Tendering and Procurement in the Construction Industry

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Table of Contents

The Issue of Project Collaborating in Construction
The Concept of Framework Contracting
The Concepts of Risk Allocation and Commercial Balance
References

The Issue of Project Collaborating in Construction

Construction companies sometimes encounter excess commitments and since they work in partnership with other companies, they occasionally opt to work in collaborative construction contracts (Manuel 2014).

Collaborative construction contracts are forms of building arrangements and agreements or other forms of mechanisms that allow the involvement of companies to work together in a single project.

Whereas the collaborative construction contracts may prove significant especially when contractors are dealing with mega construction projects that require skill combination and timely completion, they are sometimes challenging.

According to Manuel (2014), such project partnerships or collaborations act as effective strategies of managing project risks and completing the projects within the stipulated timeframe.

Companies that engage in collaborative construction contracts normally possess the aim of achieving the common goal of ensuring an effective project execution (Manuel 2014). Nonetheless, the arrangements for the collaborative construction contracts have often been doubtable and the achievement of the common goal often proves impossible.

Construction contracting is normally a complex process that requires trust building among the parties due to time, project quality, and financial issues (Mead 2007). Projects undertaken through collaborative construction contracts have regularly attracted economic, legal, trust and accountability disputes (Osipova & Aleberger 2007).

Such scandals between the partnering companies have reduced the adoption of the collaborative contracts across the world.

In most circumstances that involve collaborative contacting, there is normally no guarantee about the successful completion of the construction projects, the quality of the final project, or the responsibility of taking the construction risks among the project partners (Osipova & Aleberger 2007).

The complex nature of the collaborative construction contracts also poses the issues of mistrust, and the scandals concerning the accountability of the parties involved in the contract agreements.

Companies have reported several procurement cases concerning the ambiguities in the partnered projects and the lack of accountability between the members.

Issues of Trust and Accountability

Maintaining trust and accountability in the collaborative construction contracts has been a prevalent menace to the employers, the contractors, and the subcontractors (Mead 2007). It has remained to be a legal fact whether parties to a commercial contract have confined themselves to any written contract.

The construction law often assumes that whether the written contract existed or not, there was or should have been some form of agreement reached between the construction parties.

Additionally, most of the collaborative construction agreements rely on the unprofessional terms of voluntary arrangements, mutual trust, good faith, and mutual beneficence (Mead 2007). Building the trust and following the complex parameters of the framework agreements are challenging tasks.

In the 1990s, when the British Petroleum Company wanted to reduce the costs associated with project construction, several challenges pertaining to trust, construction costs, time efficiency and the quality of the completed projects emanated (Mead 2007). The first controversy was the Andrew Field Project.

The first scandal that emerged in the Andrew Field Project was mistrust. This showcase trial project was a successful deal, although trust between the members took a long time to prevail. British Petroleum wanted to prove how collaborative projects could be cost effective, time efficient, and successful with minimal efforts (Mead 2007).

The first case of mistrust began with the initial process of tendering because the company subjected the contractors to a competitive bidding process. Due to the rigorous process of bidding, almost a third of the contractors pulled out because they suspected that the company worked with biasness (Mead 2007).

After a successful bidding process, the BP project manager, John Martin was oblivious about the estimated amount for the construction. The contractor estimated the total cost to about 373 million sterling pounds, but the actual cost went down to 320 million sterling pounds (Mead 2007).

To be contented with the deal, John Martin had to hire external auditors.

Ambiguities of Contractual Terms & Budget Compliance

Collaborative contracts in the construction sector might sometimes turn out to be unsuccessful because construction partnerships often evolve in complex situations, their parameters are often unclear, and there exist a lot of mistrust between the project owners, the contractors, and the subcontractors.

According to Osipova and Aleberger (2007), collaborative contracts are normally unclear at their beginning, and one of the parties often tends to breach the agreements due to the nature of the unstable contracts. One of the controversial construction cases in partnered projects was the maintenance of Danish Main Roads.

The Danish Directorate of Roads has the responsibility of managing about 3800 km of the Danish main roads. In 2003, the institution entered into a partnering agreement with three other companies to manage and maintain the Danish roads (Mead 2007).

The contracts involved agreements that ranged between 200 thousand sterling pounds to 6 million sterling pounds. In total, the projects amounted to over 20 million sterling pounds.

Although the partnering agreement managed to record some significant cost reductions in the first three years, 3%, 6%, and 4.5% correspondingly, the contractors complained about excessive wastage of time and financial resources (Mead 2007).

In a separate auditing report done by independent auditors, the company seemed to have used more resources in the planning and implementation of the project (Mead 2007).

During the process of negotiating the terms and conditions of the agreements involved in the partnership, the company took the contractors through strenuous and time consuming consensuses, meetings, public procurement regulations and other strict procedures (Mead 2007).

Given that the project was under three collaborating companies, the time and resources used to go through the various agreement processes, made the project seem tricky and costly to some of the constructors.

According to the independent auditing firm, several other expenses went unaudited and the estimated improvements were therefore untrue.

Issues Pertaining to the Project Quality

In collaborative construction contracts, the issue pertaining to the quality of the project is often a disputable concept. Collaborative projects comprise agreements between several contractors, suppliers, and other construction agencies (Manuel 2015).

Managing the quality of the project to meet the expected design standards and the project requirements is often a challenging factor because different construction companies have different ways of enhancing the quality of the projects assigned to them (Manuel 2015).

In the process of trying to beat the given deadlines and work within the provided budgets, some contractors may work with constrained finances to make considerable financial savings.

In April 2013, the Bangladesh government faced a challenging task of unraveling the causes of a collapsed building that caused serious fatalities amongst some civilians (Manuel 2015). Three different contractors had collaborated to construct an eight-story building at the capital city of Bangladesh, Dhaka.

Thought to be a mysterious tragedy, the government launched an investigation to determine the causes of the collapse.

The first insight from the government officials revealed that the building had collapsed due to several construction lapses that the joint constructors caused. The contractors used shoddy construction methods to avoid some government levies that come from the construction permits (Manuel 2015).

A government civil engineering expert known as Henri Gavin established that the partnering contractors had wanted to ensure a quick start of the project. This meant that they had to use substandard material, poor construction methods, and fake tendering of the materials to reach their first construction targets (Manuel 2015).

In a report, Henri Gavin revealed that the contractors developed an uneven footing and had a poor following of the project plan. They used unstable reinforcing steel, little concrete and several other substandard materials to fight against time and the construction cost (Manuel 2015).

The contractors hired in this project used an illegal tendering process to acquire materials that would kick-start the project before the government could discover their deal.

The Concept of Framework Contracting

Constructors sometimes engage in long term contracts due to the arrangements made based on their performance with the employers (Glover 2007).

A framework contract is a form of a constructional agreement that entails a long-term procurement plan with the clients to secure the construction service of quality contractors or reliable suppliers through ensuring them a stable supply of jobs in future.

According to Glover (2007, p. 1), “the Framework agreement, often known as an umbrella agreement, is an agreement, which is reached between two parties to cover a long-term collaborative arrangement.” Contractors engage in framework contracts during the low seasons in the construction industry.

According to Glover (2007), when the scarcity of the construction jobs is over and the jobs have reemerged, the constructors compete veraciously for construction jobs available in the market.

The implications arise due to the long-term procurement strategies because contractors would often feel that the framework agreements have restricted them from winning better tenders.

Terms of Termination and Scandals Involved

A constant issue that arises in the framework contracts that involve long-term agreement in the supply of products and services in the construction deals is the terms of terminating the framework arrangements.

According to Glover (2007), when the contractors feel that, the construction jobs have reemerged in plenty and the moment of unemployment is over, they often way the benefits of remaining within the framed arrangements and the benefits of searching for other new tenders.

It is often uneasy because one of the parties will often feel disadvantaged and disappointment with the withdrawal of the disagreeing partner or the insistence of the other partner to commence the framework (Glover 2007).

Framework agreements do not normally have a fixed duration of existence and in legal terms, both parties must abide to the durational conditions. In normal circumstances, parties can often terminate the framework agreement at any time, at their own will, and within their terms of agreement.

Claims of wrongful termination, loss of contract profit, and waste of time in the framework agreement have been persistent in many cases.

While engaging in framework agreements, the parties must always observe and uphold the stipulations of the JCT Framework Agreement that governs public and private sector framework procurements (Sakal 2005).

According to Clause 22 of the JCT Framework Agreement, that controls the termination of frameworks, “no task with duration of more than 12 months is to be instructed in the final 3 months before the framework end date” (Glover 2007, p. 8).

Such a section protects the parties from engaging in long-term relationship and commitments that are non-beneficial. The section states that either of the parties can terminate the agreement through a one-month notice the last month of the framework contract ends (Glover 2007).

Cases involving uninformed, untimely, and ill-motivated terminations have often struck the efficiency of the framework agreements.

Unmet Promises supply of future work

Although the companies that procure contractors on framework contracts believe that they have the ability to continue providing their clients with a steady supply of future work, sometimes their promises turn out unachievable.

Glover (2007) explains that contractors at this moment find themselves losing important tenders, contract profits, and waste time needed to engage in new contracts with stable companies. Therefore, they often prefer to quit the framework contract.

In a Northern Ireland case, a contractor lost profits and made him feel underprivileged to lose a framework contract. However, those who stay in a unprofitable frameworks miss the chances of securing some important tenders that present themselves in the market during the period of the long-term procurement engagement (Sakal 2005).

This is because the contractor would possibly lose the promised benefits of future work and other privileges that were to accompany the long-term procurement strategy.

A failure of the employer to make genuine promises becomes a legal dispute because the contractor would always want compensations concerning the time wasted in the abortive framework agreement.

False promises in the frameworks contracts are prevalent and making legal and ethical claims exists among the involved parties.

According to Glover (2007, p.13), “the ability to make claims for loss of chance or loss of receiving is difficult because a claimant must establish on the balance of probability that there is some link between the defendant’s negligence and the claimant’s loss.”

False promises contravene the principles of good faith in the framework contracts and override the requirements of transparency in the endorsement of the construction contracts (Sakal 2005).

As witnessed in some framework cases, unless there are verifiable facts that the employer made some promises in the framework agreement, the courts can rarely assist the contractors to get their payments concerning the promised future benefits.

In case of a legal issue, Glover (2007) argues that unless the defendant agrees that there existed some promises in the framework agreement; the contractor will often remain to be a loser in the construction deal and in the profit claims.

The Problem of the Unforeseen Uncertainties

Sometimes constructions face enormous challenges such as collapses or destructions that result from the natural catastrophes and other uncertainties. Uncertainties are normally unpredictable and unforeseen (Osipova & Aleberger 2007).

Constructors serving in a framework contract that faces such challenges normally feel frustrated and would often want to terminate the framework arrangements made in the construction contract. When perhaps the employer failed to insure the project, contractors in that framework agreement will often incur considerable financial losses.

According to Glover (2007 p. 13), “where the quantification of the claimant’s loss depends on future uncertain events, the loss has to be determined on the court’s assessment of that risk materializing.”

Uncertain events such as the natural calamities are often unforeseen and setting up a claim for any form of compensation due to the damages is normally a challenging issue for the both parties.

Problems in framework agreement

Framework agreements have never missed scandals due to the issues of fairness, equality, financial losses, project quality, and mistrust in the provision and arrangements of framework tenders (Burnnet & Wampler 2003).

One of the controversial cases that marked a series of arguments is the case of Henry and the Department of Education in Northern Ireland. Henry Bros as a contractor engaged in a framework contract with the Department of Education of Northern Ireland.

Henry complained that the construction contract was inappropriate in its contracting agreements (Burnnet & Wampler 2003). Henry Bros disputable about the framework agreement when he presented the legal claim based on the foundations of the 2006 Procurement Regulations of Northern Ireland.

By awarding a construction tender to Henry without following the basic standards of tendering a construction process, the high court of Northern Ireland considered it illegal because the Department of Education for Northern Ireland seemed to have breached the Procurement Regulations of 2006.

Another similar case to that of the Northern Ireland contractor and a school department is the 2003 public procurement case that involved the New South Wales vs. the Austeel Pty Ltd (Burnnet & Wampler 2003).

The New Wales sub national government, which was the defendant, had entered into a framework agreement with Austeel Pty Limited to construct a large steel plant around the city of Newcastle (Burnnet & Wampler 2003).

The scope of the construction contract and the terms of the contract were extremely diverse and consisted several parameters of contract agreements pertaining to urban planning and designing.

The government disputed the construction progress because certain processes of the deal were disputable because they failed to follow a certain dispute resolution framework.

The government was unsure about the continual performance of the contractor, was not sure about the entire tendering process, and was not even sure amount the possible amount that the project could not exceed. The government feared to lose money and waste time.

The Concepts of Risk Allocation and Commercial Balance

The risks of engaging in construction contracts are extensive even in the concepts of risk allocation and commercial balance (Sakal 2005).

Sometimes the employers would want to dominate the ultimate results of the projects and the issues of time certainty through using fixed costs, may sometimes be unrealistic in a construction project (Mead 2007).

Such concerns explain the reason as to why it is significant to determine risk allocation and commercial balance during the process of entering into a construction agreement to avoid time and money losses.

In most circumstances, financial issues and risk management are some of the major concerns that arise in a construction contract due to the complex nature of materializing the project and the presence of some unprecedented risks (Mead 2007).

Using fixed costs in a construction project has become an issue for the contractors because of the nature of the fluctuating prices of building materials and the nature of framework contracts.

Since the construction risks are diverse and often unforeseeable, when the employers seek to control, the ultimate results of the project and at the same time maintain time certainty and fixed costs, the constructor will be vulnerable to most risks (Mead 2007).

When the employers tends to control the three major factors of determining the management of risks, there is often a likelihood that the project is financially impracticable, the site of the project is dubious, the insurance systems on the project are incompetent, the construction material is fake and illegal, the authority approvals are unmet, or the land possession is suspicious.

Working in a dynamic environment where contractors have little say on the socioeconomic issues also places them in a quandary when the employer tends to force a fixed pricing on the construction (Sakal 2005).

Such scenarios have occurred persistently in several construction cases and required the intervention of the court to resolve the imminent disputes.

Allocation of Risks in a Construction Project

Risk is normally an inevitable aspect in a construction and both the employer and the constructor always wish that risks never befell them. According to Glover (2007 p. 3), “on each project-specific underlying contract, remember it will still be necessary to consider the scope of work and/or services, allocation of risk, completion date, price and payment particular to that project.”

Most risks are unforeseeable and both parties can never determine the occurrence of a risk at any point of the construction process. It is very vital for the contractors to analyze the aspects of risk allocation due to several unforeseeable issues that may affect their contractual agreements (Osipova & Aleberger 2007).

Assessment of risk allocation in a construction projects makes the contractors aware of the unreasonable excuses and manipulations that the employers can cause in a construction deal.

Knowing the risks associated with a construction contract such as the risks of project financing, discrepancies, and omissions helps the contractors to assess the contracts.

Commercial Balance in a Construction Contract

The construction sector often experiences challenges of market fluctuations in the procurement processes and especially in the procurement of the construction materials, whose prices change occasionally (Glover 2007).

As witnessed in the above cases, working on a fixed budget from poor estimation made by the employer puts the contractor at risks of encountering the risks of material shortages, shortage of hiring skilled workers, and shortage of hiring some construction related services such as transportations.

Such shortages significantly expose the contractors at risks of settling claims related to inadequate designing of the intended project, incompletion of the assigned project, and poor selection of the construction material (Manuel 2014).

According to Glover (2007), contractors must understand principles of agreeing to certain standards of projects to ensure that cost estimations take into account the issues related to the price and quantity of the project.

Therefore, on risks associated with fixed costs, the contractors must analyze the financial feasibility, the budgetary allocation, and the market prices.

Time Certainty in a Construction Contract

Time is a considerable factor when it comes to construction of projects that require quick completion (Darrington & Lichtig 2010).

As witnessed in many construction cases, when the employer tends to control the aspects of time related to the completion of a project, there is normally a high likelihood that the contractor may encounter some serious time implications (Manuel 2014).

In a scenario where the employer tends to control the aspects of time and budget, the contractor will likely fall short of the expectations of the employer concerning the quality of the project or the state of the project, the poor designing of the project, inappropriate construction standards, and delayed progress of the project (Darrington & Lichtig 2010). Contractors would often want to work on low budgets and make some considerable profits from the construction projects. Manuel (2014) states that because some natural occurrences may delay the construction project; contractors should often assess the constructional costs and the time certainty issues.

Scandals Associated with Fixed Cost Projects

One of the controversial cases that pertain to risk allocation and commercial balance is the 2009 case of the family of Godbold and Mr. Camilleri who was a local contractor. The case entailed a fixed-price construction contract of $363,446 between the constructor, Mr. Camilleri, and Mr. and Mrs. Godbold (Darrington & Lichtig 2010).

The project was a construction of a personal house, which the employers promised on pay on eight installments depending on the progress of the construction.

Due to the dynamism of the construction market and the related market fluctuations, Mr. Camilleri found himself in financial difficulties and opted to request for more money from the project owners (Darrington & Lichtig 2010).

Mr. and Mrs. Godbold continued to pay the installments based on the progress of the construction, but remained reluctant to answer the request of Mr. Camilleri concerning the increment of the construction funds.

When Mr. Camilleri informed the owners that the project would probably take another $163,523.03 to complete, they terminated the deal.

Mr. Camilleri left the house unfinished due to financial constraints and time limitations. The house project finally ended on a sum of $44,157.23 through different contractors (Darrington & Lichtig 2010).

However, the contractors who completed the construction project were unable to complete the house in accordance with the design and quality expectations.

The increased cost of completing the house, made the Godbold family to limit their efforts in completing the project, rather than getting the best out of the expected design (Darrington & Lichtig 2010).

Although the case went to the court and the court could not ascertain the level of the unprofessionalism of the constructor in underestimating the cost of the construction project.

This was due to the reason that there was no evidence about a complaint concerning a defective building work, Mr. and Mrs. Godbold (Darrington & Lichtig 2010). The court requested the defendant to pay complainant a sum of $44,157.23 as compensation based on the stipulations of the statutory home warranty scheme.

Such a scenario explains that the projects assigned to the contractors on fixed costs normally have the likelihood of facing financial instabilities (Darrington & Lichtig 2010).

Projects carried out on fixed costs normally put the contractors at risks of constructing substandard projects, because the contractors, like in the case of Mr. Camilleri, fail to balance the commercial factors and the expected quality of the project (Darrington & Lichtig 2010).

The case of the two parties reveal the manner in which fixed cost projects are risky engagements for the contractors especially when one considers the persistent changes in the prices of the materials, the services of other builders, and other costs related to construction (Darrington & Lichtig 2010).

The scope of construction normally shifts from the intention of constructing highly standard projects, to the aim of ensuring that the project meets the standards of the estimated costs and the financial parameters provided by the employer.

References

Burnnet, J & Wampler, B 2003, ‘Unit Price Contracts: A practical Framework for Determining Competitive Bid Price’, The Journal of Applied Business Research, vol. 14, no. 3, pp. 63-72.

Darrington, J & Lichtig, W 2010, ‘Rethinking the “G” in GMP: Why Estimated Maximum Price Contracts Make Sense on Collaborative Projects’, The Construction Lawyer, vol. 30, no. 2, pp. 1-12.

Glover, J 2007, Framework Agreements: Practice and Pitfalls,http://www.fenwickelliott.com/

Manuel, K 2014, Legal Protections for Subcontractors on Federal Prime Contracts,https://fas.org/sgp/crs/misc/R41230.pdf

Mead, P 2007, Current Trends in Risk Allocation in Construction Projects and Their Implications for Industry Participants’, Construction Law Journal, vol. 23, no, 1, pp. 23-45.

Osipova, E & Aleberger, L 2007, Risk management in different Forms of Contract and collaboration- Case of Sweden, http://www.irbnet.de/daten/iconda/CIB4894.pdf

Sakal, M 2005, ‘Project Alliancing: A rational Contracting Mechanism for Dynamic Contracts’, Lean Construction Journal, vol. 2, no. 1, pp. 67-79.

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