How to be good when times are bad: early contractor involvement

Early contractor involvement, both on single projects and through frameworks, has increased significantly during the 10 years of relative prosperity. The question is: can the systems governing this form of procurement stand up to the demands placed upon them by recession?

Commentators on partnering, which is closely linked to early contractor involvement, have suggested that it can only survive in the right economic climate – one example being the initiative between main contractors and subcontractors in France in the mid-eighties that collapsed in the 1988 recession. However, the French did not have the sustained government and industry support for early contractor involvement that has been generated in the UK and illustrated through a wide variety of case studies.

For example, the 2005 National Audit Office report, Improving Public Services Through Better Construction, describes the experience of the University of Cambridge. It used to use single-stage contractor appointments in 1998, and it achieved costs 2% above budget and eight-week delays. When it changed to an early contractor involvement model in 2002, its costs were 3% below budget and there were no delays.

The cynics will say that early contractor involvement is too cosy, that it takes the edge off competitive pricing and that clients cannot afford to risk such an approach in strained economic times. The answer to the cynics is that if procurement and contractual systems are set up properly, then early contractor involvement gives far better cost and programme control. It provides a way to get contractor’s ideas about the scope of the project and its supply chain, and there is still plenty of thinking time before the contractor is authorised to start work on site.

And what about the inevitable tensions that build up during a project? Where does early contractor involvement stand then? I have recently been involved in settling two prospective disputes in Bahrain and Dubai, both of which arose on projects procured through early contractor involvement. In each case, the detailed cost and time data obtained through an open-book build-up of the price and programme, as well as the clear points of interface between consultants and contractors, allowed the parties to step away from adversarial positions and ultimately to settle their differences without going to court. Properly structured early contractor involvement should offer the same opportunities in the UK.

As to the structures available, PPC2000 and PPC International are specifically set up for early contractor involvement. The September 2008 Arup report for the Office of Government Commerce described PPC2000 as “a complete procurement and delivery system that is distinct from other forms of contract available”. Meanwhile, NEC3 has been adapted for early contractor involvement by clients such as the Highways Agency, and JCT has published its own Preconstruction Services Agreement.

So what are the features of properly structured early contractor involvement? They should include:

The cynics will say that early contractor involvement is too cosy, that it takes the edge off competitive pricing

• Consultant and contractor selection on the basis of their ability to deliver value, including early agreement of costs where possible and avoidance of percentage profits/fees that encourage cost increases

• Main contractor appointment on a conditional basis until designs and prices are agreed. This should be enough for it to contribute to designs and to build up second-tier prices through open-book subcontract tenders

• Sufficient time for value engineering and risk management exercises that allow the contractor and its prospective subcontractors to help iron out inappropriate costs or unaffordable/unbuildable designs

• Binding programmes for deliverables for all consultants, contractors and subcontractors throughout the preconstruction period.

And what should early contractor involvement avoid? Most importantly, the opportunities for brinkmanship and last-minute negotiation that arise if agreed preconstruction phase processes are not rigorously followed. It should also avoid separating the preconstruction appointment and the construction phase appointment so as to calm the fear of contractors that their best ideas will be grabbed by the client and put out to tender for someone else to build. Third, the agreed structure should avoid the risk of misunderstandings by linking consultant and contractor appointments around single integrated programmes.

It should be remembered that the recommendation of early contractor involvement in the 1994 Latham Report was not born in a period of economic prosperity, but during the last recession. However, the merits of the system will be tested during this recession and it will only stand up if structured to deliver the savings and efficiencies cash-strapped clients demand.