Construction Management is a unique procurement route.
Using this method, a property developer directly employs multiple subcontractors instead of a single main contractor. The single feature that makes Construction Management distinctive is that it’s the developer who places individual subcontracts with separate specialist subcontractors themselves.
Construction Management has been around for some time, but in recent years it has evolved with many developers now employing new, intelligent tactics to maximise profits.
Traditionally, the developer had to employ a ‘Construction Manager’ to manage the project on their behalf. The logic behind this was that their fee was lower than that of a main contractor and therefore, there were savings to be made. However, the Construction Manager had no vested interest in the financial outcome of the project and, barring professional negligence, carried little risk.
In contemporary construction, developers are starting to deliver their schemes on a quasi-Construction Management basis, effectively employing a ‘Construction Manager’ in-house, in the form of a project management team. With this approach, the developer needs the infrastructure to procure and administer subcontractors. The critical success factor is having a dedicated Project Manager to manage delivery and the construction programme.
Effectively, the developer is creating a virtual main contracting capability in-house, and the advantages in doing so are huge.
Construction Management has many benefits:
- Achieving shorter programmes as design progresses in parallel to the earlier elements of the construction
- Flexibility; subcontract packages can be let in a number of different ways depending on what is required, meaning that appropriate subcontractor’s skills can be harnessed directly rather than through a vague pass through of responsibilities as is often the case in the traditional ‘main contractor’ route.
- Financial; The reason savings are so big lies in the story of procurement routes generally – the key stakeholders, the various options available to developers and, the history of how these developed.
What are Procurement Routes and why do we have them?
From traditional ‘main contractor’ procurement, to design and build, there are many procurement routes available to developers at the outset of a project.
In different circumstances, different methods should be used. What drives decision making, or at least it should, is risk. It’s important to understand the project type, its risks, and therefore which method is most appropriate. Many developers are reliant on advice they get from their consultants about risk; this is why they appoint them.
This appointment point however, is relevant.
There is naturally a power struggle between professionals, their institutions, and the procurement methods they favour.
Traditional procurement involves the employment of architects, quantity surveyors and main contractors, so why would they argue for it?
- It’s useful for quantity surveyors (QS) to advocate for this given the large volumes of documentation and administration required, guaranteeing significant work for them.
- Architects are happy because this procurement route provides the greatest scope for design leadership and ownership and thus create both higher fees and projects more aligned with their architectural vision.
- Main contractors are satisfied as they are employed in full and often without design responsibility, both increasing fees and reducing risk.
With traditional procurement, the status quo is retained. So, with all these three stakeholders happy, has the developer got the best deal? Sometimes, the answer to this question is ‘yes’, but in many cases the answer is no.
One of the driving forces behind the growth in Construction Management was to balance the power struggle. It was intended to engender a participative process where decision-making is open.
First and foremost, what does traditional procurement looks like…
The developer employs a main contractor to manage the construction, the main contractor then employs subcontractors to undertake the works. On rare occasions, the main contractor may carry out isolated areas of work (e.g. groundwork) but more commonly, the main contractor subcontracts all of the works to subcontractors.
With this model, the developer is spending approximately £100k for every £1 million on main contractor risk and profit allowances. On a small development with a build cost of £3million, you’ve lost £300k minimum simply because you’re doing this the old way.
So, when you employ a main contractor, what are you actually paying for?
Main Contract Cost Breakdown
|Main Contract Overhead and Profit||10%||£300,000
|Main Contract Prelims||10%||£300,000
|Main Contract Measured Works||80%||£2,400,000
Figure 1 – Based on a £3million construction cost
A typical tender includes circa 10% for preliminaries and 90% for measured works. Preliminaries are defined as the “cost of administering a project and providing general plant, site staff, facilities, and site-based services and other items not included in the rates…”(Chartered Institute of Building)
Overheads and Profit
Main contractors include overheads and profit into their price. For smaller developments (say less than 50 units) this figure usually accounts for 10% of their price.
The measured works are made up almost entirely of the appointment of subcontractors. The subcontractors typically include a 10% prelim themselves, so the actual main contract breakdown looks more like this:
|Main Contract Overhead and Profit||10%||£300,000
|Main Contract Prelims||10%||£300,000
|Main Contract Measured Works||72%||£2,160,000
|Subcontractor Prelims (10% of 80%)||8%||£240,000
Figure 2 – Breakdown of £3 million construction costs
Knowledge of this is critical to a developer.
On a £3 million build, with the traditional ‘main contractor’ route, there is £840,000 (28%) of management fees and profit included. Understanding this cost profile should enable the developer to make informed decisions about their project.
To provide a framework to guide developers through the procurement route selection, understanding risk and what drives procurement policy is critical. The important criteria for choosing procurement methods are:
- Whether the developer wants involvement with construction
- Whether the developer wants to be able to alter the design during the project
- Whether the project is complex
- Whether the developer wants early completion
- Whether the developer wants certainty on price
- Whether the developer wants maximum price competition/best value for money
Let’s take the example of a residential scheme that is less than 50 units (a typical SME developer’s project). On a scheme like this, the developer almost always must be relatively close to the construction process, so we’ve discounted this factor. Their primary concerns are:
- The developer wants to be close to the design
- The developer wants to complete as quickly as possible
- The developer wants certainty on price but, because margins are tight, maximum price competition and value for money (i.e. profit) is more important
Let’s explore these in more detail…
1. The developer wants to be close to the design
Construction Management is considered a viable alternative to Design and Build given the early involvement of subcontractors and their ability to influence the design from a construction perspective.
With Construction Management the developer gains specialist subcontract expertise in construction without the architect relinquishing any real power in terms of design responsibility, which is a massive benefit in terms of buildability (and therefore cost) of the scheme.
2. The developer wants early completion
Construction Management results in the early employment of specialist contractors. This should ensure that the design lends itself to a simpler, more practical site solution. This allows the developer to:
- Start works earlier,
- Progress more quickly; and,
- Deliver works more economically on site.
The earlier involvement of subcontractors accelerates the works and brings forward completion.
3. The developer wants maximum price competition
Traditional ‘main contractor’ procurement means that the main contractor includes for risks, profit, and management. With Construction Management, the developer can pursue each specialist subcontract package individually and ensure that the lowest price is achieved for each package of work, reducing the overall build cost.
Our hypothesis is that, on projects with a construction build of less than £20million, developers should be focused on the following when it comes to construction:
- Remaining close to the design
- Delivering schemes as quickly as possible
- Creating projects with maximum price competition to achieve best value for money
This is possible with Construction Management, whereas it’s not with other procurement routes.
So, how do developers successfully make these gains set up…
What does Construction Management look like at the funding stage?
Funders always view a project with a focus on risk – how likely is it that this project delivers a return on their investment?
For any project, the simplest and most effective policy to manage funding applications is for developers to present their procurement strategy, the resource they intend to manage the works with, and a robust forecast cost to build.
Whether the scheme is via the Construction Management or traditional procurement route, funders will always look to ascertain the project risks. For Construction Management, it’s important for the developer to explain how, as a business, they intend to:
- Identify the subcontractors suitable for the works
- Manage the subcontractors (i.e. with a Project Manager)
- Pay the subcontractors (likely using the funder’s elected Monitoring Surveyor monthly)
For developers to create a presentation explaining how they intend to manage the works commercially and operationally; the inclusion of a Project Manager’s CV and/or previous projects the business has completed will go a long way to appeasing the funder and reducing the risk profile in their eyes.
Whether it is a funding application for Construction Management or traditional procurement, the fact remains that the submission needs to show exactly how risks will be managed and that the project team is capable of delivery.
What does it look like legally – what are SPVs?
Under the Construction (Design and Management) Regulations of 2007, better known as CDM regulations, the developer is legally obligated to appoint a principal contractor.
The solution that we suggest for the Construction Management route is to set up a Special Purpose Vehicle (SPV) Limited company as the contracting entity.
This is actually very common in the industry and companies contracting via an SPV merely require a few key arrangements (e.g. project bank accounts; bank guarantees; ESCROW accounts; etc) to be put in place pre-contract to avoid delays in securing contractor performance.
This is a simple, low-cost means to comply with the requirements of the CDM regulations while also capitalising on the major savings to be made via Construction Management as a route.
Often a developer will act as the client and create an SPV in the name of the project’s address “Number One High Street Limited”, “10 Gate Street Apartments Limited”.
What does Construction Management mean in terms of management of the consultants and procurement phase?
Under the traditional ‘main contractor’ procurement route the developer employs the consultants and outsources the management of subcontractors to a main contractor, who effectively manages the project on their behalf for a fee. The main contractor manages the programme and performance of the subcontractors, financially and operationally.
The project team is shown below:
The Construction Management project team removes the middle layer of management undertaken by the main contractor; the developer delivers the project themselves:
Removing a layer of management evidently means that the developer needs to replace this management in-house. You do that with the appointment of a Project Manager who serves to support you in both the pre-construction and construction stages, assisting in the coordination of both consultants and contractors.
Managing consultants will always be a challenge whichever route you take; it requires effective project management. The Construction Management route looks similar to traditional procurement in that you still employ an architect and a structural engineer. The Project Manager will take the lead in coordinating these consultants at an early stage to ensure construction drawings are produced.
One fundamental difference is that the work of the architect can be split into bite-sized chunks, speeding up the programme. Rather than delivering a complete design for the project, they deliver the scheme in packages enabling the developer to create subcontract packages of work for the procurement phase. This allows things to progress much more quickly.
Managing consultants under Construction Management is therefore simpler. Consultants can be given bite-sized chunks to deliver as checkpoints and in doing so, the developer releases the procurement and construction stages earlier.
What does Construction Management mean for managing contractors on site?
Construction project managers should start planning long before construction begins and continue revising and developing plans until the project ends. The design, pre-construction, and procurement stages of a construction project each require planning – and each may need to be revised as the next stage unfolds.
The Construction Management model is proven to encourage early involvement from all parties. Early involvement leads to effective collaboration, increased efficiency, minimised waste, and a unified objective.
When you have one Project Manager collaborating and bringing design and subcontracting parties together, you avoid the waste, increased cost and time, and also the adversarial relationships that frequently rear their head with the traditional model.
When the developer brings management in-house, they give themselves the opportunity to align all their interests. Now that they have the construction expertise in-house, they can deploy that added knowledge within the teams to all phases of the development. The developer can bring its Project Manager into the conversation to advise on how early decisions during planning may affect the construction phase. They can then collaborate with the sales team to share ideas on how construction methods and design can be modified to improve the marketing and sales aspects of your development.
Your Project Manager will have the tools to manage contractors on site. You may also add a quantity surveyor to your team, or your project manager manages the commercial side of the project using some of the latest tools and software, such as C-Link, available on the market. This depends on the size of your business and how many projects you run concurrently throughout the year.
Health & Safety Requirements
One key point to be mindful of is Health and Safety. The CDM Regulations require developers to make suitable arrangements for managing a project, including the appointment of other duty holders. Developers must make suitable arrangements for managing their project and enabling those carrying it out to manage health and safety risks in a proportionate way.
These arrangements include the appointment of a Principal Designer and Contractor. In both traditional and Construction Management procurement, the developer employs a Principal Designer (the architect). In Construction Management as we have described, the developer acts as Principal Contractor (PC) via the SPV.
As PC, the developer is responsible to “Plan, manage, monitor and coordinate health and safety in the construction phase of a project. This includes liaising with the client and principal designer, preparing the construction phase plan PDF, organising cooperation between contractors, and coordinating their work”.
To do this, developers appoint SPVs as PC and maintain presence on site through a project manager. Many developers employ a Health and Safety Consultant to support the SPV in acting as PC. The consultant sets up the CDM files and documentation to enable the developer to coordinate between duty holders to ensure all parties are aware of their legal duties and will also:
When selecting Construction Management as a procurement route, developers should always consider the context of the project and whether it’s suitable for the approach. In this procurement route, risk is almost entirely with them in respect of cost and time. A certain level of in-house expertise is required.
If you get this expertise, Construction Management brings with it many benefits. When done well, it is the best way to increase quality (each package is subcontracted to a specialist with genuine expertise) whilst reducing the overall build programme and costs.
Find me a developer who doesn’t want a better-quality product delivered more economically and quickly?
Construction Management may seem challenging, but once it has been completed on one project, you will see – it is the best way to manage a highly profitable property development business.
Feature image photo by Ricardo Gomez Angel on Unsplash
About Paul Heming
Paul was a Quantity Surveyor who gained 10 years experience of managing £200 million worth of flagship UK projects, including 20 Fenchurch Street and Battersea Power Station. In 2015, Paul founded C-Link with the intention of sharing his expertise of managing major projects with the SME market.