Last edited 04 Dec 2020

Management contractor

Management contracting is a procurement route in which the works are constructed by a number of different works contractors who are contracted to a management contractor. The management contractor is generally appointed by the client early in the design process so that their experience can be used to improve the cost and buildability of proposals as they develop, as well as to advise on packaging (and the risks of interfaces).

It also enables some works contracts to be tendered earlier than others, and sometimes, even before the design is completed (for example, piling might commence whilst the detailed design of above ground works continues). This can shorten the time taken to complete the project, but does mean that there will be price uncertainty until the design is complete and all contracts have been let.

See also: Management contracting - pros and cons.

Management contracting differs from construction management in that management contractors contract works contractors direct, whereas construction managers only manage the trade contracts, the contracts are placed by the client.

In legal terms, the management contractor is acting as a principal whereas the construction manager is acting as an agent. This means that on a management contract, the client only has one contract to administer (whereas with construction management there can be many contracts for the client to administer), but they might want warranties from the works contractors so that they can make a direct claim against them, for example, if the management contractor becomes insolvent.

The agreement between client and management contractor is likely to cover both pre-construction and construction activities, with a notice to proceed between the two, before which works contracts cannot be let. Collateral warranties are also likely to be required (for example, for purchasers, tenants or funders). In addition, the client is likely to define the works contract terms and any requirement for works contract warranties.

There is a body of opinion that believes that if a management contractor operating on a cost plus fee arrangement pursues a works contractor in court for non-performance, the management contractor is unable to prove loss and damages. This is because the loss is simply passed on to the client, and so it is the client that has incurred the damage. This has increased the tendency for clients to require direct warranties from each works contractor.

A management contractor might be reimbursed on the basis of fixed or variable costs (the works contract costs), plus either a percentage fee, a fixed fee, or on a target-cost basis. The terms of the appointment must be clear about what is to be provided by the management contractor (such as the provision of site facilities) and whether activities constitute pre-construction or construction services.

The services of a management contractor might include:

A decision needs to be made as to whether the client wishes to retain the services of both an independent cost consultant and a management contractor or to transfer cost planning, reporting and cost control as a service to be provided by the management contractor.

A judgement has to be made on the competence and experience of the management contractor's proposed quantity surveying and cost estimating team and whether the client has a competent individual to police the financial aspects of the management contractor’s consultancy agreement. Sometimes, cost consultants who were appointed prior to the concept stage, advising on budgets and design concepts, have been retained because they have the confidence of the design team and client.

The most important aspect of selecting the management contractor is the quality and cost of the project management team they put forward. The team leader, the financial manager and the planner are crucial throughout the process as is the field production manager during the construction stage. The management contractor's staff costs during construction are likely to be between 5% and 7% of construction costs, but the quality and effectiveness of staff could easily change the financial outcome of entire project by 10%.

A mock meeting with consultants and the proposed management contractor's senior project team members can be an effective means of discovering how a team performs under pressure. Obviously this should only be done when the candidates have been whittled down to two or three. This technique often produces a unanimous verdict in terms of selection.

NB: For a detailed description of the sequence of tasks necessary on a management contract, see the free work plan: management contract: outline work plan.

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'The management contractor's staff costs during construction are likely to be between 5% and 7% of construction costs, but the quality and effectiveness of staff could easily change the financial outcome of entire project by 10%.'

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