Parties Involved In The Project Completion Construction Essay

In a construction project there are several parties involved in the completion of the project. These parties can be from either the public sector or the private sector. The key parties are the owner/client, the architect/engineer and the general contractor. Between these parties there are business agreements in the form of contracts to complete the work in the project, such as: design, engineering, construction, management and maintenance.

A construction project is ready for execution after the client/owner accumulates the required funds and has obtained the necessary approvals from the relevant authorities. Upon meeting the above mentioned criteria for establishing a project, the client will approach a general contractor or an architect to complete the project.

In medium to large size projects the client can execute the work by employing the work force directly (trade contract), entrusting a select portion of the work to general contractors and executing the remaining work directly (main contract) or entrusting the entire work to general contractors (turnkey contract).

In a main contract, the client contracts with an architect whom is responsible for the design of the project and a general contractor who is responsible for the construction, which results in two separate contracts: the client-architect contract and the client-contractor contract. Subject to the client’s involvement in decision making, the architect is able to act as the client’s representative.

In a turnkey contract the general contractor is responsible for both the design and construction of the project; there is a single contract between the two parties: the client-contractor contract.

The client-contractor contract maintains the contractual relationship between the two parties in both main and turnkey contracts. Theoretically speaking, the turnkey contractor is responsible for a main contractor’s and consultant’s (architect/engineer) work within a project, in other words the turnkey contractor is also acting as the main contractor. It is important to consider the potential for change in this contractual relationship, it is important to consider the idea that a main contractor can also act as a turnkey contractor within the project.

Problem Statement

How can a general contractor act as both a main contractor and a turnkey contractor within a single project?

Research Questions

What form of project will allow the general contractor to change their role in the project’s organisational structure?

How is the general contractor allowed to change roles?

Delimitation

This study will be written from a practical perspective, not from a legal perspective. This study will focus on the relationship between the client and general contractor in a building construction project to identify the parameters in which the general contractor is able to be both a main contractor and a turnkey contractor within a single project. This study will not cover the legal issues pertaining to liability, insurance, and risk management etc.

Research Method

The research conducted is through qualitative and analytical methods, to answer the research questions raised in this study. The research will be from primary and secondary sources such as: interviews, articles, books, websites, published documents from websites (electronic books, archived documents etc.), reports, publicly available legal documents (sample contracts).

Chapter 1 – Section 1

Prior to analysing how a general contractor acts as both a main and turnkey contractor, there is necessary to outline what their contractual roles and responsibilities are within a project. By identifying their contractual responsibilities, it allows for a more accurate analysis to answer the research questions presented in the problem statement section of this study.

What is a Main Contract?

In the initial stage of the project, the client awards an architect with a consultant contract, where the architect is responsible for preparing drawings, specifications, and contract documents for general contractors to bid on. The winning general contractor is awarded the main contract for the project.

The main contract is a business agreement between the general contractor and the client, where the general contractor agrees to carry out the main construction works in the project. The general contractor (now main contractor) may subcontract one or more trade contractors to carry out specific works in the main contract.

The main contract is a result of the Design-Bid-Build (DBB) project delivery system. The DBB project delivery system is the method the client gets the project from start to finish. DBB consists of three parties: the design party, the construction party and the client.

The design party includes the architect, specification writers (consultants), engineers (structural, services, mechanical), interior designers, quantity surveyors and other participants the architect considers necessary for completing the project. Depending on the client’s involvement in the decision making, the architect is able to act as the client’s representative and also for reviewing contract documents.

The construction party consists of the main contractor who is responsible for providing the labour, material, equipment, machinery and professional expertise to complete the project in accordance with the contractual documents which are provided by the architects.

The client is responsible for providing the location of a project (the site) and the contract documents to the main contractor, providing the architect with the budget, and funding the project (paying the main contractor and the architect). The budget is an important part of the project as it allows the architect to design a building that meets the client’s requirements and it determines the scope of the project.

What is a Turnkey Contract?

A turnkey contract is a business arrangement between the client and the general contractor. To commence the project, a client awards the general contractor a turnkey contract, where the general contractor (now turnkey contractor) is responsible for the design, engineering, construction and management of the project. The construction industry refers to the turnkey contractor as a ‘single point of responsibility’, a phrase that reflects the turnkey contractor’s contractual obligations.

Note: The client can award the turnkey contract to either the architect or a general contractor, however the researcher will continue on the premise that the contractor is awarded the turnkey contract to remain consistent with the research for this part of the study.

The turnkey contract is a product of the Design-Build (DB) project delivery system i.e. it is another method the client gets the project from start to finish. In a DB project, the turnkey contractor may award an architect/engineer a consultant contract to perform the design work. The turnkey contractor is also able to subcontract trade contractors to perform specific works in the turnkey contract.

A turnkey contract can also be used in a Design-Build-Operate (DBO) project delivery strategy. In DBO the client awards a general contractor a turnkey contract, and the general contractor (now turnkey contractor) is again responsible for providing design, engineering, construction and management services, however with ‘Operate’ the turnkey contractor is obligated to also provide the building to the client once it is fully operational.

The purpose of DBO is to manage the client and general contractor “in a multidisciplinary contract: to design, build and operate as opposed to individual agreements to govern the different facets of a project” (Sunna, 2009).

In a DBB project the client has a direct relationship with the architect and the main contractor (where the architect and contractor have an indirect relationship) shown in Figure 1, whereas in the DB project the client has a direct relationship with the turnkey contractor.

Figure

Section 2

Based on the research on project delivery systems and procurement methods, the ‘private finance initiative’ involves both the public sector and the private sector working in collaboration to develop a project. This section focuses on the private finance initiative in an effort to answer the first research question: What form of project will allow the general contractor to change their role in the project’s organisational structure?

What is the Private Finance Initiative?

The private finance initiative (PFI) is a procurement method where a private party or private parties provide funds to finance public services or projects; to partially privatise the service or project. The objective of a PFI project is to provide infrastructure to the public sector with additional services like maintenance (with PFI the private sector both operates and finances the project).

Theoretically, the government (public sector) bids on a project, which includes construction work, services and maintenance. Because these projects require a variety of skills, in PFI – the government and a group of private companies place a combined bid on the project, and work in collaboration to execute the project. The concept of PFI is to involve the private sector in public sector services or projects, because private companies are considered to be better at project management and budgeting/finance management.

When a project is awarded, the public and private parties (in this case the government and private companies) create a new private company to manage and exchange funds for the project. These funds are used to initiate and run the project. For a construction project after the building is fully operational, if the private companies made an agreement for the maintenance of the building over a period of for example, 25 years; the government will reimburse the cost of the project (including interest) over time.

Contract Process

A public party (government) signs a contract with a private party (a company or a group of companies) creating a public-private partnership (PPP). A PPP is a contract between a public party and a private party.

Before the PPP is created a private company creates a new company in collaboration with other private companies, this is referred to as a ‘Special Purpose Vehicle’ (SPV). The SPV is made up of private investors, a construction company, a maintenance company and a bank lender/s. SPV contracts with the government creating a PPP, and also with general contractors responsible for constructing and maintaining the building.

The banks funding PFI projects are repaid by SPV, from payments received from the government over the duration of the PFI contract. The repayments are based on the SPV’s ability to meet the requirements specified in the contract.

PFI Project Organisation Structure

Refer to Figure 2; the SPV is divided into subgroups: A holding company (Com A), private investors/bank lenders (Com B) and a services or operating company (Com C). The primary contract is between the government and the SPV, and the requirements in the specification transmit from the SPV to Com A, Com B and Com C through secondary contracts, and then filter down to the trade contractors.

Figure

What form of project will allow the general contractor to change their role in the project’s organisational structure?

According to the concept of PFI procurement, once a PPP contract is signed a new company is formed to finance the project. Referring to Figure 2, the SPV is considered as the client in this project because the government requires additional funding for the service or building project and is allowing the private party (Com A, Com B and Com C) to partially privatise the project. However, the government is still part owner; the SPV can also be a general contractor.

In Figure 2 the SPV is both financing and operating the project, depending on how the SPV wants deliver the project, Figure 2 assumes that the general contractor (in the project environment) is a main contractor, therefore the SPV will have a client-contractor relationship. But the government is still a part client to the project therefore the SPV is also considered as the turnkey contractor to the project.

A PFI project created through the partnership of the government and the SPV allows for a general contractor to change their role in the project’s organisation structure. As shown in Figure 2, the SPV is a part client, turnkey contractor from the government’s perspective and main contractor from the SPV’s perspective.

Section 3

According to research regarding contracts and contractual relationships, ‘Novation’ allows the parties involved in the project to change the project organisational structure by transferring their rights and responsibilities to the works specified in the contracts. The purpose of this section is to identify ‘Novation’ in an effort to answer the second research question: How is the general contractor allowed to change roles?

What is Novation?

The business dictionary defines novation as the “substitution of an original party to a contract with a new party, or substitution of an original contract with a new contract.”

To expand on that definition, novation is the process of replacing the original contract with a new contract between the original parties involved. Alternatively novation is also used to replace an original party with a new party under the original contract.

Once the original party is replaced, the original party’s obligations are discharged, and the new party is responsible for the replaced party’s obligations. Novation can only occur when all the parties involved agree to replacing a party or replacing a contract.

By replacing the obligations of the original party – the main contractor – all the parties involved (client, architect/engineer, and main contractor) in the original contract must agree for the replacing to take place. If the agreement to replace comes into effect, the new party will take over the responsibilities and obligations of the replaced party, i.e. the new general contractor will become a replacement to the original main contractor.

Novation is used “when the parties find that payments or performance are impossible under the terms of the original agreement, or the debtor will be forced to default or go into bankruptcy unless the debt is restructured.” (Sahil, 2010)

According to Rowlinson (2010), if the main contractor is being replaced with a new general contractor the client’s role in the project remains unchanged (the client being the contracting party).

Figure 3 illustrates how novation affects the project’s organisation. The Client (A) awards a consultant contract with an architect (B) and a construction contract with a general contractor (C). However, the client wants to create a single point of responsibility for both design and construction. For this to occur, the client (A) can novate their rights and obligations (under the consultant contract) to the contractor.

Figure

In the pre novation phase; the client will first award an architect/engineer the consultant contract to conduct the design work for the project, through which the potential general contractor will place their bid.

In the post novation phase; the consultant contract between the client and the architect/engineer is novated to the general contractor (after the general contractor is employed). This novation results in the original consultant contract between the client and architect/engineer being completely replaced with a new consultant contract between the general contractor and the architect/engineer.

By novating the contract, the client transferred the architect/engineer’s rights and responsibilities to the general contractor, therefore the general contractor is now responsible for both the design and construction works of the project.

How is the general contractor allowed to change roles?

Based on the concept of novation presented in section 3, the client is able to contract with an architect/engineer making them responsible for the design work in the project. After this stage the client awards a general contractor with a main contract for the construction work in the project.

If the client wants to make the general contractor (now main contractor) responsible for the post tender design work, and all the parties agree to this contract change, then the client novates the contract thus making the main contractor a turnkey contractor.

Through novation a general contractor is allowed to change roles, however all parties must be in agreement. Alternatively, novation can also be used to change a turnkey contractor into a main contractor, on the basis that all parties agree.

Chapter 2 – Empirical Data

The purpose of the empirical data section of this study is to verify the practice of the PFI procurement method as well as identify the relationship of the parties involved.

An article published in The Observer section of the Guardian newspaper in the United Kingdom (UK), by Graham Norwood (2010) titled “Self-build homes face a new set of obstacles” is about the UK government’s planning and housing policy. The article’s primary focus is the effect of the policy on self-builders (owner-builders) and rural authorities, with emphasis on financing. It appears that the article is part of a debate regarding the positive and negative effects, from the owner-builder’s perspective as it depicts the UK government in a negative context.

Extract 1

Housing minister Grant Shapps says the coalition will instruct councils to create registers of potential self-builders and allocate them land, including some private plots “donated” by volume house-builders, as a condition of receiving planning consent to construct large schemes. In return, at least some self-builders, chiefly in high-priced rural areas, would have to agree that their completed homes would be classified as local social housing and not be sold-on privately.

Extract 1 outlines the policy and the government’s intentions to provide owner-builders with properties to construct dwellings to increase housing in the UK’s rural regions (by “coalition” the author is referring to the government).

Extract 2

Orme is also critical of the abolition of house-building targets, which are to be replaced with more power for councils and community groups to decide on schemes for local homes. In some cases, 90% of locals may have to support a proposal before it can go ahead, a level of support currently achieved by very few planning applications.

“Orme” is a reference to Jason Orme, an owner-builder and editor of Homebuilding & Renovating magazine. According to Extract 2 an owner-builder requires the approval of both the local authorities and the community for the design of the building.

Extract 3

The fear of many, including volume developers, surveyors and planners, is that by devolving decision-making to communities, most plans for homes will be thrown out. Until now, self-builders have been treated benevolently by planners. Before the recession there were 20,000 self-built homes in the UK annually, about 12.5% of the total, compared with 40% in Scandinavia and central Europe.

Extract 3 summarises the possible issues that can slow or stop the progress of the project. Based on the first sentence “by devolving decision making to communities, most plans…will be thrown out” the author is saying the potential effect of including local communities in the design approval process, from the consultant’s perspective.

In this portion of the empirical section scrutinizes extracts from the UK government’s Planning Policy Statement 3: Housing June 2010 discussed in the article by Norwood (2010).

Extract 4 – Paragraph 11 of Planning Policy Statement 3: Housing June 2010

Collaborative Working – Key to the success of this new approach will be collaborative working between Local Planning Authorities and Regional Planning Bodies, as well as early engagement with local communities, stakeholders and infrastructure providers. Local Planning Authorities will need to work closely with the private sector, particularly developers and housebuilders, to achieve the Government’s strategic housing objectives.

In Extract 4, “private sector” in refers to the private party that the government will provide properties to. Through this information the researcher is able to confirm the relationship between the public and private parties.

Extract 5 – Paragraph 29 of Planning Policy Statement 3: Housing June 2010

Set out the approach to seeking developer contributions to facilitate the provision of affordable housing. In seeking developer contributions, the presumption is that affordable housing will be provided on the application site so that it contributes towards creating a mix of housing.

Extract 6 – Paragraph 36 of Planning Policy Statement 3: Housing June 2010

In support of its objective of creating mixed and sustainable communities, the Government’s policy is to ensure that housing is developed in suitable locations which offer a range of community facilities and with good access to jobs, key services and infrastructure. This should be achieved by making effective use of land, existing infrastructure and available public and private investment, and include consideration of the opportunity for housing provision on surplus public sector land (including land owned by Central Government and its bodies or Local Authorities) to create mixed use developments.

The statement in Extract 5: “approach to seeking developer contributions to facilitate the provision of affordable housing”, and Extract 6: “making effective use of land, existing infrastructure and available public and private investment”, together both these statements confirm that the government (public party) is going to work in collaboration with the owner-builder (private party), because the ‘developer’ refers to the general contractor, and “public and private investment” refers to the combined funds of both the public and private parties.

When the government is going to work with the owner-builder, the government is entering a PPP with the owner-builder. In Extract 1 Norwood (2010) writes “their completed homes would be classified as local social housing and not be sold-on privately.” The government is going to allow the owner-builder to partially privatise the completed building, particularly at the end “classified as local social housing” refers to a public service.

The PPP between the government and the owner-builder is not the same as the PFI procurement discussed in Chapter 1, Section 2. According to that discussion, the government collaborates with a private party to jointly bid on a project and exchange funds to develop the project, here the government is providing the property/site for construction without financing the project.

By comparing both the discussion of PFI in Chapter 1, Section 2, and extracts 1 to 6, the following information has been verified: the government is the public party; the owner-builder is the private party and the SPV.

The relationship between the two parties is a public-private relationship, in other words the public sector is involving the private sector in public service or projects, which (as discussed previously) the concept of PFI.