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The building blocks

Sunday September 20th, 2009

by Michael Hardware, Executive Vice-President, Chelgate

Michael Hardware looks at how the construction industry’s procurement processes have developed in recent years and the different contract forms which are now available.

The construction industry has had its critics over the years. An adversarial approach became embedded in the industry during the 1980s which increasingly hindered efficiency. Project budget and programme overruns were commonplace, reducing ‘certainty’ and confidence in many projects. There were a number of reviews of the sector following this period to try and find a solution to the problems that existed, and suggest ways in which the industry could improve. The consensus was that employers, contractors, subcontractors and consultants should all learn to work together better, with ‘partnering’ and ‘collaborative working’ becoming key buzzwords in the sector.

Procurement performance in the public sector had traditionally been significantly lower than in the private sector. According to a Bath University study on construction procurement published in 1999, 73 per cent of government projects were delivered over budget and 70 per cent delivered late. The new Blair Government brought in Peter Gershon from GEC Marconi to review and improve spending efficiency in the public sector, and it was on his recommendation that the Office of Government Commerce (OGC) was created in 2000. Mr Gershon became Chief Executive of OGC, and one of the activities the new organisation focused on was construction procurement.

In March 1999, the Treasury launched the Achieving Excellence in Construction (AEC) initiative, and the OGC subsequently pushed to see a greater move towards AEC requirements and collaborative working across the sector. It reviewed the forms of contracts under which building projects were procured, and came to the conclusion that there were too many, and only one which included the terms of the AEC criteria. The OGC later met with the various contract publishers and indicated that it wanted to see greater standardisation in terminology and ultimately integration and rationalisation, thereby halting the proliferation of contract forms.

The OGC overlooked the fact that the construction industry had actually resolved the problem of contract proliferation as far back as 1931, when it set up the Joint Contracts Tribunal (JCT). This not-for-profit body remains the industry’s only consensual contract drafting body today, with the main industry organisations sitting on its council, including the British Property Federation, Construction Confederation, Local Government Association, National Specialist Contractors Council, Royal Institute of British Architects, Royal Institution of Chartered Surveyors and Scottish Building Contracts Committee.

This made it all the more strange that the OGC should decide to push ahead with its standardisation drive and endorse a single contract form for use by central government departments. And instead of specifying the contract form used in over 70 per cent of building projects, developed over decades in collaboration with the industry, it chose the New Engineering Contract (NEC), a relatively unknown and untested contract form which few in the industry liked.

“OGC is, in fact, attempting to ‘reinvent the wheel’, albeit without the support of the industry”, said Professor Peter Hibberd, JCT Chairman. “The JCT suite of contracts has been, and continues to be, developed by the industry and its users and the idea that one should now consolidate upon some other ‘contract’ that is unilaterally produced and of limited pedigree is absurd. To do so would be extremely wasteful.”

Tony Bingham, a construction barrister and columnist in Building magazine since 1987, was similarly surprised by the OGC decision. He said: “Since JCT was created by the industry back in 1931, successive generations have been brought up with its forms of contract. Everyone – employers, contractors, consultants and subcontractors – are familiar with the documentation; they are aware of the general provisions, and relaxed in their use.

“NEC, on the other hand, is a relatively new form of contract which the industry is not very familiar with, and it is not widely used. This really is a ‘hostage to fortune’.”

Like central government departments, the local government sector is also a major building procurer. It had also been looking at better procurement practices, and similarly viewed collaborative working as a key part of the solution. The sector, in the form of the Local Government Association (LGA), looked to cooperate with the construction industry to come up with a suitable form of contract which would promote collaborative working on local government projects. In response, Constructing Excellence, an organisation charged with driving the change agenda in construction by improving industry performance, joined with the JCT to develop the JCT Constructing Excellence contract (JCT/CE).

Don Ward, Chief Executive of Constructing Excellence, said: “Integration and collaborative working are fundamental to improving our industry, and we are delighted that the JCT recognised this and worked with us on this. Success is much more likely if the contract is aligned as closely as possible with the intentions of the parties involved, and this is fully reflected in this new documentation to underpin collaborative working.”

The JCT Constructing Excellence contract was launched in the House of Commons in March 2007 by Sir Michael Latham, author of the Latham Review of construction industry procurement and contracting in 1994 He said: “I commend the new documentation, and hope it will be widely used. This is a great industry. It needs to work together, not separately. We have started on the best practice road, but we are certainly not there yet. Congratulations to the JCT and Constructing Excellence for helping us along that road.”

The Vehicle and Operator Services Agency (VOSA) piloted the new contract on its extensive building and facilities modernisation programme, which includes 12 vehicle testing stations, involving an investment of over £40 million to date. Joanna Davis, VOSA’s Estates Modernisation Programme Manager, said: VOSA has achieved higher quality, better control of risk and a truly collaborative working environment. Predominantly I have been using this contract on a four-year framework of new builds and major refurbishments. The project was externally audited with the results giving a startling 13 per cent reduction in cost and a 10 per cent reduction in construction programme from that of a traditional procurement route.”

The development of the JCT/CE contract was a demonstration of collaborative working between the industry and its employers. It was a contract form that could have been recommended instead of NEC when the OGC undertook its review of the industry. The contract was reviewed by the OGC team, but because it had not yet been published in 2005, was excluded from its final considerations.

The OGC came under increasing pressure from the industry to review its decision to endorse the use of NEC contracts only on central government projects. It succumbed in 2008, commissioning consulting engineering specialists Arup to carry out a new independent review of contract forms. Arup found that three forms of contract – NEC3, JCT/CE and PPC2000, a form developed by the Association of Consulting Architects – all met OGC’s Achieving Excellence in Construction requirements. However, despite these findings, the OGC reaffirmed its commitment to endorsing NEC3 on all central government construction projects, resulting in an outcry from the industry.

Sunand Prasad, President of the Royal Institution of British Architects, said: “RIBA have noted that the OGC has still refused to remove the restrictions on government departments using any form of building contract except the NEC, despite having agreed that other forms also meet their criteria.

“The OGC’s objective to promote collaborative working is laudable, but to promote just one contract form, when others also meet its collaborative working criteria, is wrong and an inappropriate restriction on the market. Having taken appropriate advice, it should be left to individual government departments to decide which contract form best suits the specific circumstances and nature of each of their projects.”
 
This viewpoint is shared by the Construction Confederation. John Bradley, Director of Legal Affairs, said: “By favouring one type of contract, the OGC is creating a monopoly in construction procurement for government departments. This step is obviously uncompetitive and wholly inappropriate in today’s industry.

“It should be left to individual departments to choose the contract form most appropriate to the particular project.”

Suzannah Nichol MBE, Chief Executive of the National Specialist Contractors Council, echoed these comments: “Why is the OGC favouring one particular contract when a number of forms meet its Achieving Excellence requirements? The construction industry has been making excellent progress towards more collaborative working, and JCT offers a series of contracts which operate successfully in a variety of applications and projects. We firmly believe that the OGC should not be endorsing one contract over another when it may not be the best choice for particular projects.”

Norman Fiddes, Chairman of the Scottish Building Contracts Committee, said: “Although the OGC has made good progress in guiding public procurement along the right path to collaborative working, it should avoid being too prescriptive.

“The market has responded to the OGC’s AEC requirements and has brought forward new collaborative working agreements which are bound to have a significant impact on the industry as a whole. However, having commissioned a review that was favourable, it only seems reasonable for the OGC to endorse the use of all of these contracts on government projects.”

Sir Michael Latham commented: “I am pleased that there are now three partnering contracts available to clients and to the supply side. I believe that all three contracts are very suitable, and I think that government departments should be able to choose which of the three they prefer.”

The OGC has claimed that the decision to endorse NEC3 was in fact made by the Public Sector Construction Clients Forum (PSCCF), which includes all the major government departments in its membership. As the PSCCF was only formed in 2005 – by the OGC – and there is no mention of this decision in its minutes, this appears to be a suspiciously convenient explanation.

What will happen next? The OGC appears to be ignoring both the views of the construction industry and its own code of conduct, which encourages government departments to be ‘objective, even handed and transparent when making decisions and making sure that each competition is run without favouring one supplier’.

In the face of an independent report and widespread condemnation by the construction industry, can it really be logical or appropriate for the OGC to continue to seek to extend the use of a single engineering contract to all government construction work? I for one think not.

Further information

For further information, please visit: www.ogc.gov.uk

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