Early contractor engagement in two stage tendering


James Finnie

April 21st, 2020
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A brief introduction on two stage tendering

Where time is at a premium, typically on larger more complex projects, two stage tendering has become a unique building procurement process. It allows the design to be developed and the tender process to run in parallel, early in the life of the project.

Both the design and construction route benefit from close collaboration early on. The design under development is based on sound construction methodology, and the contractor gets time to consider, identify, and advise on the best construction route based on the developing design, price, and quality.

The first stage sees a list of prequalified contractors submit preliminary bids, which include building rates. These are then reviewed and the preferred contractor is engaged on a consultancy basis to advise and guide the Client’s team. The second stage sees the design developed using the Contractor’s stage 1 costings, resulting in a negotiated price for the project based on the developed design.

How does design responsibility work between the Architect/Design team and a D&B contractor on a two stage tender?

The design responsibility will pass from the Design Team to the Contractor at some point during the Two Stage Tender Process. In most instances this will happen between the two stages. It could also take place at the beginning of the process or at the end. On a medium sized residential development, it would most likely be between the two.

The Architect and associated Design Team develop the design, as is typical on a project. They’re also responsible for coordinating the design, gaining planning and building approvals, ensuring compliance with the relevant standards, and adhering to the Client’s budget. They will be liable to the Client as in any other project for the work they produce. They should know from the outset that they will be handing over the design responsibility to the Contractor.

Before roles change, it’s important that the Design Team and the Client/Developer check they have completed all the deliverables as set out in the contract agreements. Likewise, the Contractor must ensure they take receipt of the agreed documentation to the standards expected.

The Design Team’s responsibilities to the Client can either remain in an overseeing role, fall away completely, or they may enter into a contract with the Contractor to continue with the design of the project on behalf of the Contractor. This change is a pivotal moment in the project and needs to be clearly recorded as such.

The Contractor has a responsibility to advise on best practice, efficient and economic proposals, and alternative options, as well as cost saving and value engineering suggestions during this time. They could potentially have a big impact on the design – hopefully for the benefit of the client. They are also liable to the Client to ensure the advice given is sound and not detrimental to the project, although it could be tricky to prove.

Before the Contractor takes design ownership, they could also be appointed under a Pre Construction Service Agreement (PCSA). This means that they effectively act as a consultant as part of the Design Team to advise on construction related matters such as best procurement routes, appropriate building methods and financial compliance with the budget, as well as the availability of materials and suitable specialist contractors. This typically happens during the first stage.

Warranties may be required between the three parties as responsibilities change. If the residential units are sold, the property owners or the property association may require warranties. This is dependant on the specific contract arrangement.

The Contractor then takes over responsibility for not only building the project, but also developing the design further so that its various parts are viable and materials and systems can be procured based on their advice during the first stage. At this stage they will enter into a new contract with the Client to deliver the whole project going forward. The Contractor is now responsible for presenting the final designs to the Client and them or their review team for acceptance.

Although the Contractor is not responsible for any design carried out before taking ownership of the project, the contract should contain clauses to specifically state that once the Contractor takes design responsibility, they acknowledge they have examined the documentation prepared by the Design Team, have accepted it, and can adopt it. This then creates a clear-cut change in responsibilities.

What are the pitfalls with novating design responsibility?

Novating means to replace with a new contract. There are several potential pitfalls with the novation of design responsibilities. The primary one is that the “current” design of the project inherited by the Contractor may not be fully realised or completed as per the various agreements. This could have several ramifications.

  • Incomplete information can affect all parties. The Client’s design team may have to provide additional information and re-issue designs. The Contractor is often expected to pick up the slack and complete the missing information. Late release places pressure on the programme and the Contractor. This pressure can manifest itself later on as the Client’s review team may need to respond and approve designs quickly due to programme pressures. As a consequence, they could be pressured into accepting lesser quality so that the package of work can be procured in time.
  • A fast track procurement programme brings constant pressure on all parties.
    • Immediate pressure on the Design Team to complete the design.
    • The Contractor to provide construction documentation for approval so construction can commence.
    • The Client to ensure design and quality is not lost and that there are no or minimal budget increases.
  • The Contractor would be entitled to claim additional costs where they are expected to take on additional work. They may have to take on more design responsibility if information is incomplete, there are Client changes, slow release of information, or if the programme gets shortened.
  • As packages are developed there is potential for further costs to be incurred. As the budget is fixed the Client could have to look for savings in other areas. For example, the finishes or the quality of the heating and cooling systems. This could directly affect the final product and impact sales value, and therefore have a financial effect much later on.
  • Poor budgeting by the QS or incomplete documentation can put pressure on the budget if appropriate allowances and contingencies have not been made. Poor forecasting could also lead to increased costs later which would be detrimental to the project.

All this can sometimes lead to acrimonious relationships, which can also impact the smooth running of the project.

How can you prevent these pitfalls?

As with any project, the key to success is in the project planning. A thorough plan at the outset with the intention to deviate as little as possible if at all – while often a pipe dream – at least gets you off to a good start. If the main parties are clear about their roles and responsibilities and change is kept to a minimum, then things should go smoothly.

  • If the Client/Developer promotes a good overall team environment from the outset, then slippages can be identified and their risk managed easier if the team can work well together. They can then be prioritised to ensure they are promptly addressed, signed off and procured quickly to get back on programme.
  • It’s important to have a realistic budget in place before appointing the Contractor. A good QS should be able to build in contingency where the design information hasn’t been fully completed. There needs to be strong emphasis on updating and monitoring the budget, and also on promoting an open book policy where all parties are working together for the benefit of the project. Incentivising the Contractor and the consultants by offering a percentage of any cost savings would help to create a productive team-working environment.
  • Pressure can be lessened on the Design Team with the early engagement of the Contractor under a PCSA. This can go some way to offsetting any Client concerns about lack of design control, as design can still be developed quickly and efficiently if it’s based on solid construction methodologies. Helping to steer the team to the most economical solution quicker is important, as is reducing the need to research alternative solutions which are often undertaken during the developed design stage of the project.
  • Allowing sufficient time in the programme from the outset to complete the concept design package would be very beneficial. The more complete the project as a whole, the better. If time can’t be allocated, a more managed approach could also be adopted where the release of information to the Contractor is staggered and less critical packages issued later. This has to be done in accordance with the programme.
  • Appointing the right contractor with a proven track record in the industry and who is known for delivering on Design and Build projects can also help. This can give the Client greater comfort if they know they can benefit from a contractor’s expertise, minimising risks on projects.

Managing, putting in place systems, and working to tight but realistic programmes can all help prevent projects running into difficulty when design responsibility is novated.

Are there any downsides to early engagement?

There can be pitfalls, but I think the key is understanding the complexity of your project. If it’s a simple build such as an industrial building, the contractor could be engaged immediately. If the building has many design features, is highly complex and requires to be highly co-ordinated, then the Design Team will need time to develop it. I would suggest that the Contractor should still be engaged early but not their whole team. Maybe their design manager should attend early with the full team coming in later. This allows the Contractor to raise any red flags or catch potential issues earlier.

The Client/Developer may not be ready for early engagement. They may find it hard to commit to a concept design earlier than they are comfortable with. However, by now they should have a feel for how long the design takes to settle down, using this as a yardstick to bring in the Contractor to help develop the project from there.

Early engagement could put undue pressure on the Design Team to accept solutions they do not feel are appropriate or in keeping with the design. This could lead to resistance and create tension between the two. However, if it is clear from the outset that this is the Client’s preferred approach, both parties should be more prepared and responsive and the Client may have to act as arbitrator.

A contractor may have set systems and methods of construction in mind and be reluctant to recommend alternative solutions. They may prefer to push only their preferred way of procuring the project. It is then crucial to approach only those contractors in the industry who are known to deliver a varied range of projects. Undertaking a solid prequalification screening is crucial.

Early engagement will mean additional fees for the Contractor’s time, though a developer would expect to recoup these fees and more later. If nothing new is brought to the table by the Contractor, then there is no benefit and it would be seen as a loss. Again, rigid prequalification is key.

There is the potential for the Contractor to become a “shoo in” and fail to bring a competitive negotiated bid. I would suggest that under the PCSA its very clear that while Stage One will be tendered and Stage Two negotiated, the Client has the option to also tender Stage Two should negotiations and procurement options be unfavourable to them. Without going overboard it’s important to keep the Contractor keen for the project so they bring their best offer.

Image credit: iStock.com/Rawpixel

About James Finnie

James has been based in Cape Town for the last 14 years, trained in Scotland, and has worked with some prodigious practices over the years. He recently started his own architectural practice where the philosophy of Kind Design puts kindness at the centre of the creative process.

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