What’s wrong with tradition?

There is an an increasingly vociferous minority within the construction industry who argue that traditional contracting does not produce the best results. Traditional contracting, they say, occurs within a competitive tendering framework, and so produces projects that are frequently late, usually costs more than the tendered price, set up conditions for conflict by not employing proper risk management and asks for lump sum prices. Indeed, in these pages recently, Rudi Klein said not only that traditional procurement was wasteful, but that advisers who recommend it could be guilty of negligence (17 September).

Is that true, or is it another case of wanting to change something without appreciating the shortcomings of the alternatives, and the real value of that which is to be replaced?

Traditional contracting, which can be described as the separation of design and construction using a lump-sum contract, has its weaknesses, but then so do all other forms of procurement. And when traditional contracting is used appropriately, and especially when used with a preconstruction procurement agreement that enables shared involvement in design, cost and risk, any such weaknesses are substantially overcome.

It is neither competition nor the fixed-price lump sum that are the problem, rather how and when they are used. if traditional contracting is properly used, it can work

Comparing the performance of procurement routes is incredibly difficult, if not impossible. Perhaps, therefore, it is not surprising, that according to the RICS Contracts at Use Survey, traditional contracting (regardless of the contract used) remains the predominant approach. This is because to venture away from that which is known, widely understood and accepted by the industry, is itself inefficient. Indeed, it actually increases risk.

What aspect of traditional contracting is it that the critics reject? Is it the fragmented process, the competitive tendering, the concept of fixed-price lump sums, or of lowest price?

The issue of fragmentation manifests itself in all forms of procurement; it is not fragmentation per se that is the problem but the way the interfaces are managed. Thankfully, open tendering is a thing of the past, but selective tendering, particularly if it is two-stage and uses the appropriate numbers of tenderers, surely has a place; implicit competition is generally inadequate.

If the work is properly defined and adequate time is given for tenderers to carry out proper risk assessment and prepare a price, one might ask what the problem is with a fixed-price lump sum. Real problems start where a price is sought for ill-defined work, and where some of the work to be performed may be beyond the competence of those tendering, or where the conditions under which it is to be performed are beyond their experience or ability to forecast.

That creates commercial risks, which are matters of judgment to be taken within a competitive process. Clearly, if the risks are too high and cannot be managed, then one should not tender.

However, that still ignores human frailty and the client’s advisers need to protect some tenderers by ensuring a rigorous prequalification process. If, after following it, sensible competition cannot be secured, then one must consider breaking down the work so that the risks become smaller and more manageable. Wherever possible a lump-sum fixed price should still be sought and only rarely should there be a need to accept a cost reimbursement solution. Even target cost contracts and management-type cost contracts mainly comprise a series of
fixed-price lump sums. It is only the scale that differs.

Although traditional contracting may have deficiencies, tendering for work and the concept of a fixed-price lump sum have merit. It is neither competition nor the fixed-price lump sum that are the problem, rather how and when they are used. If traditional contracting is properly used, it can work. According to Constructing Excellence, it is “a low-risk option for clients who wish to minimise their exposure to the risks of overspend, delays or design failure. However, exposure to risk will increase where the design phase is rushed, where unreasonable time targets are set or where the tender documents are not fully completed”.

Of course, there are projects where traditional contracting is not appropriate, or where clients do not wish to tread the traditional path. JCT recognises this and has always responded to market changes to produce industry-accepted standard forms of contract for use with other methods of procurement, and will continue to do so.

Professor Peter Hibberd is chairman of the Joint Contracts Tribunal