Construction projects can be executed under a variety of delivery models, including design-build, early contractor involvement and alliance models, amongst others. In order to ensure the success of a construction project, it is vital to choose the most appropriate delivery model. Each delivery model comes with distinct features and the client should consider how the differences align with the project’s goals and characteristics.
This article will discuss the various construction delivery models that a client could consider. Once an overall contract model has been decided on, a client can further refine the contract to suit the project specific requirements.
When a construction project is undertaken, project personnel often focus on the technical aspects of the implementation of the project. It is however vital to first understand under what construction delivery model the project will be delivered under, as this influences how the project should be approached. The different delivery models expose each party to the contract to very different risk profiles, which should be taken into consideration when deciding on the strategy, staffing and pricing of construction projects. Not fully understanding the delivery model can lead a contractor to hugely overestimate or underestimate their tender price, leading to an unsuccessful bid or the unsuccessful implementation of the project. Common types of models include:
Design-build-bid construct only contracts
Design-build contracts, including variants such as Engineering, Procurement and Construction (EPC)
Engineering, Procurement and Construction Management (EPCM)
Early Contractor Involvement
Public Private Partnerships (PPP’s)
Table of Contents
1 Design-build-bid construct only contracts
For construct only projects, the design and construction stages are undertaken separately. The client first procures the services of consultants to undertake the design and engineering. Based on this, the client tenders out the construction of the works. The successful bidder then contracts directly with the client to construct the works, with the consultant acting in a supervisory role. The client therefore retains control and oversight over the entire project. This form of contract is suited to straightforward projects, where there is little to be gained from contractors’ input into the design.
In this construction delivery model the client retains the risk of the design, since the contractor has little, if any, input. Due to the contractors merely pricing a completed design, they have a clear indication of what they are pricing for. This is relatively low risk and therefore attracts a large number of contractors, resulting in competitive pricing. This method also provides cost certainty to the client, since there should be little variation after contract award. The client, however, has to ensure that the design and requirements were complete and accurate from the outset, otherwise there could be costly variations on the project.
Whilst being cost-effective and straightforward, there is little incentive for either the consultants or contractors to optimise the design, potentially missing out on large cost savings. Due to the competitive tendering process, there is also the risk that the lowest bidding contractor mispriced elements of the project. This can lead to an adversarial project environment, with the contractor likely to take any opportunity to apply for variation claims.
2 Design-build and Engineering, Procurement and Construction (EPC) contracts
Under the design-build and EPC delivery models, the contractor is tasked with undertaking and taking on the risk of the design. Whilst design-build and EPC contracts are similar, they do have some key difference. With a design-build contract, the client will provide a high-level design outline, which the contractor has to refine and detail engineer. With an EPC contract, the client is likely to provide output specifications and have little input into the design. Under an EPC contract, the contractor is therefore also responsible for providing performance guarantees of the completed facility.
These types of projects are suited to industrial and heavy engineering projects, where function takes precedence over aesthetics. They provide a client with a single point of responsibility for the project, who procures and coordinates the design and construction activities of all other subcontractors and specialists. The owner does not get involved in the coordination and design and construction interfaces, and expects a completed project at the end, delivered at the agreed price. The client therefore has little scope for input during implementation and should be comfortable with, effectively, leaving the project in the hands of others. It is therefore vital that the client’s requirements are very clear and well defined at the onset of the project to ensure that the end product meets their need. Any ambiguity is likely to lead to disagreements about the final product, and any changes requested later by the client are likely to lead to claims by the contractor to recover unplanned costs.
Payment for design-build and EPC contracts are generally lump sum, and the contractor is in control of ensuring they meet their quoted price. The contractor is likely to price in the additional risk they take on under this delivery model. Whilst the overall price could therefore cost the client more than other delivery models, there is price surety. If the contractor’s priced in risks do not occur, a substantial profit can be made. The contractor could, however, also make a substantial loss if risks do occur that cannot be covered by variation claims.
With a lump sum price, the contractor is heavily incentivised to perform the work more efficiently since it will result in greater profits. Arguably, it could also incentivise them to cut costs to such a degree that it impedes on quality or performance. The client should therefore ensure that the output specifications are well defined. For this reason, owner’s engineers are usually employed to verify that the requirements are met.
3 Engineering, Procurement and Construction Management (EPCM)
In an EPCM project, the EPCM contractor provides a professional service to undertake the design, plan the overall project, and then to procure and manage other contractors to implement the construction works. The EPCM contractor does not enter into contracts directly with other contractors, in contrast with the EPC model. Instead, the client contracts directly with the various other contractors who deliver the implementation. The EPCM contractor therefore isn’t liable for the schedule, cost or performance of the other contractors.
This form of contract generally has lower costs than EPC contracts, as more risk remains with the client. In addition, the client can procure each construction and supply contract individually, ensuring the best price is achieved, rather than leaving it up to an EPC contractor. There is also more scope for the client to change the scope as the project progresses, since they are engaging each contractor individually. Even though the EPCM contractor is there to manage the project, an informed client is vital to the success of the project.
The client retains a lot of the project risk due to having separate contracts directly with the various other contractors and suppliers, and has no single point of responsibility. The interface between the separate contractors is therefore a risk to the client. The client is, however, also more involved in the project and has input into how it is delivered. The EPCM contractor can help the client manage the project successfully, and its oversight can ensure that a high quality product is delivered.
The Alliance construction delivery model is a collaborative arrangement where the client and contracted parties share the risks and rewards of the project. They are usually used on large, highly complex infrastructure projects which are difficult to scope and implement under other contract models. They require a transparent open-book approach by all participants, who also jointly develop the deliverables, measures of success, and percentage split of costs and profits. They were developed to counter the disputes seen in large, complex projects, which can result in long, costly court battles.
One of the key benefits of the Alliance model is flexibility, with changes that would benefit the project readily accommodated. However, with the focus on the quality of the outcome, rather than the process it takes to achieve it, there is a risk of uncertainty and escalation of cost and programme. It is therefore vital that agreements, processes, measures of success etc. are clearly agreed upfront.
The Alliance model relies on a collaborative, trusting approach, where the parties’ interests are aligned. Furthermore, rather than attributing blame, parties are expected to jointly address any issues that arise. Whilst these can be addressed in various procedures and with clear performance measures, the success of the Alliance model remains dependent on the attitude and culture that each participant brings to the table.
5 Early Contractor Involvement (ECI)
In the ECI delivery model, a contractor is engaged early by the client to contribute to the development of the design. The ECI model allows for a collaborative approach to the project between client and contractor. This can lead to innovation in the technical approach as well as the project’s implementation. It is particularly useful if the scope of the project is not well defined at the onset. The ECI approach can help ensure that the client and contractor’s interests are aligned and that they are on the same page, which helps prevent future disputes. ECI is usually suited to large, complex projects where there is benefit from a team collaborating to find innovative solutions, but it can be applied to projects of any size.
The delivery model is generally broken into two stages, with the first similar to the Alliance model, and the second stage taking the form of a design-build or construct only. In the first stage, a contractor works with the client in developing and optimising the design. The contractor can be responsible for the design, or can work with the client’s design team. This can lead to innovation and improved constructability, which can ultimately lead to large cost savings due to better integration between design and construction. It also promotes transparency between all parties and creates a less adversarial culture. The contractor’s role should be clearly defined in this early stage, as it could be ambiguous, especially if the client employs an independent design team.
In the first stage of the ECI delivery model, a client could also engage two contractors to refine the design. At the end of Stage 1, the Client could request a competitive tender from each contractor, with the lowest bid being awarded the construction contract of Stage 2. This ensures that there is some price competitiveness for Stage 2, even though engaging with two contractors will result in a more costly Stage 1.
Alternatively, one contractor can be engaged from the start, but their price for Stage 2 built up collaboratively with the client in a transparent fashion, and/or subcontracts can be tendered out individually with full price transparency to the client. As an additional option, the client can put a ceiling on construction cost, and if this isn’t met, can retain the right to go to the open market after Stage 1. However, contractors who have not been involved in the previous design stage might not be able to submit competitive bids.
Before proceeding with an ECI delivery model, the client should plan the process that will be followed and clearly define roles, responsibilities and expected deliverables. The client should also take cognisance of the fact that, at the onset of the project, there will be little cost certainty. It should also be kept in mind that the best contractor for stage 1 might not be the best contractor for the construction stage, due to the different skill sets involved.
6 Public Private Partnerships (PPP)
PPP’s are long term partnerships between the public and the private sector to deliver on infrastructure, buildings or services. They can take various forms, depending on the need, and can be used to make projects viable. The partnership apportions the responsibilities and risks between the public and private sector. The public sector focuses on ensuring that the project is correctly defined and monitors compliance with the requirements. The private party is usually responsible to partly or fully finance, design, build and operate the infrastructure or service. In return, the public sector makes payments to the private entity for an agreed period (e.g. 30 years).
Construction of the infrastructure or implementation of a service comes with technical and operational risks, which the private partner carries. Where the public partner agreed to make set payments, they carry the demand and price risk that they are able to generate from the facility’s use. There are further risks, such as a public perception and acceptance of the project, as well as the impact of future changes in politics that could lead to withdrawal of support for the project from the public sector. It is therefore vital that the partnership agreements are well considered and thorough.
Construction delivery models differ greatly in how they apportion risk and responsibility. Clients should have a good understanding of the project they are embarking on in order to choose the most appropriate delivery model. In deciding on the delivery model to follow, clients should consider:
how clear the project scope and requirements are
how complex the project is
whether there is potential for innovation
whether they need price surety at the onset
what their risk appetite is
what the urgency of the project is
whether they want to maintain control of the project
their own capabilities in implementing the project
how involved they want to be in the project
The most appropriate delivery model should be selected to suit each project’s unique requirements in order to ensure project success for all parties involved.
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