Transcript Chapter 7

Chapter 7 Construction
Property Development (6th Edition)
Publisher: Routledge
Authors: Professor R.G. Reed and Dr S. Sims
• In the development process a property developer’s second major financial
commitment is to place a contract to construct the development.
• Construction is a crucial stage in the development process and the key aim is
to construct a good quality building that performs on time and on budget.
• The selection of the procurement route needs to be decided early on as it has
an effect on the composition and the size of the professional team.
• After the initial brief is decided, a schedule of accommodation is prepared
and the broad design constraints are decided, the choice of building contract
can be made.
• The decision on the form of contract will depend on the developer’s
requirements and the size and complexity of the development. Time, cost and
performance are key influencing factors.
• Different types of developer and stakeholder attach varying degrees of
importance to time, cost and performance (quality) and these factors will
influence the procurement strategy to be selected (Table 7.1).
Table 7.1 Examples of Prioritised Criteria by Client Type
(Source: based on Morledge in Kelly et al. 2002)
• This type of contract tends to be used on relatively straightforward small to
medium sized schemes where the developer is able to use a number of
variations and amendments to tailor the contract to the needs of the project.
• Developers appoint their own professional team who are responsible for
designing the building to meet the specified requirements, for supervising the
construction phase and for administering the contract.
7.3.1 The Traditional Roles of Professional Team Members
• The architect is responsible for the design of the buildings in terms of
aesthetics and functions following the developer’s brief and budget.
• The quantity surveyor is responsible for preparing estimates of building cost,
preparing the Bill of Quantities (i.e. measured specification of materials and
work to enable the contractor to submit a price) and, during construction, for
preparing valuations of work.
• A clerk of works or resident engineer may carry out a full-time ‘on-site’
supervisory role.
• Other members of the team can vary and may include a project manager,
structural engineers, mechanical and electrical engineers.
Discussion points:
Who are the key professionals a developer
needs to bring into the development team?
What role does each professional play in the
7.3.2 Choosing the Contractor
• Once the detailed design is completed, the quantity surveyor prepares the Bill
of Quantities, which specifies and quantifies the materials and the work to be
carried out in great detail.
• When choosing contractors to be invited to submit competitive tenders for
carrying out the work, it is necessary to limit the total number of contractors
invited to submit competitive tenders.
• If the work is specialised, contractors skilled in that type of work are selected.
Sometimes it will be preferable to use a large national contractor, while at
other times local or regional contractors are favoured.
• Developers are often guided by their architect, project manager and/or
quantity surveyor on the selection of the contractors for the tender.
• The prices submitted by each of the contractors are examined by the quantity
surveyor and the project manager to ascertain what is offered.
• The reliability and financial stability of the contractor are vital considerations
since the failure of a contractor is a major disaster from the developer’s
perspective as long delays occur while the legal position is resolved and
another contractor is found to complete the work.
7.3.3 Paying the Contractor
• The method of payment for the works has a substantial impact on the
developer’s cash-flow position. It also has significant impact on the cash-flow
of the contractor, who has to consider the method of payment when
preparing the price for the work.
• The developer has to pay out very substantial sums of money over a
considerable period of time before obtaining the benefit of a completed
building at the end of the contract.
• The ideal arrangement for developers is for the whole of the contract price to
be paid when the building is handed over, so that they do not part with their
money until the time when they should be receiving an income from the
building or have the benefit of occupation of it.
• The method of paying for the work has to be related to the circumstances of
each contract. The contractor is more likely to be flexible if they are a partner
in the scheme and stand to benefit in terms of a profit share.
7.3.4 Calculating the Cost
• An accepted approach is for the contractor to submit a bid on either a ‘firm
price’ or a ‘fluctuations’ basis.
• Quantity surveyor’s re-measurements, architect’s variation orders and
instructions and extensions of time may affect the cost.
• Developers and their professional advisers must decide on what basis they
wish contractors to prepare their competitive bids in order that the
contractors submit prices on the same basis.
• Often there are two main alternative methods of calculating the cost:
(i) A cost-plus contract where the contractor is paid on the basis of the
actual cost of the building work (‘prime cost’) plus a fee to cover their
overheads and profit.
(ii) A target cost contract might be negotiated or established by tender. A
target cost is agreed with the contractor plus the contractor’s fee and
any savings or additions to the target cost are shared by the parties.
7.3.5 The Duration of the Contract
• The date agreed in the contract for the completion of the building is not
certain as the contractor can apply for extensions of time for a number of
• Extensions of time usually result in an increase in the cost which will certainly
include the contractor’s ‘preliminaries’ (overheads such as insurance, cost of
plant hire, etc.). The impact of an extension is felt twice by the developer:
firstly, it affects cash-flow and, secondly, it increases costs.
• The main reasons for extension of time which entitle the contractor to
recover additional loss and expenses include inadequacy and/or errors in the
contract documents, the drawings and/or the Bill of Quantities; delays by the
architect in issuing drawings or instructions; delays caused by tradesmen
directly employed by the developer; failure by the nominated subcontractors;
bad weather; strikes and lockouts; shortage of labour; damage by fire and
natural disasters.
• Key advantages and disadvantages of the traditional approach are
summarised in Table 7.2.
Table 7.2 Advantages and Disadvantages of Design-Bid-Build Procurement
Competitive equity and fairness
Design-led facilitates high quality
Reasonable price certainty based on
market forces with reduced unknowns
Acceptable strategy in terms of public
accountability and transparency
Well-known procedure and prove
Flexibility – changes are easy to arrange
and have limited effect on value
Strategy is potentially open to abuse
resulting in less certainty
Overall construction timeframe may be
longer than other options because there
is no parallel working
No ‘buildability’ input from contractor
The strategy can lead to adversarial
relationships between the parties
Approach is not fully promoted by all
Discussion points:
For what reasons might a developer select a
traditional (design-bid-build) contract for a
development project?
What are the two types of bids that a contractor
can submit?
• Typically the contractor actually assumes the risk and responsibility for the
design and construction of the scheme in return for a fixed-price lump sum.
Design and build is a fast track strategy.
• Use has become more widespread due to dissatisfaction with other types of
contracts and the problems encountered with splitting design and
construction responsibilities. Design and build was originally used on simple
and straightforward schemes but is now used on many types of building
• The contract is based upon a performance specification by or on behalf of the
developer. Performance specifications vary from being fairly simple to very
detailed depending on the nature of the scheme.
• A developer using this type of contract may appoint a specific contractor with
which they have successfully worked before or who has expertise in
constructing buildings similar to the one proposed.
• The advantages of this type of contract for the developer are that while it is
possible to provide for fluctuations in the contract price, and there are various
alternative ways of paying for the buildings as the contract proceeds, usually a
lump-sum fixed price is agreed.
• A management contractor is engaged by the developer to manage the
building process and is paid a fee. Initially developed in the USA, this type of
contract became more widespread in an international context because
developers were impressed with the fast track methods of construction.
• The developer appoints the professional team to prepare the drawings and
specification for the project. The quantity surveyor prepares a cost plan based
on the drawings and specification. The actual cost incurred by the
management contractor (‘prime cost’) is paid by the developer, having been
certified by the architect and monitored by the quantity surveyor.
• Note that the management contract itself is not a ‘lump-sum’ contract. The
management contract is based on the contract cost plan prepared by the
quantity surveyor, which is only an indication of the price.
• The developer may have to accept a very high degree of risk with this type of
contract. Developers who have used this type of contract have found cost
control the biggest problem as there is no tender sum.
• The key advantage is the saving of time, achieved by overlapping the design
and construction of each package and involving the construction manager at
the beginning of the design process.
• The appointment of a project manager is not necessary for every project. A
project manager tends to be needed for large and complicated rather than
small, simple projects.
• Project management is an occupation and project managers may be
architects, quantity surveyors, real estate managers, valuers/agents, or have a
building/contracting background.
• The project manager is concerned with the overall management of the project
and is not involved in carrying out any part of the project. The project
manager needs plenty of common sense, administrative ability and a good
knowledge of construction.
• The objectives are to ensure that the finished project is suitable for its
intended purpose, that it is built to satisfactory standards, that completion
occurs on time and that the project is carried out within the budget.
Discussion points:
What are the benefits of having a project
manager in the development team?
Under what circumstances might a developer
decide to appoint a project manager?
7.6.1 Pre-Contract Preparations
• The project manager should check that the developer has the necessary legal
title on the site, whether it is freehold or leasehold, and that vacant
possession of the whole site is available immediately.
• The project manager will arrange, if not previously carried out by the
developer, all of the necessary ground investigations, structural surveys and
site surveys, and communicate the results to the rest of the professional
7.6.2 Preparing the Contract Documents
• The project manager’s most important job is to ensure that the contract is not
allowed to commence without adequate documentation. Incomplete
drawings are probably the most common cause of delays and cost increases.
• The project manager needs to be absolutely satisfied with the availability of
the drawings by the architect, as well as satisfied that the Bill of Quantities is
as complete and accurate as possible.
7.6.3 Appointing the Contractor
• If it is proposed to invite competitive bids from selected contractors, the
project manager should agree with the architect and the developer the names
of the contractors who will be invited to tender.
• The quantity surveyor compares each tender against their priced Bill of
Quantities. Once satisfied on all matters, the project manager then authorises
the placing of the building contract.
7.6.4 Site Supervision
• The project manager should be continually satisfied about the arrangements
made by the architect for site supervision during construction.
• The size and complexity of the scheme may merit the appointment of a fulltime site supervisor, such as a clerk of works or a resident engineer or indeed
a resident architect.
7.6.5 Construction Period
• When the contractor has taken possession of the site, the project manager
ensures that the works are carried out on schedule and that the overall cost is
kept within the budget.
• To carry out his duties effectively, regular meetings of the project team are
held, such as on a monthly or fortnightly basis. The architect should report as
to whether any variation orders or instructions have been given to the
contractor, the quantity surveyor then presents a report on the financial
situation and other professionals provide their reports.
• The project manager summarises the overall financial situation, particularly
with regard to payments to the contractor, compares them with the budget,
checks on dates of handover and compares the estimated date for the receipt
of income or capital payments with the budgetary expectation.
• These are matters of vital importance to the developer’s cash-flow. If it
appears that the project is running behind schedule, then methods of
speeding up the work to recover the position are considered, together with
the implications for cost.
7.6.6 Handover of the Completed Development
• A short time before the date for completion and handover of the building
from the contractor to the developer, the architect prepares a list of all minor
defects that must be remedied before handover occurs.
• If the development has been pre-let or pre-sold to an owner-occupier, then
the occupiers and/or their contractors may wish to have access before formal
handover by the main contractor working for the developer.
• The project manager, with the architect, needs to attribute and resolve
problems quickly.
• The quantity surveyor should then be asked when any outstanding
re-measurement work will be completed and be in a position to agree the
final account with the contractor, so that the architect may issue a final
• The importance of inspecting the site and its immediate environs on the
handover date should not be overlooked.
• Where an occupier is not taking possession immediately, then the developer
is responsible for a vacant building and a programme of regular cleaning and
maintenance should be instigated.
7.6.7 Monitoring Construction Process
• The project manager’s objective is to produce the building on time and within
budget for the developer client.
• Any delays in completion or increase in costs will affect the profitability of the
development; therefore it is essential that a developer is kept regularly
informed on progress and cost.
• Typical reporting methods include: bar (or Gantt) chart (Figure 7.1), cashflow
table and graph, financial report, checklist.
• Whilst regular reporting on progress and cost is a way of keeping the
developer informed, it also provides the project manager with an essential
tool, especially if the developer insists on regular reporting. The project
manager will know whether the aims are being achieved and it will bring into
sharp focus the targets that need to be achieved and the problems that need
to be tackled.
Figure 7.1 Overall Development Programme – Gantt Chart
Discussion points:
What are the main issues that developers need
to consider during the construction phase of a
What are the major risks the developer faces
during this stage?
• In the public sector, there are three main procurement approaches:
(a) PPP, (b) Design and Build and (c) Prime Contracting.
• In bringing the public and private sector together, the aim is that the business
community’s management and financial skills will lead to better value for
money for taxpayers.
• Clients, designers and contractors have evolved their relationships with
developments and developed different types of business relationships, among
these is partnering.
• Partnering is a business relationship for the benefit of all parties, built on
trust, openness and respect.
• There is a requirement to develop an environment for long-term profitability
and to encourage innovation.
• Partners commit to improved project buildability and a lowering of project
costs through the process of value management.
Chapter 7 Construction
Property Development (6th Edition)
Publisher: Routledge
Authors: Professor R.G. Reed and Dr S. Sims