Before entering the next contract with a main contractor or subcontractor, ask yourself if you know the programme in detail? I mean, beyond “yes, they need to finish in 20 weeks”.
I didn’t ask myself this question often enough and probably made a mistake to that end. To my liking, the programme and negotiation of the programme are never given enough focus by clients at the tender stage. Whether that is when procuring a single main contractor or with individual subcontractors, it always comes second in terms of rank to negotiating the price.
It’s obvious to see why this happens, and I don’t think it’s entirely wrong.
Still, I feel many of us do not wholly reflect on how much the price is tied up with the programme, and getting the programme right is the means to ensure the fixed price lump sum remains that: a fixed price lump sum.
Contract negotiation almost always involves compromise to achieve a document that is acceptable to all parties. Projects may succeed or fail due to the terms and conditions in the contract, and the quality of the programme is no different.
Successfully negotiating a favourable programme can help you hold one another to account and make Extension of Time claims happen less often on your projects. For me, the programme should act as a shield as much as a sword. A small amount of front-end work will pay dividends for you long term.
Why is the programme important?
On one of the recent Own The Build episodes, Jason Farnell described construction contracts (and all contracts for that matter) “as an expectation exchange” by two parties. Any agreement is effectively a set of expectations listed out of one another:
The Client: “I need you to build this, for that price, in this time.”
The Contractor: “I need to be paid this price, every month, to deliver in this time.”
I’m oversimplifying, but the point is that so often, clients and contractors shy away from the programme during the early-stage negotiations when a little bit of focus can set the programme on a positive trajectory for the rest of the project.
In construction, we are much maligned for our inability to finish schemes on time. Perhaps the lack of focus that I refer to anecdotally is part of the reason Mace recently reported that “80% of all projects experience cost or programme overruns.”
What information needs to go into the contract?
At the tender stage, when the contractors are most eager to impress, this is the opportunity to focus on the programme. During mid-tender meetings – and you should do this with all contractors tendering – invite conversation around the topic of programme: what are your main concerns? Where do we need to focus the design team’s energy? What are the critical milestones, in your opinion?
Asking these questions to any contractor tendering will help you understand the main risks you need to focus on. What’s more, you should create an Information Release Schedule (IRS), which can help you push the rest of the project team to release information that keeps the Contractor on schedule.
How do I incentivise the programme?
Negotiating a programme is not simple, especially when you are not the construction expert. Your focus usually is the completion date, but understanding the milestones to that point is critical.
Once you have the IRS agreed between you both, you should be able to start formulating the programme together to an agreeable level where both of you are happy to commit to the completion date. Once a completion date is agreed upon, the question is, how do you incentivise the Contractor to deliver this.
The traditional approach is to start talking about LADs. Liquidated and Ascertained Damages or “LADs” are an agreed, pre-determined amount paid by the Contractor to the Client if they breach the contract and finish late. The benefit of Liquidated and Ascertained Damages is that they are payable upon the breach occurring and give the Client some means of recovery should the works finish late. Liquidated and Ascertained Damages are generally stated in contracts as an amount per week but can be noted per day or, in the extreme, per hour or minute.
As a client, I think you want to consider; are LADs the best way to motivate a contractor?
I would argue that often it isn’t. While it is a motivating factor, it is usually only motivating towards the end of the programme. All their other clients are doing the same thing, so it is ‘encouraging’ to the same level on all their projects. Put yourself in their boots: they have two projects occupying their resource, both have similar levels of LADs included in the contract; which project is the one that they will be motivated to work on – hard to say, isn’t it?
LADs are necessary. However, they don’t need to be the motivator.
The carrot or the stick?
An alternative I like is LADs plus a performance bonus for completing on time. So, the contract reads:
- The completion date is 31st December, finish late & you will be charged £x per week.
- The completion date is 31st December, finish early & you will be awarded £x per week.
I realise that this isn’t necessarily a new concept. Still, many performance incentives fail because things go wrong early, making early completion unattainable, meaning the Contractor thinks they will never hit the date.
One way to mitigate this lack of motivation is to give bonuses for hitting milestones throughout construction.
A simple example of this could be:
- Complete the Shell & Core works, and you will be awarded £x.
- Complete the building to Watertight, and you will be awarded £x.
- Complete the whole project, and you will be awarded £x.
This strategy is a way to keep the Contractor focused throughout the project and not to lose heart if they are potentially running a little bit late early on. I think you can understand the motivation would be there for a contractor under this route.
What’s more, let’s go back to the example of the Contractor reviewing their commitments in-house. They have two projects, one with LADs and one with LADs plus a performance bonus. Which scheme is the one they are naturally going to be more interested in being successful? Which one will get the best resource and most attention? It’s obvious, isn’t it – make that project your project.
These are the reasons I prefer to motivate with a bonus rather than with the threat of LADs.
Where I’ve seen this done to good effect by savvy clients is that they negotiate a discount during the tender stage (as we all do) and then say okay, this discount I am going to leave it on the table as a bonus for you to earn back if you deliver this project on time as I need.
An example could be: £1million project gets a 5% discount, i.e., £50,000. If the Contractor hits their Shell and Core milestone, they get £10,000. If the Contractor hits their watertight milestone, they get £10,000. If the Contractor hits their overall completion milestone, they get £30,000.
Where you are talking about a 5% discount, yes, this money is significant. Still, I believe most successful clients/developers are happier with a shorter, slightly more expensive construction process than a cheap but very drawn-out construction project. Finishing on time or early is excellent for business. Finish on time, and developers get their product to market more quickly; they reduce the cost of funding and release profits and cash flow into their business much more rapidly, allowing them to grow and move onto their following developments.
It is for all these reasons that I take things back to my original point. Before entering the next contract with a contractor or subcontractor, do you plan to execute the programme? Do you know what the expectations are regarding the programme in detail?
Hopefully, this blog has given you some food to think about how best to manage the programme and negotiate it into contracts successfully.