UK construction has been the subject of many independent reviews, with a general theme being that it needs to become less adversarial to become more effective and efficient in the delivery of projects. The key example being the Latham report in 1994, which was a big advocate for more partnering to combat these adversarial relationships. It was this same report that endorsed the use of the NEC suite of contracts, first published in 1993 that have risen to become prominent across the infrastructure sectors in the last twenty years.
Partnering is one form of collaboration, but in recent years we have seen a rise in the use of contracts utilising Early Contractor Involvement (ECI), specifically on HS2 and Crossrail, with varying degrees of success. ECI has a scalable approach, so whilst currently, in use on major programmes of works, there is no reason why it cannot be adopted on any project. This article will examine the factors needed for success and the options available that will provide you with the most benefit.
Adversarial Industry moving to collaboration and partnerships
Traditionally delivered projects are ones whereby the client engages the services of a designer to take the scheme through outline design, planning and then onto detailed design before the procurement of a contractor for the build phase.
However, this can be viewed as the least collaborative approach as it does not allow the contractor to contribute at all to the design process, and therefore if you put your supply chain into a competitive tendering situation, they could focus on highlighting areas of design they will target for post-contract variations even going as far as to factor these into their tender return. If successful in contract award, their focus will then be on value recovery from the outset as opposed to on delivery. Once the stall is set out like this from the start it is easy to understand how adversarial behaviours can start.
By separating the parties in this way with their only way to engage with one another being through legally defined contracts then if a dispute should arise the recourse is to rely on the legal system to resolve it. This is not only time-consuming but again forces the parties into adversarial behaviours.
If tenders are scored and awarded purely on the lowest price coupled with the lack of consultation as to the balance of risk between the client and contractor then when you consider the small profits margins in construction, it is a recipe for a claims culture being adopted.
The Latham report recommended that these different parties come together in partnering arrangements that engender collaboration with the expected benefits being a change in culture, attitude, and ultimately the final results.
What are the pros and cons?
The benefits of ECI are the parties being able to work together on identifying and resolving issues that could affect construction, i.e., de-risking a particular constraint or appeasing a third party whose consent is needed.
Contractors will also be able to advise on issues such as buildability of the design, sequencing of the programme and the best way to mitigate risks in construction. They will also be to advise on issues such as site layouts, locations of compounds that enable the client to start negotiations on any land take agreements in advance of the works starting to avoid delay.
Discussions around lead-in times for key materials can be brought to the fore with decisions made as to who is best placed to order these should the programme be under pressure. In terms of working together on commercial issues, then an open book tendering exercise can be undertaken, giving the client full visibility as to how the price is built up and allowing them to see that a robust procurement exercise has been completed.
By allowing the parties to work together on planning at an early stage; this allows them to not only identify potential issues, e.g., statutory utilities diversions, but also provide innovative solutions with the benefits being the risk to health and safety being removed or reduced, reductions indirect costs or mitigating your risk profile.
Of course, there are downsides, and most of these are centred around a lack of experience in being able to manage such an arrangement and not seeing the warning signs that despite the best endeavours, the costs are escalating and that clients are being railroaded into an ever-increasing budget or high price.
Also, embedding a contractor early on to assist with the design can also mean they are so intrinsically linked to the project that other contractors might not be interested in bidding for the project if a two-stage tender should be adopted.
If as a client, you do not pick the right commercial and contractual model, i.e., with the right balance between incentivising the contractor to engage in driving solutions as there is a clear benefit to them, then you may well see behaviours of actively driving the budget up as high as possible through the identification of issues and simply adding these to either the risk register or the budget, the results of which will actually limit your procurement options in the future.
How to set up for success – Teams, Agreements, Contract Structure
In terms of contract structure then, for JCT, they offer a Pre-Construction Services Agreement which enables clients to employ the services of a contractor before they procure the mains works contractor. In terms of NEC, they have a secondary option clause X22 to select.
The norm is to have two stages whereby stage one is the development of the design, programme, and price in anticipation of stage two – Construction Delivery. There is usually a clear notice to proceed between stage one and two required to be issued by the client.
If you intend to work with one contractor through detailed design and construction the following plan is generally adopted. This works well if you are working with an existing supplier with whom you have an established trust relationship with good lines of communication. If you do not, then you could consider running a quality only tender competition whereby suppliers submit their proposals as to how they will deliver on this basis and where they have done so successfully before.
In terms of the process for moving through the stages with one contractor:
- Set a budget for the overall project
- Contractor delivers Stage One on a cost reimbursable basis but up to an agreed limit
- Stage One deliverables are provided to an agreed programme. The deliverables include:
- Detailed design which is assured for constructability
- Jointly agreed construction programme
- Stage Two prices including how this affects the overall budget
- Construction Phase Plan
- Detailed stakeholder management plan
- First principles price build-up for the Stage Two price
- Detailed risk registers with clear action owners and agreed mitigation options
- The contractor is then incentivised to deliver the final cost (including any monies spent on Stage One) inside the overall budget. If they achieve this, a share of the budget will be given to the contractor. Establishing a budget that offers a real incentive is key, as if it does not the only incentive to maximise margins is to drive the budget as high as possible
If you intend to work with a contractor for Stage One only, i.e., you still want to run a competitive tender for the Stage Two works; the process is generally as follows. Note the advice above though, in that once you have embedded a contractor in Stage One but not given them any certainty in terms of their award of Stage Two then consider how this plays back in terms of their level of commitment in finding you the most innovative solutions if you then offer these ideas and solutions up to a wider supply chain.
- Client retains full ownership of the budget
- Agree to a price for Stage One only with an ECI Contractor
- Stage Two deliverables are provided by the ECI Contractor as above, excluding the price
- Client takes the Stage One deliverables and runs a competitive tender
- Winning contractor appointed on a price for Stage Two only with no incentive on the overall budget
Of course, there will be many variants of the above depending on how the client wishes to contract with some being that contractors are incentivised on their own price plus certain elements of the client’s budget but not the entire budget. Examples include the client pays for statutory undertaker’s (SU) diversions, but the contractor is incentivised against their costs thereby creating a relationship involving the contractor working with the SU to reduce costs and minimise programme impact.
What not to do
It is vitally important that you set the parameters of what you are trying to achieve. For example, do not set up meetings and invite everyone in the hope that collaboration starts. As a client, you need to clearly set each meeting’s objectives and certainly in the contract documents, including exactly what is required for each stage. This could mean that you produce outline designs and then allow the contractor to consider sequencing, materials and lead times, site considerations, and advice on costs. If this means you either amend the outline design or firm up the detailed design requirements, then think about how any additional costs will be offset against the benefits realised.
You need to include the right to switch individuals at any point in the process if you consider you are not achieving the benefits expected. This should not be viewed negatively rather that you need the right sort of character to be able to work constructively between the parties and be prepared to take critical feedback for the good of the project.
Consider the differing contractual models that each party is engaged upon, i.e., if the designer is on a fixed fee; they will seek to design in the most time-efficient way, so any perceived prevarication will be detrimental to them. If the contractor takes away their designs and spends weeks reviewing them, you can expect to notice the delay and additional costs whilst they wait. If the contractor is paid on a cost-reimbursable basis, they might want to take the most time available to complete their tasks. You need a contractual structure with common interests such that the parties can truly focus on the project as opposed to protecting their commercial interests.
The benefits of ECI are there for all to see in theory, but to realise the benefits, it requires very close management by the client, or the danger is that it can just become a talking shop. To realise the advantages, you need an experienced project management team that can steer the supply chain’s experience to the focus areas and really achieve an output.
Whilst you may take some solace in the availability of a contractual provision to replace any parties or individuals you consider are not benefitting from ECI ultimately; once the design has been completed, then you are more or less constrained by it. That is to say, if the cost plan is updated at this point and you realise you have a problem, then what are your options? You could run a competitive tender in the hope they provide you with more cost-saving ideas, or you re-run the ECI stage but with a different contractor?
Either way this is not a great outcome, with either option requiring a significant amount of re-work and uncertainty. ECI, therefore, is not for passive clients. Do not expect to mobilise the people you need and then sit back and wait for the roll results. You need to actively manage the skills you have employed by focusing on the areas that you believe will return the greatest results. If you can master this, your results will pay dividends in the long run.