The packaging of works by contractors to subcontractors and subcontractors to SMEs is widespread in construction dependent on the scope and nature of projects undertaken. How to package up works and what influences the decision as to how small to break the packages down is generally driven by the risk appetite of the main contractor, resource availability of the supply chain, and the main contractor’s confidence to deliver the works in large packages or their ability to manage the interfaces between smaller packages.
At a high level, packages of work on most projects are typically set up as follows, but can be split out or coupled together dependent on individual project needs.
- Design including architectural, engineering and temporary works
- Design and build
- Manufacture and installation
- Installation only
- Operation and maintenance
When you think of the resources required to build a project, as a main contractor, keeping a full time multi-skilled work force is both a strength and a weakness. It’s a strength in that you have the flexibility to react immediately to your client’s demands, making you more appealing to work with, but a weakness in that you will have to continue employing the full workforce when they are not fully utilised, which will undoubtedly affect operating margin. This is fundamentally why, for many main contractors, they decide to subcontract packages of work. The concept being they only need to pay for the specialist work when it is required in the scope and on a contract by contract basis, thereby enabling them to be more competitive when tendering.
For main contractors they will also see the advantage in approaching their supply chain when tendering for a project in an effort to secure favourable prices or find a technical solution to the client’s requirements that will allow them to get ahead of the market.
However, packaging of works by a main contractor or by a client operating on a management contractor basis is not without considerable. If one package contractor slips against the programme then coordinating the others can be fraught with issues and lead to overall delay and additional costs, all of which will be the main contractor or management contractor’s risk.
Risk Transfer through Packages
As a main or management contractor, the need for efficient productivity is arguably your key risk to successful delivery. Therefore, transferring this risk into individual elements of work is appealing. However, before setting your procurement strategy it is important to consider the following:
- Ensure that you have back to back packages of work i.e. none of the scope slips between packages as you will have to retrospectively add this in to one of the package contractor’s scope later and usually at a premium cost as it will be done so in a non-competitive situation.
- When drafting contracts or subcontracts, ensure the liability is clear and you have included obligations for the various package contractors to work together in delivering the works. As the client you are responsible for delivery but you should include express conditions on each supplier to coordinate their works with others.
- Be careful that when passing down the risk it is equitable to the size of the organisation e.g. the limit of liability is excessive leading to poor tender returns or you intend to include the provision for liquidated damages but in the event they are invoked it will render the package contractor insolvent.
Also, remember to think about the working constraints of the project itself. For example:
- The geographical location
- The working times
- The stakeholders involved
- The time of the year the project will be constructed
- Any particular materials required and their lead in time
- Commonality of materials between trades – e.g. are you better buying these yourself and securing a bigger buying gain?
Dependent on these factors it may become confusing and unmanageable if you break the scope down into too many packages. Whilst you might initially produce a bigger buying gain by breaking out and procuring the works into smaller packages, you will then need to provide more staff to manage all the suppliers which may make the financial situation counterproductive.
In terms of warranting the works, having one point of contact versus many smaller points of contact will be easier when it comes to testing and inspecting the works, plus dealing with any defects that arise through the defects liability period.
If we focus on a specialist package of works such as M&E and look at the various ways you can procure these complex and resource intensive works, it’s perhaps easier to understand the balance between risk and reward when procuring packages. As the client, you can look at the interdependent packages associated with M&E and what can be grouped together versus that which is too specialist to be anything other than subcontract.
M&E could be viewed as first fix and second fix with the first fix possibly being carried out by a less specialist trade e.g. cable trays and the second e.g. cable installation, power and testing being carried out by a specialist. To consider the next level down of individual packages of M&E works:
- Power supply, direct and distribution
- Controls Systems
- Ductwork & Ductwork Installation
- Water & Air systems
- Security Systems
- Fire Detection Systems & Sprinkler Systems
- Heating, Venting & Air Conditioning (HVAC)
Some of the above will have to be carried out by specialist installers such as the controls systems, security systems, fire detection systems, and telecommunications. However, there is likely to be a great deal of overlap and therefore coordination. As noted above the more you break down the packages into their component parts the higher the level of supervision required, and in the case of M&E you will need to employ the services of a specialist M&E Engineer.
However, for some of the other packages such as power supply, ductwork, water and air systems, lighting, and HVAC you could group these up as a package. In this scenario, a large amount of integration is still required between the designer, trade contractors, and specialist contractors and there is a risk that with so many specialist disciplines no one takes full responsibility coordination.
From a client’s perspective, an area of work that is difficult enough producing without ambiguity is the M&E design where the architect will seek to delegate design responsibility to specialist contractors, which in turn leads to a timing issue e.g. the above packaging of works can only be successful if you have a fully detailed integrated design or else how can you let packages with any degree of confidence.
Finalisation of the services design may not be fully complete until the architect has engaged with each specialist, given them a performance specification, settled on a product, understood its requirements, and then detailed those in the final design. It is for this reason that you need to consider the timing of design release before procuring individual packages and also the reason that a one-stop shop M&E contractor is so appealing in that you can leave them to finalise the working drawings, procure and manage all the specialist trades.
Testing and commission is another critical element of successful M&E installation. For example the seriousness of this can be seen on the Crossrail projects whereby the contracts were drafted such that the client entered an express provision to reject the entire signalling works in the event of acceptance testing falling below the required level.
Also, if you consider the public fall out of the Heathrow T5 opening in 2008, leading to flights being cancelled which was subsequently blamed on a lack of integration testing and training for personnel, you can see the importance of having an adequate testing regime. On many projects, the end user will expect handover training and at least twelve months of ongoing support and operative training. If you have one point of contact for all of your M&E works this will undoubtedly be easier than having to coordinate or set up post completion training and support agreements with multiple subcontractors.
Whilst some of the issues associated with fragmented works packages can be dealt with through reviewing designs for completeness and co-ordination before they are issued, it is equally important to review tenders to ensure that each supplier has the requisite experience, they can resource the programme, and they have the right behaviours to work with others.
How to consider your options
As a client you want to maximise your buying power. One way to do this is to break the packages up into small works, which means that subcontractors will not price as much in preliminaries on the basis that the main contractor or client will coordinate the works. However, unless you are fully able to carry out this coordination, you will end up in the position where you are paying for disruption due to the inefficient working of your package contractors and also your own increased management time in an effort to bring the works back on programme. If you consider the lack of an integrated programme on the Crossrail works apparently led to an increase of circa £1billion in the main works civils packages, you can see how co-ordination is a major challenge in the industry even when you invest significant sums of money in project management.
Another factor to consider when breaking up packages is the maturity of your supply chain relationships i.e. is this a trust based relationship whereby you have worked on numerous projects before and if an issue arises you will be able to resolve or remove these issues collaboratively to allow progress to be made without delay? If the relationship is there, a package contractor may be able to offer preferred rates on the basis they do not need to include the same level of risk as they would contracting to a new untested organisation and that as a client you may offer preferential payment terms compared to others. Also, your ability to procure package contractors of this type can be shortened on the basis that you can have pre-agreed terms and conditions between companies.
What other factors could influence your decision?
If a client uses nominated subcontractors, managing them as another package contractor can sometimes be problematic on the basis that any performance issues can be tricky to deal with. Clients will not want to take ownership of delays associated with nominated suppliers.
Building on the point about supply chain relationships above, if you are considering breaking the works down into small packages then looking at alternative payment methods should be considered. For example, if you have always procured and paid on a measure only basis, package contractors or subcontractors may not be incentivised to maximise output, conversely they may be looking for variations to maximise their margins.
However, if as a client you accept that you have ultimate programme responsibility and you are confident in your ability to co-ordinate and deliver the works, why not consider open-book contracts. An example of this, albeit on a much larger scale, is the works on T-5 at Heathrow where the scope included sixteen major projects and 147 sub projects which were delivered by a fully integrated alliance team. The team consisted of client and package contractors who were incentivised to work together and optimise production with any commercial benefit shared between the parties. This innovative approach allowed the project to be delivered on time and under budget.
Image credit: iStock.com/Neustockimages
About Dean Suttling
A member of the Royal Institution of Chartered Surveyors, Dean has twenty years of experience in commercial management and quantity surveying, undertaking roles for contractors, clients, and consultants.