Advisory Essay On Procurement Route And Contract Type For Grade 2 Listed Building.

Your report must advise your client on the following issues:

1) Following a discussion with a colleague the director has been recommended to use the design and build procurement route with a lump sum contract, but has asked you to advise them whether this is the most appropriate procurement route for this project or would a traditional form of procurement route be more advisable.

2) Advise the Client by identifying and evaluating the most suitable form of contract to use with your recommended procurement route selected above.

3) The Client wishes to use a letter of intent to secure the successful contractor to commence the works as soon as possible. This is due to the City Council Solicitors' department often taking 3 to 4 months to get the contracts signed meaning that the Client often suffers cash flow problems and late commencements on site that can then lead to claims for damages from contractors. Advise the client on what steps he can take to address the main 5 risks associated with the use of letters of intent.
 

Selection of procurement route

Construction law is one of the branches of law and is the amalgamation of various different laws like the laws of planning, employment, commercial law and law of tort (Bailey, 2014). The construction industry greatly rests on the provisions of the construction law and the applicability of the construction law differs from country to country. Two important aspects in construction are the procurement route and the contract type and utmost care must be taken while selecting the procurement and contract type for any construction project (Hart & Green, 2012). Sheffield City Council is currently looking forward to the development of a Grade 2 listed building, currently abandoned, into 10 one bedroom apartments and 5 two bedroom apartments, along with retail on the ground floor. The local council has granted all permissions for the development, with a budget of 2 Million and a contract period of 12 months. The collaborating paragraphs will provide an advisory report on the selection of procurement route and contract type for the development. 

As per the given scenario, for the purpose of the development, one of the colleagues of the director of Sheffield City Council has given advice to the director to use the design and build procurement route. The design and build procurement route is a modern approach and differs from the traditional approach. The design and build procurement route is a project delivery system, which is used in construction. In this method a construction project is delivered, in which the design and construction services are contracted by a single entity, known as the design-builder or the design-build contractor. This method relies on a single point responsibility contract, which reduces the risks for the project owner (Cooke & Williams, 2013). As it covers both the design phase and the construction phase within the same timeline, it also helps in reducing the delivery schedule. This method or route of procurement is characterized with clear contractual remedies for the clients, as the design-build contractor will be held responsible for the whole project work, irrespective of the nature of fault (Morledge & Smith, 2013).

The traditional procurement route, on the other hand, involves the appointment of the designer and the contractor separately. Furthermore, a consultant team is appointed under this approach for determining the cost and for taking control of the design. Once the design is complete, the construction work is carried out by the contractor through bidding. This is followed by the preparation of the tender documents by the contractor based on the drawings, specifications or the bill. The lowest tender is then usually given the contract and the contractor is becomes liable for all the workmanship, materials and sub-contractors (Doloi, 2012). The Design and build route provides one single organization for the designing and building and thus, it saves time. Moreover the cost in this procurement route is comparatively less than the other routes and establishes better communication between the client and the contractor. Moreover, this route results in an integrated contractor contribution to both the design and planning. Whereas, the traditional procurement route is criticized for its inability to integrate the two separate functions of design and construction and for the impossibility of the contractor to become sufficiently involved, early in the procurement process and to make significant contributions (Hampton, Baldwin & Holt, 2012). Hence, as a chattered surveyor, I would request the director of Sheffield City Council to stick to his colleague’s advice and use the design and build procurement route. 

Design and build procurement route

From the given scenario, it can also be seen as that the colleague of the director has also given advice to the director for choosing the lump sum contact, in addition to the design and build procurement route. The lump sum contract and the Guaranteed Maximum Price contract (GMP) are the two types of contracts, which are usually selected in case of the design and build procurement route (Brook, 2016). The lump sum contracts, in one hand, are those in which there is a fixed and agreed price, which is paid to the contractor by the client. Moreover, higher prices can be charged by the contractor under such contracts for taking care of unforeseen contingencies. The price to be paid under these contracts usually includes costs of materials, labor, contractors overhead and also his profit margins and the responsibilities of job execution and all other construction activities fall on the contractor (Potts & Ankrah, 2014).

However, there are certain disadvantages of such contracts, like it is of highest risk to the contractor, it requires the project to be designed completely before commencement, it can lead to longer construction process than other contracting alternatives, its allows the contractor to use his owns means and methods and it can also attract high contract prices, covering unforeseen conditions (Hughes, Champion & Murdoch, 2015). On the other hand, the GMP contracts ensures risk reduction and in GMP contracts the client needs to pay the contractor the cost of doing the work, along with such amount, another agreed sum of profit to the contractor, limited to a predetermined maximum level. Such contract also transfers the risk from the client to the contractors. Furthermore, the cost under runs under the lump sum contracts are typically retained by the contractor and adds on to the profit of the contractor, whereas, in case of GMP contracts, such cost under runs are returned to the owner (Chan et al., 2012). Therefore, in the given case, the use of the GMP contracts will be the most suitable one to use as it is precise, cheaper and risk-free compared to the lump sum contract, which has uncertain cost fluctuations and less flexibility.

The construction law has various ancillary aspects like planning, commercial, contracts and tort law. The applicability of these aspects varies from country to country. The given scenario is based on the construction industry of UK and ancillary aspects like the law of contract and tort will apply, as these are highly applicable in the UK (Bassi et al., 2012). Therefore, in a construction contract, certain legal rights and obligations are formed between the contractor and client. The contractor therefore, becomes legally obliged to perform his duty towards the client as per the agreement and in case of any breach of such duty, the client can legally claim damages from the contractor (Adriaanse, 2016).

Traditional procurement route

Furthermore, the law of tort is also applicable as the contractor has a duty to do the work with care and must not be negligent while doing the work. It is a legal obligation that the contractor must provide the construction work with care, so that no damage or loss is suffered by the client. Any act of negligence due to the lack of duty of care by the contractor will attract the law of tort and the client will be entitled for any damages or losses under the law of tort (Boas, 2013). Therefore in the given case, the general principles of contract law and the provisions of the tort law will get applied.

It is to be stated that the Letter of Intent does not have a legal meaning. It is generally used to describe different types of contract. Ideally a letter of Intent is used as a description letter which is issued by an employer. The Letter of Intent is issued to the contractor. It generally reflects the intention of the employer to create contractual relations. The letter of Intent directs the contractor to start the work as per terms and conditions of the contract prior to executing the contract. It is ti be noted that a letter of intent has three basic operations. It operates primarily as a statement which is not binding upon the parties and dealing with the intention of parties to enter into contracts in the future. It is to be noted that the letter of intent also serves the functions of an interim contract which has its own terms governing the relationship of the parties. However such an interim contract will only be valid until the time the formal contract becomes enforceable (Thomas & Wright, 2016). Lastly it also acts as a contract which is final in nature having its own terms and conditions even though it cannot be executed formally.

It is to be mentioned that in the given case study, Sheffield City intends to use the Letter of Intent for notifying the contractor to begin work prior to framing the contract. The solicitor’s department of City council generally takes three to four months to prepare the contract and get it signed by the parties. However, it can be said that due to delay in preparing the contract the client might suffer financial problems. It can be said that late commencement of the construction work due to delay in preparation of the contract will make the contractor eligible to claim damages for the loss suffered by him. It is to be mentioned that there are several risks associated with the usage of letter of intent. Some of the aforementioned risks are:

• The Letter of Intent contributes to the negotiating process because it has a lot of aspects. It can be said that letter of intent can initiate negotiations of the written contract terms.
• Time required to negotiate a written contract can be give birth to new issues, the ones which the contractor might resist. The terms of the letter of intent can be different from the terms of the written contract which might give rise to complications
• The letter of Intent can increase the burden of administration as it is a two step process. The employer is expected to take advantage of the work during the time period when the written contract has not been executed. He is also expected to demand assurance of the work in the form of bonds and insurance covers. On the other hand the contractor is expected to demand limited liability during the pre contractual phase.
• It can be stated that scope of performance is considered to be very narrow and limited. The letter of intent is generally considered to be insufficient and ineffective in governing the terms of work. There can be confusions regarding the terms of the work in a situation when the written contract has not been executed.
• It is to be stated that the letter of intent tends to transfer the risks of negotiations in the contractor’s favor. The contractor is expected to carry on with the construction project according to the terms of the final written contract which can be different from the terms as stated in the letter of intent.           

Selection of contract type

However, the aforementioned risks of using the letter of intent can be eliminated by taking the following the steps (Gunnarsson, Linell & Nordberg, 2014).  If the following provisions are included in the Letter of Intent the aforementioned risks can be eliminated.

Timelines- The closing date of the negotiation period and deadlines for completion of work can help the parties to be on track.

Requirements- The terms of the work which are to be binding on the parties are to be clearly mentioned in the letter of intent. It is to be stated that a letter of Intent which is not binding upon the parties will still create relations partially binding upon them. It can be said that nullifying the duty of good faith of either of the parties to the contract is not permissible.

Nature and Scope of Diligence- The statement of assets and liabilities should be mentioned clearly in the letter of intent.

Descriptions of requirements- The letter of Intent must state the intentions of the parties to create legal relationships. It also has to be clear about the requirements and the points which are likely to be raised in the future.

Exclusiveness- It is to be mentioned that the parties must negotiate in exclusivity and in good faith until the final contract is prepared and executed. Such intention to act in good faith must be mentioned in the letter of intent. Any exception to such intention if existing also needs to be mentioned. 

To,

The Director,

Sheffield City Council

Address- Town Hall, Pinstone Street, Sheffield

Subject- Advice to resolve issues related to construction

Dear Sir,

After analyzing the issues of the construction project undertaken by you I have given an advisory report to you. The advisory report deals with my findings and knowledge of the different procurement routes available and the contracts in the construction field. It also aims to solve the issues of selection of procurement route and type of contracts to be formed as faced by you. I have also addressed the issues which you might face upon using the letter of intent. However, the steps that can be taken to overcome such risks associated with the usage of letter of intent have also been discussed in the report. 

I hope the advisory report will be helpful to you and will provide solutions for the for the issues faced by you  

Thanking You,

Yours Faithfully 

References:

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Bailey, J., 2014. Construction Law. Crc Press.

Bassi, A., Howard, R., Geneletti, D. and Ferrari, S., 2012. UK and Italian EIA systems: A comparative study on management practice and performance in the construction industry. Environmental Impact Assessment Review, 34, pp.1-11.

Boas, H.C., 2013. Cognitive construction grammar. In The Oxford handbook of construction grammar.

Brook, M., 2016. Estimating and tendering for construction work. Taylor & Francis.

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Chen, H., 2012. A letter of Intent for a neutrino oscillation experiment on the Booster Neutrino Beamline: LAr1 (No. FERMILAB-PROPOSAL-1030). Fermi National Accelerator Laboratory (FNAL), Batavia, IL.

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