Higher education and construction – some current trends

The market for procurement by universities remains healthy. A recent report showed university spending on non-residential development was at an…

The market for procurement of projects by universities remains healthy. According to a recent report of the University Association of Directors of Estate (AUDE) on the 2014/15 figures, university spending on non-residential development last year was at some £2.5 billion, the highest ever. Universities are continuing to recognise that buildings such as science and research laboratories are enormous magnets for the best students.

The construction market, like other markets, has changed with the economic recovery. Only a few years ago, universities faced a buyer’s market.  Contractors were desperate for work.  Main contracting is a cash-generative business. Interim payments, particularly if the contractor can arrange for them to be “front-loaded”, can be held by the main contractor for a while before it pays its subcontractors and suppliers.  During the recession, main contractors needed to maintain this source of cash. They also had to find ways to keep their workforce busy, without creating redundancies.  Tenders became keener, labour and materials prices decreased, and employers, including universities, reaped the benefit.

There were downsides to the above.  Unless a contractor could be nailed down on price with machinery such as a GMP (guaranteed maximum price) contract – usually a mirage anyway, since no contractor can take the risk of variations or delays caused by its employer – contractors were always going to prop up their thin or negative margins by making claims for extensions of time and costs. They were often fuelled by a sense of injustice at being pinned down on price in the first place.

The position has now changed.  Contractors can now be more choosy about work.  They know that some of their competitors expired during the long recession, and that they, along with others left standing, are now in a far stronger position.  When work is more plentiful, and at better margins, contractors are even willing to compromise their older claims so as to release their contracts managers and other staff to the more fruitful front-end work. Indeed the main problem for contractors in recent months has been holding their prices firm in the teeth of rising labour and materials costs, particularly in specialist areas such as mechanical and electrical works.

What forms of procurement are currently used?  Two-stage tendering is not always to a contractor’s liking. Contractors often bid low on the first stage (pre-construction services) in the hope of being approved for the second stage (construction) which they cannot be sure of getting.  Also, they are sometimes wary of employers holding back fees for pre-construction services. The contractor says that it has produced a workable design, and has put together the tender documents for the various works packages, as required.  The employer says that everything has cost too much and taken too long, and that the contractor has misunderstood its objectives.  These contracts sometimes run into difficulties because the scope of services is not sufficiently precise.

What about “design and build” as against “employer-design”?  The usual rule is that if the project is a fairly process-driven form of construction such as student halls, then the cheap and cheerful method of design-build may be advantageous, for costs purposes. There is some disquiet at present that student accommodation may be becoming too “standard” and box-like.  D&B contractors will generally design down to the price.

Conversely, if what is being built is a research laboratory with state-of-the-art technology upon which the university’s intake of science undergraduates depends, then the design needs to be higher-spec, and, probably, undertaken by a team of professionals. The usual problem with employer-designed works is that a contractor will play on the separation of design and construction obligations. It may attempt to persuade the university that its professionals are at fault in their design or supply of information.  The typical contractor’s tactic is to try and drive a wedge between the university and its professionals, so that the university is unclear who to trust. 

In this situation, the best general advice that can be given to universities is to side with its professionals, at least at first, unless or until it is clear that they are negligent, or in breach.  One mistaken tactic is simply to stand back and assume that the professionals and the contractor can fight the dispute out amongst themselves. It does not work like that. For example, it will not be possible to claim back from an external quantity surveyor, engineer or architect, the costs of a contractor overrun, merely because the professional supplied some information later than he should have done.  Generally, negligence will need to be shown, and that is more difficult.

There are other forms of procurement. Management contracting is supposed to have the benefit of the contractor being partly on the employer’s side of the fence, and using its knowledge of design and construction issues to assist the employer in managing the various sub-contractors.  The managing contractor gets a relatively low fee percentage, but has little risk.  So long as it manages the sub-contractor in accordance with his own management contract, it is not liable for delays, defects, or insolvencies in the supply chain.  The success of this form of procurement generally depends upon the know-how and experience of the management contractor.

If the employer wants more direct control, construction management may be the better bet. Here, the employer enters onto direct contracts with the trade contractors (piling and foundations, steel/concrete frame, roofing etc). The general problem is if one trade contractor causes a delay which knocks on to another, the employer is forced to resolve the issue itself, and makes sure that any claims are passed on from the “innocent” contractor to the “guilty” one.  This form of contracting is sometimes being used nowadays at the start of a build, with the groundworks and foundations being let under a trade contract, and the groundworker then handing over to the main contractor for the rest of the construction.

Universities need to devote resource to their choice of procurement route, form of contract and contractor. There is no one route that can be guaranteed to deliver on time and on budget, but some care at the outset can save time and costs later.

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