What to Focus on when Engaging Construction Contractors 1

Monday, June 20th, 2016
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When delivering on significant building and infrastructure projects, choosing the right contractors to carry out construction and engaging them in an effective manner is key.

Do this right and the building phase of the project is likely to go relatively smoothly. Get it wrong and cost blowouts, disputes, quality problems and acrimony will generally result.

So what should you avoid? According to many experts, there are several areas where things can go wrong.

First, there is the issue of a badly written brief with a poorly defined scope and/or badly drafted contracts. According to Rob Buchanan, a chartered engineer and partner at construction law firm Norton Rose Fulbright, incomplete or unclear scope means that the contractor in question is not given an accurate idea about what he is going to build and is unable to accurately and/or adequately price that into their quote. Apart from creating the potential for variations, this can lead to quality issues as contractors look for ways in which to make up any lost ground in terms of them deriving an adequate level of return from their participation on the project, Buchanan says.

There are also procurement issues, whereby a lack of clarity surrounding the scope can result in the contractor being uncertain of the materials and quantities they need to order. This can lead to delays and cost blowouts, especially in cases where fabrication of goods has to be accelerated as a result.

“If you don’t get the scope right, you can’t price it and you don’t know what you are going to build, it’s a cock-up right from the start,” Buchanan said.

Nicole Stoddart, managing director of construction services for AECOM in Australia and New Zealand, agrees. Gaps in the scope or contract, Stoddart says, could create opportunities for contractors to claim legitimate contract variations, lead to potentially unhappy clients who might not get what they thought they were paying for and ultimately, wind up in disputes. Indeed, Stoddart says, some contractors could potentially see opportunity within areas of ambiguity of the scope and could in fact seek to exploit these areas as a reason for variations.

“Contractors can sometimes see advantages in gaps and clients can pay heavily for gaps, so it is important to fully scope the project and also to spell out the deliverables that are expected and the timeframes for those,” she said. “Scope definition is one of the most important things to get right in a contract.”

Aside from contract scope, further issues revolve around the need to ensure that the contract itself is completed properly with all relevant information and to agree up front on labour rates with respect to latent conditions and variations, according to Buildwise Projects managing director Georgia McKay.

In addition to clearly specified terms and conditions, contracts should include all relevant documents which make up the agreement in question, McKay says. This could include drawings, specifications, the scope of work, and other information such as soil reports or energy reports.

Meanwhile, labour rates with respect to any variations or latent conditions should be agreed up front. These could be specific rates agreed to by the parties or the parties could simply agree for these to be determined according a pricing guide such as the guides contained the 2016 Rawlinsons Australian Construction Handbook, she says.

Having all this in place creates certainty for all parties involved.

Finally, extreme care must be taken with regard to any contractor who offers deep discounts and whose price comes in substantially lower compared with the price put forward other bidders. Whilst a contractor may have genuine reasons for wanting to offer a discount, Buchanan says – including, for instance, an attempt to break into a new market – he warns that principals and project managers should be wary of those who put forward low quotes without any apparent reason for doing so. Such contractors, he says, not only have the tendency to cut corners and skimp on quality, but are also likely to be more aggressive in terms of matters such as the way they go about claiming payments.

CBRE NSW senior director of project management Geoff Warren goes further. As well as cutting corners on quality, builders who discount heavily are likely to skimp on matters such as licensing, industry accreditation and insurance, Warren says, and are unlikely to have made adequate allowance for risks associated with the projects within their bid.

In extreme cases, this could lead to the principal being exposed to substantially greater cost down the track. Take, for example, the case of contaminated soil. If the cost of remediation had not been allowed for within the quote and were sufficient to force the contractor into a position of insolvency, these costs could essentially fall back onto the principal even in cases where the contractor was responsible for them under the terms and conditions of the contract. In such cases, the principal could then be left with a clean and non-contaminated site but without an adequate budget from which to undertake construction.

So what are the strategies for success, and what defines a good contractor?

Buchanan says it is important to validate a contractor, including by speaking to previous clients who have employed the contractor in question beforehand and also by examining their balance sheet and ensuring that they have the financial capacity to meet their obligations. In addition, it is a good idea to try to specify the specific personnel whom you would like on the projects, ensure that risk is apportioned to the party who is in the best position to manage that risk and for the project manager to foster goodwill within the relationship at all times by fulfilling their own obligations under the contract in full.

Stoddart stresses that good contractors will have a solid track record, price risk adequately and effectively and be clear about what is and is not included in terms of costs under the contract and what does and does not constitute a variation. McKay agrees about the importance of communication and adds that it is imperative that all sides have a clear understanding with regard to expectations. Warren, finally, believes a good contractor is aware of their responsibilities, communicates effectively and well and takes time to understand the scope, budget and time frames associated with the project as well as to clearly identify any risks involved. Especially in large projects, he says the importance of clarity within the contract cannot be understated as the people who signed the contract will more than likely not be the same ones as those charged with administering the contract down the track.

They all agree, meanwhile, that the scope of the contract must be absolutely clear.

Choosing the right contractor and developing and maintaining an effective working relationship with them can make or break the success of a project.

With a few simple strategies, clients and project managers can maximise their chances of success in this area.

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  1. Brett Bates

    Although the basic concepts and strategies would equally apply to small scale residential construction project work, most builders rarely implement them. The usual premise basically goes along the lines of repeatedly using the same main groups of subbies until something goes horribly wrong with their part of the work and then trying to find new ones. Management of the Builder/Subcontractor relationships must be successful for the project to be successful but it is usually done very poorly.
    Maybe your next article could look at this phenomena?