delivery strategy, maintaining a high level of transparency, clear
definition of scope and focused delivery. The role of NEC played in delivering
London Olympics is being praised by everyone; one such view is presented below.
“I think NEC3 is the unsung hero of the Olympic Games – a bit like the spine or the
heartbeat in the human body” Owen (2012), Commercial director at CLM he
expressed his views on NEC by stating, “I believe it helped deliver the project”.
Owen (2012) specified the effect of three factors that are important, “If you just
focus your teams on those three elements that will go a long way to success……..
And that’s what NEC3’s all about – those three ingredients are very clear but it’s
actually making them work”.
The idea was to making NEC work for adapting the contract to CLM’s purposes
therefore first factor Owen (2012) named was the ‘people’: “When you’re looking
at something of this size and scales don’t forget about the organization around it
and the people you put in place”. Secondly it was important that the supply chain
was trained which was fundamental in overcoming a disconnection between
corporate and operational understanding of NEC3. And the third key enablers
were that the team adopted a web based collaboration tool to manage the contract.
With the help of this the entire team had covered around 70000 formal contract
communications. Owen (2012) conceited the success of the project, “I think that’s a
real mark of success because we have managed the contract how it was intended
to be managed from day one”.
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Figure 13: A complete view of London Olympic Park 2012
Source: (BBC, 2012 )
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6.5 CASE STUDY - 4: The Montreal Olympic Complex (Thompson, 1981)
The subject of the study is the Olympic complex in Montreal, Canada build to
accommodate summer Olympics in 1976. This is one of the severely affected
projects by cost overruns due to poor planning, design, estimating and execution.
Each of the flaws along with the inflation caused the final financial outcome which
was a nightmare.
The design of the structure was dramatic and ultra-model in concept however for
reducing the cost and time some of the designs were removed. The constructions
of design works were very complicated. Along with the design there were many
problems this project faced during its construction period. They are:
Design: The design of the viaduct was made complicated in order for a better
appearance. This increased the cost of the formwork 15times the cost actually
planned.
Labour: A total of 100 days of work disruption was caused by labours out of which
80 days were strike and rest were lost through slowdowns. The improper contract
signing tempted the labour to take advantage.
New construction technique: It is usual that with any new techniques learning
process will be slow, painful and expensive. This was exactly the case at Montreal.
Due to the heavy construction all the resource materials were exhausted and they
had to be imported from outside. This would cost them more money.
Weather: The weather in Canada is not always favourable to the construction and
the post construction works need to be finished before starting another. To reach
the dead line the curing was sometimes done by heating and the cost of heating
was about $400000 per day.
Scheduling: The scheduling was prepared by unfamiliar theorists who did not
have a very good civil engineer experience. After some days due to the
ineffectiveness of schedule, the schedule was abandoned everything became a
daily crash action.
Fixed deadline: The late award of construction contracts and a fixed deadline for
the project had pushed for a schedule compression. This caused chaos with double
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crews, double shifts and overtime. Doubling the crane alone increased the overall
productivity by 25%.
Procurement type
For constructing this design an innovative contract strategy had to be developed.
The Olympic site was built on a cost plus fixed free arrangement. The Contractor
agreed this on a condition with the Client that he is not responsible for the
completed structure.
Figure 14: A complete view of The Montreal Olympic Complex 1976
Source: (Crooks, 2000)
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Finally after starting the project with a budget of $120 million at the finish it had
cost $1.5 billion. The final project contained less than originally envisioned and the
government has been since trying to cover this huge debt via taxes to the
frustration of the citizens. The incomplete Olympic site was finally opened on July
17, 1976 and offered for commencing the games. The Montreal case may prove as a
lesson to be learnt by the Client and Contractor while undertaking a project. This
failure emphasises on the importance of the need for right evaluation of the cost
and time and those features which translate into higher average costs.
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6.6 CASE STUDY – 5: Construction of an Industrial Building (Thompson,
1981)
The design defined in the contract documents was a reinforced concrete framed
building ten bays long by six bays wide, six storeys high with identical floor slabs.
Columns and slabs were plain, of constant section and with regular spacing. The
successful tenderer, (the Contractor), carefully planned the job, designed his
formwork and compiled his estimate on the basis of constructing successive floors
of columns and slabs, always starting at the same end of the building, full width,
along its length.
While the Contractor was constructing the foundations and the first rows of
ground floor columns, the design of the structure was altered to permit the
installation of additional heavy machinery on the third floor. This floor slab was
strengthened and increased in complexity and thickness over half the length of the
building. The section of the supporting columns was increased. It is predicted that
redesign of the second half of the structure will take several weeks.
6.6.1 EXERCISE
In projects changes may cause either benefits or drawbacks. One of the
major drawbacks is the cost overruns. The major cost due to change is by the cost
of rework or revision of work. Rework is the unnecessary effect of re-doing a
process or activity that was incorrectly implemented in the first place and can be
created by defects or variations. The effects due to the changes can be grouped as
direct effects and indirect effects. Rework is an example of a direct effect of project
change and in addition to this, project changes can also bring some indirect effects,
which will ultimately have an impact on project cost and schedule.
Direct effects
■ Addition of work
■ Deletion of work
■ Demolition of work already done
■ Rework
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■ Specification change
■ Time lost in stopping and restarting current tasks in order to make the variation
■ Revisions to project reports and documents
■ Reorganise schedule and work methods to make up lost time
Indirect effects
■ Loss of productivity due to reprogramming; loss of rhythm, unbalanced gangs
and acceleration
■ Change in cash flow, financial costs, loss of earnings
■ Increased risk of co-ordination failures and errors
■ Loss of float, therefore increased sensitivity to further delays
The major sources from which the Contractor may try to recover the additional
costs are:
1. Materials
For any building work the construction materials are bought beforehand. When
the building plan changes the work as planned gets halted and therefore the
materials bought do not serve their purpose at that time. These materials need to
be either stored or used for other purpose. For the variation new construction
materials have to be bought. With the inflation, the rates of the materials change.
Certain materials can’t be save for use at another time they are nothing but waste.
For the extra reinforcement work needed additional quantity of steel will be
required. These buying will affect the cash flow as well as the tender quoted at the
beginning.
2. Formwork
The change in formwork increases the cost of total construction. Reinforcements
are required for a formwork construction; hence for a specified plan the
reinforcement materials are brought in advance. When the plan changes and a
higher quality of formwork are required, the materials currently available do not
match the quantity required. Materials of a higher specification are required which
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incur additional costs and time. Due to this the time and price quoted in the tender
for the formwork are not followed as planned ultimately causing chaos.
3. Delay
The delay caused in the project due to variation affects the entire characteristics of
the project. The work planned, the materials purchased and the equipment
borrowed all are wasted due to the delay. For instance, a tower crane is rented for
the work with the money already had been paid. In this situation when the project
is delayed the tower crane could not be utilised for the real purpose it was brought
and with the work unfinished the crane needs to be rented again. Along with this
the overheads from the administrator point of view would also be affected.
4. Disruption
The variation causes disruption to the entire programme of the project. The
disruption mainly affects the Contractor’s work. Initially the Contractor would
have planned for a certain program for the flow of works. With the variation
coming into the play, this program is affected. Disruption to the work occurs as the
work has to be stopped for the new design to be made until that the materials pre
ordered for the construction work continues to arrive. Later the storage of these
materials becomes a concern. This causes a loss of productivity to the Contractor
and additional costs to carry out the works using new rates.
5. Cash Flow
Due to variation disruption in work takes place, this affects the works ordered to
the sub-Contractors and the materials supplier because the cash had already been
paid by the Contractor for the progress of the work. When the work gets stopped
the payment made to the Contractor gets delayed causing a serious damage to the
Contractor’s cash flow. During this period his outcome exceeds his income forcing
him to operate at loss.
6. Consequential Factors
This factors deal with the various consequences the the Client and Contractor need
to face for delaying the project. Say if the project was initially planned to be built
on summer due to the delay now the project needs to be built on winter in the
presence of horrible weather. This causes extra money for delaying and sometimes
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reheating the materials if needed. Certain equipment need to be rented again for
the work to progress. There are several consequences that need to be faced caused
by the variation.
6.6.2 Changes in contract price using Traditional method
Assuming that a Traditional ad-measurement contract otherwise called Unit Rate
is being used in this case, an ad-measurement contract as claimed by Smith (1995)
is based on bills of quantities (BOQ) or schedules of rates. He states that this type
of contract works on a monthly payment basis where the payment is based on
measuring the quantities of completed work and valuing rates as per tender or
new rates negotiated from the tender rates. He further stresses that in the time of
bidding the Contractors have to set rates per unit items on the basis for indications
of potential threats to total quantities within a limit of plus or minus 15% variation
of these quantities. With reference to this O'Reilly (1999) claims that in certain
circumstances, admeasure and value system shall be used in Traditional contract
and those circumstances being highly uncertain materials such as earthworks,
different types of sub-soil materials and the volumes of fill materials or mass
concrete. During these periods the works are carried out under the supervision of
an engineer who shall ask to strengthen the foundation, strengthen the slab, and
other reinforcements, which perfectly suits in our case. Hence with the help of
Traditional contract this situation shall be evaluated. However using the
Traditional methods the evaluation, cost adjustments in the contract are evaluated
by following methods (Franks , 1991).
For certain works if the quantity of work and the rates and prices used in the
contract bills are same then same values could be used for similar works.
a) On the other hand if the works from one another vary in the bill then use of fair
rates and prices shall be expected.
b) In certain cases if the work types set out in the bill are similar but quantity and
conditions of the work are different then with a typical rates of a work as a
basis of determination, the evaluation of other works are carried out making
reasonable allowances for the quantity and conditions of the work.
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6.6.3 General Lessons
There are several lessons to be learned from this case study about a variation in a
project. The challenges faced by the Contractor and the Client and the
consequences they need to face for finishing the project. Some general lessons
learned when dealing with the changes under Traditional contract are described
below.
1) When using an admeasurement contract, no changes in the plan or
construction must be brought into action unless and until it is mandatory for
the functioning of the facility.
2) It is necessary that the Client considers all the possibilities before going for the
change and if the Client decides to go for the change then he/she must be fully
aware of the consequences that need to be faced. Sometimes it is much
comfortable for the Contractor to make changes once the project is finished.
3) It is important to realize the impact of the variations not only in terms of
money and material but also on all values of the various characteristics of the
project which may affect the outcome, such as time. Apart from the project cost
other subsidiary costs must also be taken into account.
4) When the Client thinks there is a major change to be made then all forms of
contract must be analysed and a contract form should be chosen which best
suits the situation that is adequate to enforce the changes.
6.6.4 Evaluation of BOQ with the separation of method-related charges
The separation of method related charges helps the Contractor setting up the
prices for a new contract in the tendered B.O.Q once the variation order is issued.
Method related charges as stated by Langdon & Rawlinson (2006) are that: “The
Contractors have the option to define a group of bill items and insert charges
against them to cover those expected costs which are not proportional to the
quantities of permanent works. To distinguish these items they are called method
related charges”. He lists out them as:
1) Time related cost elements or frequent charges
2) Charges for elements which are either repeated or directly related to
quantities.
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In this case the Contractor shall insert the method related charges in the tendered
B.O.Q to charge extra for the variation introduced. Because of the variation the
Contractor have to strengthen the slab and thickening column’s section which
involves some extent of complexity. He can also include some time related cost
elements, if it took more time to re-draw the design the material price may be
inflated which in-turn costs the Contractor more than expected. So using method
related charges in the Traditional admeasurement contract as assumed, the
Contractor can sustain his credited cash flows and can manage the project within
the anticipated budget having the variation in mind. Although the method related
charges does not have specific standard to be followed which depends on the
Contractor this might help him in retaining the control of the project in all aspects.
6.6.5 Evaluation using NEC forms of contract
NEC is a development to the Traditional forms of contract and it is prepared by the
project management specialists for the purpose of making the contracts user
friendly and more effective. In case of a variation the mechanism for evaluation of
the situation using the NEC form of contracts are:
There will be an early warning issued. With this warning the Clients and the
contracts shall be alerted about the forthcoming problems. With the vast number
of contract solutions available in this format of contracts, the parties could decide
of something to deal with the issue.
One of the main features of the NEC contract which are regarded as its advantages
are its better programme management techniques and shared contract data. With
the contract data being shared the parties would be aware of their roles and
responsibilities and how to act when a situation arises. Along with the contract
data the risk is also shared mutually between the parties.
In the NEC variation is considered as a compensation event. For any losses suffered
by the Contractor the Client has to compensate it. These details shall be encrypted
on the contract details at the start of the project. There are also special types of
allotments for variations in a contract in NEC.
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Sometimes the compensation to the Contractor from the Client shall be based on
the forecast change in actual costs. The disruptions caused, the parties suffering
and the amount to be compensated. All these details are forecasted and dealt with.
According to NEC (2005), “Compensation events are valued before they occur,
ensuring that project parties have early awareness of the cost and time
implications of events, allowing for effective planning and reductions in disputes”.
Therefore with the help of NEC the variation can be better tackled when compared
to the Traditional methods. The benefits will be better communications and faster
development of a close working relationship between the parties, with little or no
extra cost involved. In the Traditional methods the variation causes severe cost
and time overruns whereas in NEC there are some accommodating features in the
contracts for variation. Thereby enlightening us that NEC is a preferred choice of
contracts over the Traditional methods in case of complex projects and crunch
situations where the risk is very high.
6.7 COMPARISON OF TRADITIONAL CONTRACTS WITH NEC
With the growth in use of NEC all over the world, the Traditional contracts have
been taking a backseat in the major projects where their absence is no longer felt.
In a study Broome & Hayes (1997) felt that it was the clarity of NEC that
outperformed the other forms of contract. He listed the beneficial features of NEC
as:
Ease of understanding
Clear text
Clear risk allocation
Clear definitions of roles and responsibilities of each party
Clear guidance and procedures
Clear payment for charges
Reduced sources of conflicts
Broome (1997) explains the minimum difference between the conventional and
ECC practice as:
1. Relocation of the specification material into the contract data, site information
and works information.
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2. Changing the terminology in existing specifications to that used in the ECC.
One of the characteristics mentioned by Bennett & Baird (2001) is “The actions
required by the parties to the ECC are designed to be solution oriented rather than
problem focussed, in contrast to Traditional forms of contract which pay little
attention to teamwork”. He explains that along with the clarity the approach of the
NEC is very modest when compared to the Traditional method. From an interview
conducted by Broome & Hayes (1997) it is inference from various interviewees
that in NEC the various parties in contract feel to be having a greater knowledge on
the financial and time outcomes of the project. This is mainly because the risks are
identified, allocated and their consequences are settled. With this knowledge the
contracting parties and the Project Managers can feel certain of finishing the
project within the given budget and time. Broome & Hayes (1997) also points out
another distinctive feature of NEC as “The reduced level of argument over
responsibility for risks that have occurred has contributed to the greater degree of
cooperation and openness compared with normal contracts”. One of the
comparisons he cites out in his study is given below.
Table 5: A Comparison of physical Condition of clauses in Traditional and NEC
form of Contract
Source: (Broome & Hayes, 1997)
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The philosophies of the NEC contracts which are the main reasons for its success;
as described in the NEC (2005) are:
1) A collaborative approach to any issues mitigates them and also reduces the risk
inherent in construction work
2) A clear definition of roles and responsibilities helps accountability and
motivates people to play their part
This philosophy has widely been accepted by the world for the essential popularity
of the NEC contracts. Wright & Fergusson (2009) lauds the NEC contracts for its
versatility when compared to its other forms of contract. He claims that NEC is
suitable for any engineering and construction projects due to its exclusion of
discipline specific matters. Therefore he relishes its use by any discipline or
combination of disciplines including civil, mechanical, electrical, building and
process.
6.8 SUMMARY
The contracting strategies applied in some major construction projects in the
world were analysed in this chapter. From the case studies a comparison was
drawn between the Traditional and NEC form of contract. From the difference it
was learnt that NEC offers a better contracting solutions. The further lessons learnt
will be described in the next chapter of this dissertation.
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7. GENERAL DISCUSSIONS
7.1 INTRODUCTION
This chapter presents some results of research carried out by the author so far in
this dissertation. The purpose of the research was to learn the importance of
contract strategy, different types of contract strategies involved in the construction
industry and the difference between Traditional form of contracting and New The
Engineering Contracts. The author has studied the FIDIC and ICE form of contracts
as the example for the Traditional form of contract. During his research the
following issues have been highlighted by the author.
7.2 LESSONS LEARNT
The dissertation was carried out in order to describe the importance of
procurement strategies and the author has got a handful of lessons learned about
them. One of the first findings was about the purpose of the procurement
strategies. They are learned to achieve: firstly, certainty of cost and time for a
design created by an architect working for the Client, next it is supposed to achieve
speed and cost certainty and lastly its purpose to achieve speed for a design
developed by an architect employed by the Client.
While examining about the procurement types, the author came across the
different types of procurement methods and their use. The Traditional method was
found to be suitable for the projects where the functionality is prime objective and
it is lauded for its price and cost certainty. However the Traditional method would
be inefficient for the fast track projects. On the other hand the Design and Built
shall be suitable for the fast track project but it cannot be employed for the
complex projects. There is a procurement type which could tackle both the fast
track as well as complex project, the Management contracting however it will
prove ineffective in front of the inexperienced the Client. The Clients cannot pass
the risk to the Contractor in this type of procurement method. The author has
made efforts to study that where prompt completion is the prime objective a
Management Contract is frequently employed. Here a professional organisation is
employed to manage design and construction which overlap. The PFI projects are a
superior option for the publicly funded government aided infrastructure projects.
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Cost–Reimbursable and Target–Cost contracts are commonly employed for sudden
emergency projects and for high-risk projects. It was found in this case the
Contractor is supposed to reimburse his actual cost and may have the incentive of
a bonus or penalty arrangement. These are collaborative arrangements and the
Client must be involved, through his Project Manager, in all major decisions. This is
a very flexible contract from but any target must be realistic as a low figure will
destroy the incentive. In such a situation where the time factor plays a major role
the management of an agreed programme is substantial and it is probable that
either a management contract or a target-cost contract will be adopted.
One of the most important factors first learned during the research is that for
success of project it is essential that an early interest must be developed by the
Client in appointing a most appropriate organisation for the design and
construction of the project. There are many situations where it is necessary and
may prove advantageous to involve the construction Contractor in the early stages
of project development to consider methods of erection. There was enough
evidence produced in the literature review in favour of the above theory. Along
with an early involvement the Client must also carefully analyse the options
thoroughly, the Client must decide on the contract strategy usually in consultation
with the Engineer before making a choice. The need to look at certain project
performance factors for a successful conclusion of project were also analysed and
listed as: culture, leadership, motivation and commitment. Effective application of
these characteristics is essential in all departments of the project team for avoiding
any disappointments. This was well illustrated in the Gateshead Bridge case study.
Secondly, the research in this dissertation focused on the different types of
contract strategies (contract forms) available. All conditions of contract were
examined with reference to various project management authors’ comments
regarding those contract types. Along with the procurement types the different
forms of contract available were also discussed. From the research it was found
that the Traditional forms of contracts were not always suitable these days. The
contracting approach must be amended to meet the current demands. The
demerits of the Traditional form of contracting were studied and the impacts of
their ineffectiveness were determined as cost overruns and time overruns which
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severely affects the Client’s objectives. Hence it was stressed that innovations have
to be brought on. Developments have already started arising; the various
developments were described in this dissertation with the comprising changes and
speciality.
To study the role of project management and the Clients in the contract selection
for effective completion of project, case studies were illustrated. The case studies
were selected appropriately to reflect the current trend of contract strategies
implemented and compare them with the Traditional methods. For example the
paper Delivering London 2012: procurement stands as a perfect example for the
NEC form of contracts used. In recent years most of the modern projects are opting
for the developed forms of contract rather than the conventional forms. From the
case studies dealt it is inference that for a complex project where there are scope
for uncertainties and variation, the Traditional form of contracts are not suitable
anymore. In the case studies it can be seen with the help of NEC contracts the
projects are completed well in time and budget. There are different types of
contracts into the NEC each one of which could be accommodated as per the
requirement of the project. The case studies also explained us that the contract
alone is not the match winner for the project but also the various parties involved
in the project. In the Gateshead project all the parties collaborated with each other
and formed as the Project Manager which helped them with a quicker decision
making process. The appointment of a special Project Manager for the Client’s
consultation and overlooking the Contractor’s work was also observed. The
findings derive from the case studies were that the use of NEC had made the
project outcome more effective and efficient. An early forecasting of the cost and
other characteristics of the project by the NEC methods alerts both the Client and
Contractor. This makes them work together and solve the problem.
With the help of these case studies, the author has studied the effective
implementation of the innovative contract strategies such as NEC form of contracts
in the projects. The author has learned about the NEC contracts and depicts one of
its main features as: it will highlight the shortcomings and deficiencies by the
project participants. The reason for this is the definitions of roles, risks and
processes in the NEC contract are much tighter than in any other form of contracts.
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The case studies outcast the advantages of the improved form of contracts to the
Traditional form. In The Montreal Olympic Complex project, the project fails and
results in severe cost overrun. The budget of the project increased ten times the
planned amount. There were no specific single reason for the failure, rather it
could be said that everything on the project was faulty. Starting from the design to
the construction the project faced so many problems. The project management
was not efficiently applied into the project; if a different contract strategy is to be
applied into the project the results could be very different.
The time factor in the project has been fast growing as the fundamental factor in
upcoming projects. The study from case studies reveals the Clients opt for
‘certainty of completion date’ when compared to the ‘shortest design and
construction period’. From the case studies dealt in this dissertation, in the case of
Olympic park the main objective of the project is the timely delivery. The Montreal
Olympic project stands as a perfect example to stress the importance of project
completion in time. It is learnt from these projects that delay in time causes the
cost overrun as well. For reducing any further defaults completion of project in
time is suggested.
An effective application of a good project management technique is also equally
important in a project. This research has stressed on the project management in
contract strategy. The author has learned the positive effects out of this
involvement. It is learned that the quintessential characteristics of project
management is its ability to look at the needs of the Client and the risks involved in
it. It is also helpful in anticipating problems and communicating the contingency
plan and priorities to rest of the participants. The most important reason for
employing project management was discovered to be its ability to produce quality
and deliver value for money.
Role of the Client is another important component in the project success criteria.
However not all the Clients are the same and so do their needs vary accordingly.
The author emphasises from his research that the Clients must first find out their
needs and set objectives such that they are clearly specified to the Contractor. The
Clients’ need so far has focussed on the classic trio of time, cost and
functionality/quality. But the modern the Clients have started demanding more
involving the reduction in time or reduction in cost based on the project situation.
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The research has discovered that the Clients have started setting incentives for
effective performance of the Contractor. However studies have revealed setting
incentives does not always help rather an effective collaboration of the Contractor
and the Client is the most important factor for project success.
Lastly the author has made a comparison between Traditional forms of contracting
with the NEC forms. From the exercise it was learnt that the NEC can effectively
deal with the variation with minimal demerits. Whilst dealing with case studies it
was determined that the Clients using NEC feel they are well aware of financial and
time outcome of project at any time. This is due to the transparent nature of the
NEC contracts which makes the project participants feel comfortable. The variation
exercise teaches that the Client must not always go for changes once the project is
initiated and construction work going on, unless he is fully aware of the
consequences he has to face. The Client must also learn to select the contract
strategy well keeping in mind the progress of project.
7.3 RECOMMENDATIONS FOR THE MANAGEMENT OF FUTURE
PROJECTS
It is not an easy job to prejudge the evolution and development of existing systems.
However prediction could be made based on the currents trends and relating them
with the historical approaches. Therefore based on a thorough analysis it could be
stated that the future project shall have complex designs, larger size, higher
budgets and a more demanding the Clients. Hence to meet the demands the
contract strategies will continue to evolve and developments will be arising.
The author suggests that the Traditional form of contracts may be helpful in
dealing with very small projects but when it comes to complex projects with high
the Client demands the conventional contracts do not stay up to their expectations.
As per the current trends an extensive use of modern form of contract has been
widely applied throughout the world. Since this approach has been proved
advantageous the author recommends following actions to be followed for greater
good in the construction industry:
1. Provide increased training for project teams and project management the
Contractors.
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2. Increase the awareness of the benefits of the developed form of contracts to the
Clients.
3. Promote wider future use of the innovative contracting strategies in the
Engineering and construction industry.
4. Actively promote the joint working approach of the Client, the Contractor and
Project Manager Collaboration by co-locating future project teams in site offices.
7.3.1 High risk factors involved in future complex projects
The author is wary about the High risk factors the future projects are on the verge
of facing. Therefore he suggests certain procedures to be followed in order to
reduce the risk factors causing any problems. The first things the author suggests
is an early qualitative assessment, he emphasises its significance to the
stakeholders particularly those who are inexperienced. The common point learned
from this dissertation is that one must understand about something which he
wishes to undertake; likewise it is preferably a good option the adoption of the list
of high risk factors which could help stakeholders to take great care of it from the
early stages of the project. Another procedure to overcome these risks is to involve
the Project Manager in all preliminary discussions, programme planning and cost
estimating. This will help in Project Manager directing his team in such a way that
the risk factors are not disturbed. The risk management process must be an on-
going process and the interested parties must remain focussed in tackling them
throughout the year.
7.4 SUMMARY
This chapter focussed on the author’s perception of the dissertation. The lessons
learnt from the start of the research till the end were analysed. The case studies
were examined and their views about the form of contracts used were mention.
Lastly this chapter is concluded with the recommendation for future purpose by
the author.
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8. CONCLUSIONS
The author has researched the Engineering contracts and contract management
along with all aspects of contract strategy. He has compared theory with practice
by the introduction of case studies of recent projects. Finally the author has
achieved his project objectives namely:
Examining the concept of contract strategy.
Investigating the different contract strategies used in construction industries.
Interrogating the role of contract strategy in project management.
Examining the implications of contractual variations in construction industries.
To compare and evaluate changes in a project by applying the Traditional
contract strategy with the new engineering contract systems.
Analysing into the merits and demerits of various contract procedures for the
given situation.
The author has analysed the necessity for contract strategy study and has limited
his research to risk analysis and the Clients objectives involved in success of the
project. Initially the author’s intention was to study the various contract strategies
available and suggest an appropriate one over each type of project. Therefore he
has discussed about the application of different types of contract strategies and
place of their use. For example, in a case where the time is stated as the most
important objective a suggestive use of management contract or a cost
reimbursement contract with time target is encouraged. However at the later
stages of the research the author has learnt, the decision of the contract strategies
vary by the project situation and the Client/the Contractor needs and it is
inappropriate to judge based on the project types.
The author feels that the project management is an essential part in contract
strategy and it is important that the Client is informed about the progress or
changes in the project. For example, in all but the simplest repetitive contracts
there is need for the Client to appoint the Project Manager and the Project Manager
must keep the Client informed about all major decisions. From the research it is
deduced contract strategies alone do not cause the success in projects, but also an
effective collaboration of all project participants along with a wise application of
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project management techniques. The satisfaction of all the participants is essential
for a motivated and dedicated effort made towards the project completion.
The author has studied that the completion of all technical and engineering
projects involves risk and uncertainty. The proper allocation of risk between the
parties involved is a major consideration during contract strategy studies. The
risks may occur in any form and one such form is need for change. The author has
observed that the contract strategies could be amended based on the situation for
an effective outcome. For instance even after the start of the construction phase
the approach may change during the life of the project and the Contractor may
bring in change according to the calamities surrounding the project i.e., either due
to the shortage of time or for applying different construction method. The author
has learned a major lesson about the variations in a project from this dissertation,
it is that do not vary the work included in a current contract unless it is vital to the
safety or functioning of the facility. The consequences of a major variation in terms
of cost, delay and disruption were illustrated in the case study of the multi-
storeyed building. Evaluation of the change was seen to be very problematic when
the Traditional ad-measurement contract was applied, due to the absence of an
agreed programme. However it proved much easier when treated as a
compensation event in NEC, but even here sometimes it is unsure whether the
Client fully understood the full after effects of the change.
The author has noted a rise in the number of projects in recent years for which
early or timely completion is a major concern. But this research incurs that the
Traditional method emphasis on price which does not potentially focus on the
increasing importance of timely completion and rapid completion in technical
projects. For this purpose developments in contracts were formed. One such
development is NEC (New Engineering Contract). NEC is used for almost all U.K
infrastructure projects for its collaborative nature; early caution requirement and
attention to programme were applauded by the highly successful managers of the
London 2012 Olympic park project. The major advantages of NEC contracts found
to be helpful for the Client are as follows:
1. It employs a user friendly language
2. It is possible for early findings of risks
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3. A collaborative approach to any issues mitigates them and also reduces the risk
inherent in construction work
4. A clear definition of roles and responsibilities helps accountability and
motivates people to play their part.
Finally the author is satisfied with his work that he has explored the range of
contract types and administrations which have progressed to meet the varied
requirements of the industry as well as society and changes in technology. From
his findings the author states the future of the contracts in construction industry
lies in the hands of developed forms of contracts rather than the traditionally
followed ones. The author feels that such innovative contracts which promote
collaboration and facilitate project management will be widely used in the future
for major high budget and high risk projects.
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Assaf, A. & Al-Hejji, S., 2006. Title: Causes of delay in large construction projects.
International Journal of Project Management, 24(4), pp.349-57.
Barnes , M., 2006. Project Management inUncertainty An Integrated Approach.
Speech. Shangai: 20th IPMA World Congress of Project Management.
BBC, 2012. London 2012: Olympic Park in pictures. [Online] Available at:
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