Balancing risk and reward in the tender phase of design-construct contracts: How to have a successful experience with your design consultant.

 

by Stuart Tucker, GM of civil infrastructure at Beca

I’ve spent about 20 years working in design-construct contracts of one form or another, mostly in the tender and early delivery phases of large infrastructure projects. While I’ve seen plenty of changes to how professional services are procured and delivered for this work, two aspects remain the subject of considerable debate: How much design is enough and how should that work be reimbursed; and what are the designer’s responsibilities in relation to the tender phase – specifically, how much responsibility should the designer carry for additional cost as the design is developed in the delivery phase?

So how much design should we do?

Tender design work is really about helping constructors identify and manage risk while they determine a price for undertaking the works. It seems to work best when tender teams:

  • Carefully review scope at the outset of the tender phase;
  • Identify those components where cost risk may be reduced by design, noting that not all elements require design input to successfully price; and
  • Prioritise components so that design effort is focused on elements with the greatest cost risk.

Once priorities are agreed, budgets should be set by the constructor, balancing its desire to limit spend against the level of risk it is prepared to adopt. More design might provide greater certainty or even innovation but cuts into the time available for pricing. Less design time might mean more time for pricing, but greater variability in actual out-turn cost. There is universal agreement that once budgets are set, designers need to provide the agreed pricing deliverables in full and on time.

Balancing these aspects introduces a degree of tension to the tender team – which can help drive performance when managed well. It’s critical that the people pricing the work have a thorough understanding of the risk profile adopted for the overall tender design and for each element – because the risk profile adopted will differ between projects and across individual elements within a project. In my experience, the best teams continually review progress and change course as new information demands. They can only do that effectively with a thorough understanding of the risk profile.

Reimbursement of designers is a separate but related question. The industry has settled at reimbursing designers on a time and disbursement basis, usually at heavily discounted rates, with a top-up on winning. This approach is appropriate because:

  • A level of reimbursement is required to make tender design work viable for consultants, taking into account win rates and returns for combined tender and delivery phase work.
  • Much of the value in a developed design is created in the tender phase. This aspect is now recognised by some principals, who pay bidding teams for use of the intellectual property created by them in the bid phase.
  • The scope of design work is uncertain and usually changes considerably through the tender phase. And so the reimbursement model needs some flexibility.

So when can I sue my designer and how much can I get?

The topic of designer responsibility for tender phase work is usually considerably more vexed in my experience.

Invariably, designers seek to limit their exposure, while constructors seek to maximise the responsibility of the designer if things go wrong. And at times things do go wrong. Not because designers are incompetent – it’s because tender phase design is demanding. The work is fast paced and tender teams (designers, constructors and estimators) are often working with limited time (and budget) and uncertain inputs.

Discussions about the extent to which designers should be liable for tender design work need to start with the recognition that the designer is providing a partial service, in limited time, with limited budget and often based on very limited information. The tender design is often based on assumptions that cannot be fully tested and cannot be subject to the usual checking and verification processes because of time and budget constraints. The quality of deliverables that are provided for pricing purposes is inevitably impacted by those limitations. It is critical that designers and constructors have constructive and transparent discussions about those constraints on the quality of pricing deliverables and that the risk profile being adopted is agreed and understood at the outset of the tender phase.

The challenge here, of course, is that when tender design is found to contain issues that are negligent errors or omissions in the subsequent delivery phase (rather than inevitable issues that are a consequence of the risk profile adopted), the designer will invariably argue that the tender phase duty of care and limitation of liability apply. It’s not an unreasonable position, but it annoys constructors for two reasons:

  1. The error is usually only discovered in the subsequent delivery phase when it is too late to adjust the price; and
  2. The loss borne by the constructor can often be many times greater than the designer’s tender phase limit of liability.

This brings us nicely to the limits of liability that should apply to tender phase work. How much should I get? I would argue “not too much”, because the designer offers a partial service that is not subject to the usual checks and verification within tight time and budget constraints. Additionally, the designer is not usually privy to the final pricing decisions of the constructor – it is the constructor that must weigh up all of the threats and opportunities, including those associated with design issues and quantity creep, and make an appropriate allowance in its price. This is not to say that the designer has no responsibility for these items – if a designer has made a negligent error or omission in performing the tender services, it must shoulder its share of the consequences in accordance with the tender services contract.

I also think that higher limits and more onerous duties of care imposed retrospectively on tender design work will be counterproductive, leading to more conservative designs (that designers can safely deliver in the subsequent phase with reduced threat of claims) that reduce the likelihood of winning the bid.

Tender teams (designers and constructors) perform best when both parties engage in constructive and transparent discussions about budgets, work scopes, duties of care and limits of liability. Both parties need to reach agreement on suitable terms that enable each to perform at their best, without too much fear of subsequent claims. I think a balanced approach is required – all care, some responsibility.

*This article was first published in Contractor: Perspectives 2015

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s