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Traditional Construction Contract Or Design & Build: Making The Right Choice.

By Admin |  09th July 2020

The selection of an appropriate procurement method is essential for successful project development. The most suitable method can lead to increased certainty regarding time and costs and ensure that the completed works are fit for intended use. Construction in the Sri Lankan private sector primarily involves two popular methods of procurement, namely traditional construction contracts (or design bid build) and design & build contracts.

Public sector infrastructure development is also procured through the two popular methods, in addition to a variety of other methods including Build Own Operate (BOO), Build Operate Transfer (BOT), and Build Own Operate Transfer (BOOT). This insight will provide an overview of the suitability of the traditional construction contract as against the design & build contract, based on different commercial contexts, whilst highlighting key considerations.

Selection of Procurement Method

Procurement methods vary primarily for two reasons. The first is due to the freedom of contract where parties have the ability to tailor agreements to suit their needs. The second reason is owing to increased specialisation in the market, resulting in willingness of contractors to undertake responsibility beyond mere construction elements of a project.

Where the project is iconic or the client wishes to use his own designs, a construct only arrangement would be better suited. In this context, the client appoints consultants to design the development and then a contractor is appointed to construct the works.

In situations where the project is more functional and is not intended to be iconic, or the client does not wish to use his own design team, a design & build arrangement would be most appropriate. This arrangement would involve the client appointing a main contractor to design and construct the works, once the requirements are discussed and finalised.

Traditional Construction Contracts

The traditional construction contract has three stages. The first is the design stage where the client appoints a consultant to prepare a detailed design of the project and the associated tender documentation. This will comprise of drawings, work schedules, and bills of quantities, etc. The second is the tender stage where different contractors are invited to submit price proposals to complete the works, with the client selecting the most competitive proposal. The final stage involves the successful tenderer performing the construction works according to the design developed by the consultant.

The most defining feature of the traditional construction contract is the separation between the design and construction stages, with the client interacting with two independent parties. In any case, quite often the design consultant will be retained through the construction phase, for matters including any additional design information that may be required, to ensure conformity of shop drawings of the contractor with the main design, and for contract administration.

Advantages

  • Client retains control over design. This means that the client can assemble his own design team or use a reputable design team in the market. Recommended if the client intends to leverage existing working relationships with design consultants
  • More comparable tenders/proposals. Since the contractors will only deal with construction, their proposals will be more easily comparable. In contrast, proposals concerning both design and construction would be harder to compare, as it is inevitable that approaches of different contractors will differ in relation to the design element. This allows for selection of the most optimal tender in terms of cost/quality for construction.
  • Lower risk profile for the contractor. The design consultant/ client will be liable for design issues minimising the risk for the contractor.
  • Tried and tested procurement method in the market. Both clients and contractors will find it easier to negotiate and implement as a result.

Disadvantages

  • Delays. The design element will be prepared by a party separate to that handling construction. This will require coordination and continuous discussions between the designers and the contractors, thereby increasing the overall project duration.
  • Uncertainty/ variations in scope. If the designs are changed, or the design process is not complete when constructions begin, any changes in scope may be charged at a premium. This will also be the case if there are any errors or inconsistencies in design.
  • Longer tender process. The tender process is likely to take longer in construction only arrangements as a sequential approach in adopted.
  • Increased risk profile. Client does not have a single party to hold responsible for both design and construction, in the event he would like to seek relief or compensation for any related faults.

Design & Build

Design & build contracts involve a change in the sequence of a traditional construction contract. The client will firstly select a party with both design and construction capabilities by way of tender. The client can either present a simple brief outlining the project for the contractor to agree and then develop, or a more detailed schedule with specific requirements. The selected contractor will then undertake the design, planning and implementation of construction works, in accordance with the client's requirements.

The most defining feature of this procurement method is the single point of responsibility placed on the contractor in respect of both design and construction.

Advantages

  • Increased time efficiency. One party will handle both design and construction, thereby minimising both the need for coordination of both elements between two parties, and the risk of inconsistencies. This also means that the construction phase can be fast tracked, by an overlap between the construction and design phases.
  • Increased construction efficiency. One entity handling both elements would result in better coordination between construction skills and design skills. This means that the client will be able to take advantage of the contractor's full expertise, allowing design responsibility to drive construction efficiencies.
  • Single point of responsibility. Responsibility of completing on time/ achieving requisite quality would depend solely on the contractor, providing the client a relatively easier avenue for seeking compensation.

Disadvantages

  • Client has less control over design when compared to construction contracts. This could be an issue where the design is a key element of the project.
  • Client may face difficulties in preparing a sufficiently comprehensive brief at the outset.
  • Contract price may be higher to reflect the increased contractor risk- if awarded on a lump sum basis. Contractors may charge more due to their increased responsibility resulting in a higher initial contract sum.
  • May prove difficult to distinguish between design developments within the contractor's scope at the outset of the project, and substantive variations thereto. This could lead to disputes particularly in relation to related costs.
  • Tender process will not be as easily comparable. Different contractors may approach the design element differently resulting in less comparable proposals.

Contract Price

If the contract is on a measurement basis then payments for works completed is based on the materials used or on the actual costs incurred. In contrast, a lump sum contract involves a fixed price for certain items of work, with the contractor assuming any risks if there are delays or changes in price, unless such variations are approved by the client. Whilst the client has discretion over the pricing methodology, lump sum contracts are more appropriate where the project has a well-defined scope of work at the time at which tenders are sought and the likelihood of significant changes to the scope of work are remote. In contrast contracts on a measurement basis are more suitable where the design has been agreed on in reasonable detail but not been completed in sufficient detail for bills of quantities to be produced at the time at which tenders are sought.

It is important to note, if a contract is awarded on a lump sum basis, price certainty will depend on no subsequent changes being made. This is because such changes could prove to be expensive as prices charged by the contractor for those changes, will not be subject to competition.

Sri Lankan Context

The Construction Industry Development Act, No. 33 of 2014 (the "Act"), requires the registration of contractors engaged in identified construction works, with Construction Industry Development Authority ("CIDA"). Identified construction works essentially include developments for public use and of a value more than LKR 10 million, or such other value prescribed by the relevant minister.

The Sri Lankan government has introduced new regulations to formalize the construction sector and avoid issues caused by delayed or abandoned projects. The Construction Industry Development Regulations of 2020 published by way of Gazette No. 2181/21 dated June 25, 2020 has made it mandatory for property developers to register with CIDA. Further the regulations provide for registration of skilled construction workers, issuing of craft identity cards, a code of conduct for such identity card holders, disciplinary procedures for qualified persons and guidelines for disciplinary procedures for registered contractors which provide for the imposition of sanctions of and penalties on errant contractors.

The Act requires the use of standard documents specified by CIDA, for any identified construction works in Sri Lanka. However, it is to be noted that the Procurement Guidelines of the Government of Sri Lanka stipulate that in the case of foreign funded projects, the standard documents preferred by the relevant funding agency may be adopted. CIDA standard documents are broadly based on the Fédération Internationale Des Ingénieurs-Conseils ("FIDIC") rules.

In practice, clients embarking on major developments generally insist on contractors being CIDA registered, whilst they may adopt CIDA standard documents depending on preference.

The following include some of the commonly used standard documents used in Sri Lanka, that would fall under the category of traditional construction contracts:

  • FIDIC Conditions of Contract for Construction 1999 (Red Book 1999);
  • FIDIC Conditions of Contract for Construction MDB Harmonised Edition - (Pink Book 2010);
  • ICTAD Standard Bidding Documents for Procurement of Works (CIDA/SBD/1Second Edition January 2007);
  • ICTAD Standard Bidding Documents for Procurement of Works- Major Contracts (ICTAD/SBD/2Second Edition January 2007);
  • ICTAD Standard Bidding Documents for Procurement of Works- Minor Contracts (ICTAD/SBD/3Second Edition January 2007);

As for the design & build category the following standard documents are often used:

  • FIDIC Conditions of Contract for Plant and Design Build 1999 (Yellow Book 1999)
  • ICTAD Standard Bidding Documents for Procurement of Works- Design & Build Contracts (ICTAD/SBD/4First Edition- Amended May 2003)
  • Form of International Contract for Process Plant Construction published by the Engineering Advancement Association (ENAA) of Japan - in ADB's User's Guide to Procurement of Plant Design, Supply and installation SBD - May 2014

ICTAD (Institute of Construction Training and Development) has been succeeded by CIDA and any standard documents issued by ICTAD are still valid unless replaced by CIDA.

Conclusion

If timing of project completion is of utmost importance, a design & build method would be the best choice. Where design is of the higher priority, and the project is highly complex, a traditional construction method would be a better choice, as it will allow bespoke designs to be provided by specialised consultants.

Either arrangement will have implications in terms of risk for the client and so careful attention and scrutiny should be paid to the client's objectives, the responsibilities to be assigned to the parties involved and the commercial factors underlying the project. Ultimately the method of procurement is a commercial decision to be made by a client, based on specialist advice from professionals experienced in the complexities of construction procurement, documentation, implementation and risk management.

This publication is solely for the purposes of general information of our clients and other interested persons. The aim is to provide a general overview of the topic and this should not be construed as legal advice.

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