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Where is the evidence?

WORDS BY Bryan Miller

Introduction

The traditional method of completing a project using a lump sum contract with fixed price and fixed time for completion has been under challenge for many years. Various parties in the construction industry continue to search for other ways to procure a building project. A variety of alternative delivery systems have been promoted on the basis they provide considerable advantages for owner or builder, or both, that are absent in the traditional method. Unfortunately very little research has been undertaken in Australia on the validity of alternative procurement systems, leaving owners, architects and builders to select a particular system on the basis of various unsubstantiated claims, rather than factual evidence of the real advantages or disadvantages.

 

The Traditional System

Under the Traditional System, once a price is agreed, a lump sum contract is executed between the parties.

The architect will normally (although not always) be appointed by the owner to act as the owner’s agent in matters arising during construction. In addition most of the current lump sum contracts used in Australia require the architect to also act as assessor, valuer and certifier independently of the owner and the builder.

Traditional lump sum contracts also contain provisions for minor changes in the scope of the works and for the time for completion to be extended.

It is claimed the traditional system sets up an adversarial relationship between the parties with the builder seeking to change the fixed time/cost offer by the claiming for variations and the time extensions. There are also claims that the independence of the architect is, in many cases, called into question. These claims appear to be based on isolated examples rather than factual evidence and, in spite of the criticisms, the traditional procurement system continues to be widely used by a variety of owners.

 

Other Procurement Methods

In the 1970s Civil and Civic, the parent company of Lend Lease, introduced the concept of Design and Construct (D&C).

It was claimed under this system the builder would accept all responsibility for the design and that as a result the owner would face no claims for variations and no claims for extension of time. D&C contracts include a rather brief set of documents describing the owner’s requirements in very little detail, as the documentation stage had not yet been undertaken. Hence, while under a D&C contract the time and cost are clearly stated, the detailed nature of the building and its components is not.

For some owners, with initially little interest in the quality of the end product, this proved to be an attractive option. On the other hand, after a number of projects were completed using D&C owners began to realise the old maxim ‘you get what you pay for’ holds true for D&C.

If the Brief did not specify the detail of something then it would not be provided.

Another alternative appeared in the 1980s and is still in use in various forms today. This is termed Construction Management. In this system there is no builder and no subcontractors. The owner enters into a series of direct trade contracts with each contractor and employs the skills of a construction manager to coordinate the work of the trades.

There is no fixed price and no date for completion. Rather the owner, construction manager and architect (if there is one as part of the team) organise the works against a pre agreed project budget and construction program. The advantage to the owner is that there is ultimate flexibility of changes to the scope of work but against this the owner has no recourse to the trade contractors for rectification of defects other than any conditions included in specific trade contracts.

In addition to D&C and Construction Management there have been numerous other procurement methods developed, all with claims of advantages and disadvantages. The list includes Alliance Contracts, Partnering, Guaranteed Maximum Price (GMP), Build-Own-Operate-Transfer (BOOT), Public Private Partnerships (PPP) and more recently Novation and Early Contractor Involvement (ECI). This list is not exhaustive, and there will be more in the future as the Construction Industry continues to search for the ‘perfect solution’.

A few words would be appropriate here on the process of novation. Under this system the owner engages the architect and consultant team in the normal manner to provide design and part-documentation services. The fee agreements will contain an additional provision requiring the team to have their contracts ‘novated’ or transferred to the builder at some point in the documentation process. The builder will be selected on a price offer to the owner for the construction of the project, including the remaining fee costs for the consultants to complete the documentation stage, calculated on the basis of a review of the partly completed documents.

The proponents of this method claim it is possible for the owner’s requirements to be clearly identified and included in the partially completed documents, hence there can be no change to these elements and no surprises as to what are important features in the project design. The builder takes full responsibility for any errors that may be found in the design. Errors during construction resulting from documentation omissions or errors are the builder’s liability.

Hence the disadvantages found with many D&C contracts are claimed to be overcome with Novation.

Some owners have found the Novation system is not exactly as described. Partial documentation means the owner’s requirements are only partially defined. Where the detail has not been resolved pre-novation there is the opportunity for the builder to interpret the detail in the most commercially beneficial way, irrespective of any other considerations. Novation may provide some owners with more clarity and at worst, Novation becomes a de facto form of a D&C contract. The fixed time and cost offer has, in reality, no more certainty than other fixed time and fixed cost procurement models.

 

Establishing the Facts

Unfortunately very little research has been undertaken into the various procurement methods being used in the Australian Construction Sector. One of the earliest and most thorough reviews of construction methods was a report entitled ‘No Dispute’ published by the National Public Works Conference in May of 1990.

The object of the Joint Working Party responsible for this report was to:

‘Develop co-operatively proposals for the changes in the practices in the building and construction industry which would lead to improved practices, and better quality work, with the overriding aim of achieving a reduction in claims and disputes.’

The report, now over 20 years old, makes interesting reading. While not specifically addressing the question of procurement methods there is considerable discussion on risk allocation, the quality of documentation and the advantages of the independent contract administrator. There is reference to ‘Alternative Contract Strategies’ on page xvii of the Executive Summary and this is considered in more detail on page 187 in Paper 11. At that time alternatives to the ‘Traditional Contract Strategy’ were considered to be D&C, Project Management and Construction Management contracts.

 

The Building Education Revolution

In the period of 2008-2010 and the Global Financial Crisis swept around the world causing great concern to all the developed economies of most nations. In Australia the Rudd-Gillard Labor Government decided the best way to protect the Australian economy would be to inject a major stimulus into the Construction Industry. A $16 billion program was created entitled the Building Education Revolution (BER).

The aim of the BER was to quickly commence new buildings to all schools, both public and private, throughout the Country. Each project was to be funded from the $16 billion budget using a set of guidelines to ensure the money would be well spent.

Unfortunately despite the best of intentions the BER did not achieve its primary objective. Subsequent press reports noted delays and hold ups and by early 2012 about 80% of the funds had yet to be expended. Apparently at this time many projects were only at a very early stage of construction or awaiting approval before construction could commence.

Many explanations were offered and much blame was placed at the foot of the State Governments, particularly Victoria and NSW. A number of stories also began to appear concerning the way the funds were being spent and the inappropriate nature of some of the BER projects approved for construction.

 

The Orgill Reports

The Federal Government elected to set up an independent inquiry in to the various allegations being made about the BER programme. Mr Brad Orgill chaired the Building Education Revolution Implementation Taskforce which had the job of reviewing any complaints and providing recommendations to Government resulting from the investigation. Orgill produced three reports in August 2010, December 2010 and finally in June 2011.

The Orgill reports made a number of recommendations based upon a review of 460 school projects. The report noted the vast majority of BER projects were completed using a traditional lump sum contract with an architect/superintendent administering the contract provisions. In Victoria, there were no BER projects using Novation or D&C.

Virtually all projects used the AS4000 or AS2124 as the preferred building contract.

In Victoria, Arup were hired as an overall project manager for the program with all school Project Managers reporting to, and obtaining approval from, Arup before the funds could be expended. Other States used various management strategies and Orgill observed these approaches to procurement achieved ‘varying degrees of success’.

The Orgill reports provide some up-to-date and extremely relevant research into a large sample of recently completed building projects.

Orgill’s conclusions included two main observations. Firstly he noted the key to obtaining value for money when choosing a suitable procurement method was where the client (school or Department) was an ‘informed buyer’.

Secondly he posed serious questions about value of the project manager as part of the building process.

 

The Skinner Report

In 2011 Associate Professor Peter Skinner conducted a detailed analysis of the Orgill reports. His report entitled ‘in support of the managing architect’ provides further analysis of Orgill’s conclusions.

On page three of this report in the executive summary Skinner stated in item 2:

‘Key Conclusions regarding procurement methods.

The (Orgill) report concluded only two strategies successfully delivered value for money.

Only where the Education Authority:

leveraged existing capital works to act as an informed buyer

and/or

empowered school principals and managing architects was value for money achieved. Successful outcomes were only observed where architects were active managers in (a) public or (b) private sectors.’

This is followed by item 4 on the same page in relation to the role of the architect and project delivery systems as follows:

‘The Managing Architect and delivery of value for Money.

All independent schools and the majority of Catholic School authorities appointed architects in a managing role. Government authorities appointed architects in a managing role in Tasmania, ACT, WA and (for the initial phase) in SA.

All 15 projects investigated that had managing architects were rated as achieving ‘Satisfactory’ value for money. None of the 71 projects rated as ‘Fail’ or ‘Marginal’ in terms of value for money had used managing architects’

Skinner has therefore reinforced the views of Orgill. The two reports provide real current evidence in support of the traditional procurement method using a fixed price fixed time lump sum contract with an architect as the independent administrator of the contract provisions.

 

The Sharkey & Bell Report

In June of 2014 another report entitled Standard Forms of Contract in the Australian Construction Industry was produced by Professor John Sharkey and Matthew Bell. The research included a web based survey of some 295 respondents together with a series of 47 interviews with Industry stakeholders. The report notes that 68% of all respondents were using a standard form of contract. The most popular forms of contracts were identified as:

AS4300          23%

AS4000          18%

AS2124          17%

AS4902          14%

On page 5 it states that some 84% of respondents reported the standard forms of contract had been amended and the primary reason given for this was the ‘need to shift the risk’. Hence Sharkey and Bell conclude that while the various Australian Standard forms of contract are widely used, in most cases some parts of the base document have been amended to suit the requirements of one party.

 

Final thoughts

The traditional method of building procurement has been around for a very long time and has been the subject of many criticisms by various stakeholders of the building industry. Hence there appears to be an ongoing quest to find an alternative system to successfully complete a project.

The numerous alternative procurement methods are claimed to have various advantages but there is little evidence to support these claims. For example:

Does a D&C contract actually deliver a satisfactory outcome for an owner?

How does a Novation contract actually work in practice?

What of ECI or Alliancing or GMP. Do they live up to the claims by their supporters?

With little factual research undertaken to date it is difficult to assess the real value of alternative building procurement methods.

While some interesting conclusions have been provided by Orgill and Skinner, and to a lesser extent by Sharkey and Bell in support of the traditional system it will now be up to others to verify that various alternative systems do have real advantages.

 

References:

‘Building the Education Revolution’ available at http://web.archive.org/web/20100417041604/http://www.deewr.gov.au:80/schooling/buildingtheeducationrevolution/Pages/default.aspx

‘In support of the Managing Architect’, Research Report (November 2011) – available at: http://www.architecture.com.au/docs/default-source/qld-policy-advocacy/in-support-of-the-managing-architect-lessons-learned-from-the-orgill-report-.pdf?sfvrsn=0

 ‘Standard Forms of Contract in the Australian Construction Industry’, Research Report (June 2014) – available at: http://www.law.unimelb.edu.au/melbourne-law-school/news-and-events/news-and-events-details/diaryid/8204