10 things to know about management contracting

1. What is management contracting?

Management contracting originated within the US construction market, which typically has large scale projects with complex requirements. These projects call for early involvement of a professional team and an experienced contractor, greater flexibility in respect of design development, programme and costs, and delivery through specialised management. 

It was hoped that its use in the UK would encourage collaboration between parties and combat some of the more adversarial practices seen on projects in the 1980s and 1990s. However, due to its unique risk profile it was not a particularly popular procurement method, and was not used much in an era when the traditional and D&B construction routes were better understood and became the norm. In the current economic climate – where contractors are finding it difficult to predict both costs and lead times – we are seeing an increase in its usage. 

In essence, it is a procurement method which sees the employer appoint: (i) its own professional team to undertake the design of the project (as per the traditional construction route); and (ii) a management contractor to engage, manage and co-ordinate separate specialist works contractors. 

As a separate professional team and specialist works contractors are employed, the management contractor does not undertake any design or construction work. In particular, the management contractor is not therefore responsible to the employer for the works contractors’ performance (save where it is in breach of its duty to manage and supervise the works). 

Payment of the management contractor is based upon the cost of the works packages, plus any agreed fee. It is therefore more akin to a services contract on a cost reimbursement basis, than a traditional lump sum construction contract.

Both the JCT and NEC have standard form management contracts: the JCT Management Building Contract and NEC4 Option F, which we consider in this article .

2. When is it used?

Management contracting typically lends itself for use on more time-critical, larger-scale and technically complex projects, which require (and benefit from) early contractor involvement, and the letting of works packages on a piecemeal basis - such that construction can commence before design is complete. 

Although this can mean that there is a lack of cost and programme certainty at the start of the project, at the same time the employer has more flexibility than on traditional and D&B routes and can often ‘hit the ground running’ with construction and design continuing in tandem. 

Bringing the management contractor onto the project at an early stage enables the employer to benefit from its expertise and advice in relation to procurement, buildability and any required interfaces between the works packages. By entering into essential and time-critical works packages during this early stage, the management contractor also removes some of the administrative (and often time-intensive) burden from the employer.

When choosing this procurement route, it is important that parties acknowledge that there will not be the certainty in relation to programme and costs at the outset. It should also be acknowledged that projects using management contracting inherently carry risks of time and cost overruns, particularly if there is complex design that requires development and could potentially change. 

That is not to say that the employer must swallow and accept liability for all change, time and cost overruns that arise. At the very least, the management contractor still has to sign up to, and complete the works by, an agreed completion date. Management contractor default, acts and omissions also impact upon its entitlement to the overall time that is available for the delivery of the Project. 

3. Managing the management contractor

Whilst the management contractor does not carry out any construction or design work on site, its responsibilities throughout the project can involve: 

• developing and putting in place design and construction programmes
• assisting the employer and consultant team with value engineering, estimates and costings
• advising the employer and consultant team in respect of materials procurement
• identifying the relevant works packages and competitively procuring them
• managing, co-ordinating performance of and enforcing the works contracts; and
• assisting with the negotiation and finalising of final accounts with works contractors

Management contractors need to be extremely experienced and highly skilled. Whilst this obviously encompasses the provision of expertise on design, programming and buildability, it also requires the management contractor to be shrewd and proactive when it comes to managing (and passing through) claims from works contractors. 

Employers need to be vigilant and ensure that its management contractor does not establish a culture or agenda whereby works contractors' claims are automatically passed through without proper investigation or interrogation - and without cognisance of the management contractor’s own default, acts and omissions. By: (i) being fully aware of the terms of the management contract (and performance against/adherence to those terms) and; (ii) having back-to-back works contracts, the employer should be able to keep a handle on these types of behaviours. 

Avoiding an automatic pass-through culture can be achieved where the management contractor is properly incentivised to act in the employer’s interest (like other consultants). This can be achieved by rewarding delivery to anticipated time and costs, or by negating fee entitlement for administrating works packages that are in delay. If the employer remains fully involved and correctly administers the management contract, whilst taking advantage of the management contractor’s skills and experience, such arrangements should hopefully be mutually beneficial. 

However, conflicts of interest can arise. The management contractor’s employment of affiliated or related parties as works contractors can cause obvious conflicts, and the terms of the management contract needs to provide for the avoidance of this conflict in particular. 

4. The employer’s role and consultant team

The risk profile for the employer is very different to traditional and D&B procurement methods. The employer needs to wisely choose its team of consultants and management contractor, which will form the overall team (see diagram below). On the whole, management contracting requires a greater degree of involvement and proactive management than other procurement routes, so employers should be prepared for this.

The success of the above profile is dependent upon the employer choosing a consultant team that is extremely experienced, highly skilled and proactive. The employer must also properly manage its consultant team and ensure that its actions do nothing to impede the management contractor in fulfilling its role. 

That said, the employer must be equally cognisant of the impact that any management contractor default, acts and omissions might have on the consultant team – and make provision for such impacts. For example, if the management contractor is liable for the late delivery of the project, this will require longer than anticipated terms for the consultant team appointments. Any liquidated damages provisions in the management contract should take account of the cost of these extended terms. Each consultant appointment should make provision for the extension of its term, and the rates payable/costs recoverable during that extended term. 

As noted, the management contractor is not usually responsible for the performance of the works contractors. It is therefore important that an employer considers what direct contractual link it intends to have with the individual works contractors in terms of warranties or third party rights in order to ensure it has sufficient recourse in the event of an issue (e.g. insolvency of the management contractor) or a dispute. 

5. Works contractors

Management contractors are responsible for selecting the most appropriate and skilled works contractors, putting in place the relevant works contracts and then managing and enforcing those contracts. 

Responsibility for delivering the work rests with the works contractors; the management contractor is only responsible for discharging its own obligations under the management contractor. Protection is afforded to the management contractor by including a clause in the contract which, in the event of a breach by the works contractor, makes its liability to the employer no greater than whatever it can recover from the works contractor.

In theory, this means the employer is getting the skill of experienced individual works contractors without paying a main contractor for the premium of taking the risk of these works packages. In turn, the employer will take the insolvency and delivery risk of the project (across a number of different packages). This more fractured approach is why the management aspect of the management contractor is so pivotal and key to the success of the project.

It also means that it is imperative that the employer has visibility on who is undertaking the works. Understanding their relationship with the management contractor is important for the reasons set out above. Equally important is understanding the relationships and interplay between key works contractors – see further below. 

These points demonstrate that the role of the employer in management construction requires greater involvement and proactivity, particularly in the procurement process but also during the construction period.

6. Works contractors’ costs

These costs form the basis of the Project’s Prime Cost (in addition to which the management contractor is paid a fee for its management services (and for overheads/off site activities)). 

The management contract will oblige the management contractor to fulfil all duties required of it under each works contract. As part of this, the management contractor must take a robust and contractually compliant approach to the assessment/certification of sums due under each works contract. 

Where a works contractor is in breach or fails to comply with its works contract the assessment/certification of sums due under each works contract cannot be done in isolation. For example, the JCT Management Building Contract envisages that where such default has caused claims by other works contractors and/or the management contractor to incur costs and expenses (including liquidated damages), it must deduct these from the defaulting works contractor. If it fails to do this, the Employer can recover such amounts from the management contractor. 

There may also be issues where a claim is made by a works contractor for an alleged breach of its works contract by the management contractor. These are not costs that the employer should bear. The JCT Management Contract deals with this by not requiring the employer to reimburse the management contractor for works contractor costs that arise as a result of a breach of contract or negligence on the management contractor’s part. Under NEC4 Option F, such costs are likely to fall within “Disallowed Costs”, which are deducted from Defined Cost. 

The important takeaway is that employers must be vigilant and ensure checks and balances are in place so that increased costs (such as loss and expense) that the management contractor may be liable for, do not end up flowing into the prime costs and being paid to the management contractor. 

7. Programming

One of the key roles of the management contractor is to prepare the detailed construction programme for the project, with input from the employer’s consultant team. It must also maintain the programme and update it on a regular basis throughout the course of the project.

This can be challenging, particularly given that projects which typically adopt management contracting are large scale, with delivery dependent upon many different and often fragmented works packages with complex design and works interfaces. 

The nature of the procurement route also means that the timetable for the works can be uncertain, hence the importance of continually monitoring progress. It is important for management contractors to ensure that the programme ultimately reflects what the works contractors plan to do and that the works contractors fully comply with their own programming obligations. A constant understanding of progress against programme is essential – particularly as the management contractor still has to sign up to, and complete the works by, an agreed completion date. 

Programme updates are not sufficient to demonstrate entitlement to an extension of time. We have seen management contractors using programme updates to show delays to completion, and using this as the basis of their extension of time claim (e.g. the difference between rev 7 and rev 8 = EOT claimed). This is not sufficient to demonstrate cause and effect and does not allow for other issues which could have incurred (including the actions/omissions of the management contractor itself) – see further at paragraph 9 below. 

8. Delivery

The approach to projects under management contracting is often to split them into phases or sections, because this method is often used on projects which require early contractor involvement and where design, cost and the programme all require further development. 

Under the JCT Management Building Contract, for example, the management contract covers a pre-construction phase and a construction phase. During the pre-construction phase, the design is developed by the employer’s consultant team (including the management contractor) so that, when a “Notice to Proceed” is given by the employer, the works are ready to commence and the start on site can be fairly rapid.

Works contracts are let once the Notice to Proceed is given and, at this stage, the completion date is confirmed and any amendments required to the Contract Particulars are made.

9. Extensions of time

During the construction phase, if the works are delayed and adjustments are required to the agreed completion date, the management contractor must demonstrate its entitlement to an extension of time. Under the JCT Management Building Contract, this entitlement arises where there are Relevant Project Events which cause delay beyond the completion date. NEC4 Option F requires the occurrence of compensation events. 

The JCT Management Building Contract recognises that a Relevant Works Contractor Event which entitles a works contractor to an extension of time under its works contract might also entitle the management contractor to more time. The management contractor still has to demonstrate that a Relevant Works Contractor Event has caused or contributed to its delay and will be precluded from an extension of time where it has caused or contributed to the Relevant Works Contractor Event in question. 

Under JCT Management Building Contract, the role of the Architect/Contract Administrator is also crucial when dealing with works contracts' extensions of time – and it plays an important ‘checks and balance’ role of the management contractor’s assessment. Whilst it is up to the management contractor to notify the Architect/Contract Administrator of and consult with him on decisions on works contracts’ extensions of time – if the Architect/Contract Administrator disagrees, it has to say so.

The above creates risk for the management contractor, but also requires close scrutiny and administration from the Architect/Contractor Administrator too. The Architect/Contractor Administrator needs to be able to call out where it does not agree with management contractor’s assessments, or where there are areas of management contractor default (which might not be referred to in the extension of time particulars for Relevant Works Contract Event).

10. Can management contracting be successful? 

It is possible to use this procurement method successfully; however, it has to be adopted on the right kind of project with the right protagonists. 

If a project is large scale and complex, requiring an early start on site date, with employer led design which requires further development, then using an experienced management contractor to advise on procurement, buildability, value engineering and interface issues can be extremely beneficial. 

In turn, the employer should ensure it has considerable in-house experience and picks the right consultant team to support its more proactive and more involved role on the project. It is important that the employer and its consultants have an understanding and awareness of the management contractor’s obligations, particularly with regard to reporting and notifying delays, cost increases and design changes. It is essential that the management contractor is itself “managed” and its obligations are properly enforced, in order to ensure a successful project. 

What is key is ensuring the right team is picked to administer the project and that everyone has an awareness and understanding of the processes and contractual mechanisms to help manage issues such as delay, costs escalation and design changes.

If you need any assistance on your project or more information on management contracting generally, please contact: Gregory Buckley and Jennifer Fitzmaurice