In construction a contract acts as a binding agreement between the party commissioning the building project and the contractor responsible for carrying out the construction work, with a number of forms of contract. The type of construction contract being used will have an influence on the structure of the construction team. In order to ensure product specifications become orders it is important for the marketer, not just the specification salesman, to understand these contract types.
For each construction project there will be a string of influencers, their strength of influence will depend on the type of contract being used to deliver the construction project. To effectively market your construction product it is necessary to understand the type of contract being used and then identify the individuals and their organisations in the project team.
The main contract types are Traditional, Design and Build, Management and Private Finance Initiative (also known as PFI). Here is a summary of these forms of construction contract:
In use since the 19th century, the Traditional contract is the most widely used and suitable for one-off or small projects. In this instance the Client appoints the Architect to design the building, leading and supported by other members of the design team. The Architect works in the best interest of the Client. Once the design is complete Contractors are invited to bid to secure the work. Once the Main Contractor is in place Sub-Contractors are appointed.
In this instance the Architect is responsible for product specification at the design stage and has influence over the Contractor’s choice of product during construction. At early design stage an Architect might be very committed to a particular brand of product. Yet typically there will be cost overruns and a Sub-Contractor might suggest a cheaper alternative. While the Architect recognises that this will compromise his design he also accepts the need to save money and may accept the change. In this case the strength of influence has moved from the Architect to the Sub-Contractor.
Design & Build
Introduced in the 1960’s, initially to provide high rise public accommodation, Design & Build (D&B) is now widely used in commercial applications. In this instance the Client appoints a consultancy team to work up an outline design, get planning permission and define key requirements. The D&B Contractor may take on responsibility for this process.
The Contractor is appointed, either via a competitive bid process or negotiated price. At this point the members of the consultancy team may transfer across to work for the Contractor, or the Contractor may appoint his own design team.
The Architect works to the Contractor’s brief, which may include lists of approved products. It is also likely that performance specifications will be used, allowing the Sub-Contractor to make the final product choice. Unless a specific requirement is included, the Client lacks control over detailed aspects of the design. An advantage of this type of project is that time to completion is shorter as construction starts prior to design completion.
In the instance of Design and Build the Contractor has significantly greater influence over product selection, with a focus on value engineering. However the objective is still to deliver the Client’s requirement in a cost effective manner. Since the adoption of Design & Build, the influence of the Architect has reduced.
Introduced in the late 1970’s it is suited to complex, fast moving projects. It works best when the Client understands the construction process.
It relies on trust, with the construction team working together to solve problems. Often detailed design is the responsibility of the specialist Sub-Contractors, who need to be the leaders in their field and may work with the manufacturer to develop solutions.
Like Design & Build, it sees construction starting before design is complete, with various elements being designed in parallel.
Private Finance Initiative
The Private Finance Initiative (PFI) or Public Private Partnership (PPP) has been widely used by the UK government since the 1990’s. Its initial advantages were that it was off balance sheet and avoided the need for government to invest large capital sums.
It operates like a car lease purchase scheme, with the Client paying little or nothing up front, but regular installments for the use of the asset. It has been used for many forms of capital projects including the provision of street lighting, schools, hospitals and roads.
It operates in a similar manner to a Design & Build contract, except that the contractor operates and manages the asset after construction has been completed.
In December 2012, following a Treasury review, a number of modifications were made to the PFI concept to provide better value. Soft services were removed, there was a commitment to make procurement faster and hence cheaper. The government would also become a minority equity co-investor, sharing contractual risk and surplus profit. The revised format is known as PF2. We have seen this procurement method used for some of the Priority Schools Building Programme, but it has not returned to the pre-2010 levels.
Like D&B, in PFI the Client prepares an outline requirement which defines key performance requirements. The Contractor then has primary responsibility for product specification with the Architect working within that team, with the needs of the contractor in mind as opposed to an exclusive focus on the needs of the client, often issuing performance specifications.
Unlike the other types of contract there is another source of influence, the Facilities Manager (FM). Usually part of the PFI contractor organisation, the FM team will wish to minimise the cost of maintenance and have their own product requirements. Another important factor is the length of product warranties. These will be required for the duration of the PFI contract, typically 20 years. In this way any costs associated with product failure remain with the manufacturer and are not a risk for the PFI contractor.