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Last edited 17 Dec 2020
Construction contract strategy
As construction projects involve large amounts of money, a great number of organisations, long durations and great complexity, the development of a clear contract strategy is very important. Adopting the right strategy at the beginning of a project can significantly reduce the risk of problems further down the line.
The contract strategy determines the level of management, design, construction, maintenance, operation and so on that will be required from different parts of the supply chain, and to what extent those services will be integrated. It also determines the level of risk that is allocated to different parties in the supply chain.
Developing an effective contract strategy that supports the client's objectives and allocates risks to those best able to control them, is critical to delivering a project on time, on budget, to the required level of quality and with the fewest possible disputes. For more information see: Procurement route and Standard forms of contract.
This can be particularly difficult on large or complex projects, where the supply chain can be very long and responsibility for performance may cascade down through a plethora of suppliers sometimes unknown to management at the top of the chain. For more information see: Supply chain.
A common problem is that whilst the first and second tiers of the supply chain sign up to fairly onerous agreements, as the chain develops, so the contractual liabilities decrease until suppliers at the end of the chain are often not locked in at all. It is important therefore for all parties to ensure that certain rights and obligations exist not only in their own agreements, but also in the agreements contracting parties have with others. This ensures that the main contractor is not left responsible for all obligations to the employer, that sub-contractors have enforceable rights and that timings are co-ordinated throughout the supply chain. For more information see: Back to back provisions in construction contracts.
In addition, there may be a need for third party agreements such as collateral warranties, which are agreements associated with another 'primary' contract to allow a duty of care to be extended by one of the contracting parties to a third party who is not party to the original contract. For more information see: Collateral warranties.
- The size, complexity, duration and cost of the project.
- Whether the nature of the works required can be described in detail.
- Whether the quantity of works required can be determined.
- The complexity of the supply chain.
- Whether the client requires a single point of responsibility.
- Financing of the project.
- The location of the project (is it in the UK?).
- The experience of the client and contractor with projects of a similar nature.
- Whether the works involve repeating activities, allowing long term relationships to be built up between the parties to the project.
- Whether the client is a single party or multiple parties.
- Risk allocation.
- Market conditions.
- The potential for prefabrication.
- Third party dependencies.
The Construction Playbook, Government Guidance on sourcing and contracting public works projects and programmes Version 1, produced by the Cabinet Office and published in December 2020, states:
- 'defining critical risk allocation, and ensuring it is properly reflected in the contract
- 'documenting the decisions made earlier on the contractual roles and responsibilities
- 'defining clearly the rights and obligations of each party and the associated contractual processes required to implement the commercial model, manage the contract and deliver the project
'The contract is where all the key elements of the project are drawn together and must
be a fully integrated, consistent suite of documents. It will define what you want to buy (specification), the method and timeframe for delivery, risk allocation and other key
commercial terms (e.g. the payment mechanism and KPIs) and what happens if things go wrong.'
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