Does Novation Provide Better Delivery of Projects?

Monday, February 29th, 2016
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Since the mid-1980s, a significant proportion of major projects have been delivered under the novated contract procurement process. Why and how did this process become embedded in the construction industry, and does it really provide better delivery of projects?

First, it may be useful to ask, what is novation?

Here is an example:

A client wishes to develop a site (it can be any type of building). He or she will engage a team of consultants to assist in scoping the project through master planning, feasibility and concept design phases. The team will usually include a project manager, an architect, town planners, a quantity surveyor and specialist engineering consultants.

If the project stacks up financially, the design process continues through schematic design and to some arbitrary point in the design development (DD) phase. Benchmarks such as 50 per cent DD, 70 per cent DD, and even 90 per cent DD have been used, although no one has ever provided a hard and fast definition of what these percentages actually mean in terms of a measurable deliverable.

It should be noted that in the design development stage of the design and documentation process, construction documentation has not yet been completed. The New York Office of General Services, in its OGS Design Procedures Manual A Guide to Designing Projects for Design & Construction, states

“The Design Development Phase focuses more on the technical aspects of materials and building systems. Although this phase allows the Designer to finalize space and function to a great degree, the primary achievement is to enable the Client to understand how the project will function as well as give more detail about what it will look like.”

The Design Development Phase is the period when all the issues left unresolved at the end of schematic design can be worked out, and at a scale that minimizes the possibility of major modifications during the construction documents phase. It is also the period in which the design itself achieves the refinement and coordination necessary for a really polished product.

While most design issues should be resolved by the end of design development, some will continue to be refined, resolved, or modified during the construction documents, bidding and construction phases of the project.

The last sentence is the kicker. There is an acknowledgement that completed design development documentation will require changes to be finalized. Presumably 50 per cent DD documentation will require more changes than 90 per cent DD. In fact, at 50 per cent, or even 90 per cent DD documentation, the inference is that there will be possibly significant unresolved design issues outstanding.

Now comes the novation magic.

This incomplete package of documentation is offered to the market, and contractors are asked to submit fixed price lump sums to:

  • Take responsibility for the design carried out to date
  • Take responsibility for the design team by the novation process, whereby all duties and obligations of the design team are transferred from the client to the contractor
  • Take responsibility for completing the design
  • Make due allowance for the costs embedded in the incomplete design

By this process, the client has transferred all the design risk to the contractor, and effectively now only has to deal with a single entity in relation to responsibility for the delivery of the project.

Clearly, this looks like a good deal for the client, and is advocated by financiers and legal advisors as the best delivery method for the client.

In fact, in the mid-1980s, when interest rates were between 15 and 20 per cent, the novation process was used to compress overall project delivery programs by sliding construction starts to before the completion of the design documentation. Projects could become revenue earners sooner (particularly prime office space) and borrowing costs could be minimized.

But what is the reality?

Here are some of the disruptors to the ideal novation process that I have seen over the last 30 years:

  1. Architectural and engineering consultants traditionally acted as independent, though paid, advisors to the client. Most were able to provide reasonably impartial advice to the client in terms of administering the construction contract. Under novation, despite attempts to write contractual clauses to the otherwise, novated consultants work for the contractor.
  2. So, by novating consultants, clients lose access to people who started the project delivery journey with them and know the most about a project.
  3. Expecting novated consultants to act as the client’s secret police, waiting to cry foul at the slightest contractual nonconformance, puts consultants in difficult and unfair position. I know, because I have had to do it!
  4. Some clients attempt to overcome this by only novating the engineering consultants and retaining the architect (by the way, project managers and quantity surveyors never get novated). Where this happened to a project I was on, the design process ground to a halt as there was no clear decision making process and client and contractor expectations of the design outcome did not align.
  5. Contractors want to start building as soon as the contract is awarded. Unless the project team has prepared an early works package of works that is complete, certified, and will not be affected by completion of the overall design, contractors who don’t understand the design process place unreasonable demands on the design team. Unresolved issues (remember the incomplete DD documentation?) are usually so because they are the most difficult to resolve, either due to insufficient information or because ‘typical’ items took precedence. This environment is not the best for achieving the optimal design solution.
  6. I take my hat off to contractors willing to provide lump sum prices on incomplete documentation. The margins are always tight, and making allowance for the ‘known or unknown’ unknowns in the documentation can be the difference between a winning and losing tender. Many a contractor has told me “If it’s not on the drawings, it’s not been priced.” The contractor’s problem becomes the consultant’s problem, when extra cost is attributed to ‘inadequate design’ and then the set off clause in the novated contract is enacted.
  7. The contractor’s input into partially completed DD documentation is often limited to sourcing more economic alternatives, because these savings are retained by the contractor. Just remember Alucabest is not the same as Alucabond!
  8. Unless the novated contract wording is modified (I have tried, and it’s not easy to do), novated consultants may end up subjected to scope creep. A simple example, the phrase “the consultant shall provide all necessary services as required to deliver the project” can be (and has) been interpreted by a contractor as requiring the consultant to redesign alternative solutions for no additional fee.

Novation is not going away, so how do we make it better?

Contractor input into the design process can provide real value when it is provided early. If the client, the contractor and the design team were able to work together from the very early stages of project procurement, I believe real pragmatic benefits can accrue to the project.

Unfortunately, this is at odds with current project tendering and procurement processes in Australia, so I am not holding my breath.

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