Deciding on a project delivery method for your construction project

I need to deliver a construction project — how do I do it?

It is critical when carrying out any construction, infrastructure, or other project to ensure that you use the appropriate project delivery method that matches your required budget, timeframe, and project deliverables.

Deciding on which project delivery method to use at the start of the project will save you time and costs as the project progresses and will lay a solid foundation for the project’s ultimate success. Here are 8 key issues that you should take into account.

What is the dollar value of the project?

Your budget for the project will have a significant impact on how that project will be delivered. It may not be appropriate, for example, to use a purchase order or a minor works contract for a larger value project, nor for a smaller project with a high degree of risk (such as one containing design obligations). A tight project budget may lend itself to a construct only or design and construct contract, perhaps with a guaranteed maximum price to put a “cap” on costs. Alternatively, you may need to engage a contractor to assist you to scope and price the project as its deliverables are refined. Here, an early contractor involvement or managing contractor method of project delivery may help you save costs as the parties work together to develop the project.

Is the project’s timing critical?

If timing is critical for the project, it may be preferable to use a more standard contract that both you and the contractor are familiar with, to reduce time spent in contract negotiations and revisions to the draft contract prior to execution. Construct only or design and construct contracts may be a better choice, potentially with revisions to place more emphasis on finishing on time by limiting the qualifying causes of delay and increasing the liquidated damages payable by the contractor for late completion. A construction management model where the contractor receives an incentive for early completion may also be an option.

While the early contractor involvement and managing contractor methods do require careful selection of the contractor, the earlier in the project that the contractor is involved, the earlier the project design and planning can be completed. This may enable the contractor to commence ordering construction supplies or materials to make allowance for long lead times.

What is your risk appetite?

Considerations about your risk appetite, and how risk adverse you are, may impact on the choice of project delivery method.

If you are more comfortable with a traditional contractual structure, fixed risk allocation, and fixed time and costs, you may prefer a construct only or a design and construct contract in which you can shift the various risks of the project (including time, cost, and quality) more towards the contractor. If you are risk adverse, you should avoid entering into an alliance agreement or other “relationship contract”, since risks in those models are generally shared between the parties or transferred to the party best able to manage those risks.What is your long-term vision for the project? An important factor to consider is what is being constructed and how it will be used. Will there be significant public interest in the project? Are non-pecuniary goals, such as safety and environmental protection, important? Will the project require maintenance into the future, with such maintenance services to be carried out by the same party who constructed the works? If so, an alliance agreement or a design, build, operate and maintain agreement may be more appropriate.

Is the design fully worked out?

Has the design of the project been prepared internally or does it require development through consultation with external parties? If the design of the project is likely to be varied during the term, flexibility in the project delivery method would be preferable to avoid repeat variations to the contract or the scope of the works. Delivery methods that enable such flexibility include managing contractor and early contractor involvement, where the contractor can provide advice as to design and buildability aspects as well as assist you and your consultants to refine the design as the project progresses.

In circumstances where the project’s design can be finalised before the construction works are commenced, a construct only contract, where the contractor constructs the works on the basis of the finalised design and does not bear any design risk, may be more appropriate. Consider the potential “gap”, however, between design responsibility and construction responsibility, and whether you would prefer single-line responsibility by novating the consultant’s contract to the construction contractor under a design and construct arrangement.

How much control do you want over the project?

If you possess the necessary internal resources to manage the project, the direct managed project delivery method (in which you engage and manage all the consultants and trade contractors and take ultimate responsibility for the project’s delivery) will give you more control over the project. For higher risk projects, however, you may be better protected through a project delivery method where the contractor takes single-line responsibility for all aspects of delivering that project.

Do you wish to encourage innovation and cost savings?

In circumstances where you would like to encourage innovation in a project or work with the contractor to achieve cost savings (perhaps with an incentive structure built into the contract whereby savings are shared between the parties), the more relationship-focused project delivery methods may be more appropriate. Other methods such as construct only, design and construct, and design, build, operate and maintain operate within a more restricted structure due to the defined contractual obligations, risk shifting, and focus on fixed time and costs.

What is the local industry familiar with?

It will be important to consider whether the industry is familiar with the type of project delivery method that you choose. Construct only and design and construct contracts are much more commonly used within the ACT. However, while alliance agreements are more common in NSW and Victoria, they are less commonly used in the ACT. Local contractors may not be as experienced in delivering projects through those methods and may therefore build extra costs into their fee to protect themselves against unknown risks in a contract that they are not familiar or comfortable with.

So what do I do now?

After considering the above factors and any other factors that may be relevant to you, the project delivery method that best satisfies your needs and the needs of the project should be selected.

We would be happy to provide advice on the pros and cons of the relevant project delivery methods and which method best suits the needs of your particular project. We can also assist by drafting the necessary contracts or by making revisions to your standard template contract to suit the project and your preferred risk allocation.

For more information contact the Construction Group:

Christine Murray | Partner
(02) 6279 4444