David Somerset
Managing Director Somerset Consult UK
Construction projects are invariably high‐risk ventures and, as with all projects, their success depends heavily on the successful management of risks. The collective responsibility for management of risk lays with the project stakeholders themselves and so the relationships which develop between those persons and organisations are fundamentally important.
What do we mean by ‘relationships’? A dictionary definition might be ‘the way in which two or more people or groups regard and behave towards each other’.
In a construction project relationships may be additionally defined as ‘contractual’ (the parties to the contract) or ‘professional’ (consultants) and it should always be recognised that a ‘personal’ element frequently develops.
At the outset of most projects enthusiasm and expectation levels are high and relationships blossom on a wave of optimism. However, there is a high risk 1 that relationships with clients and contractors will deteriorate to some degree as the project progresses. A well‐known case, Walter Lilly v Mr McKay, 2 highlights the extent to which relationships can deteriorate, ultimately giving rise to legal disputes.
For the purpose of this paper, rather than discuss generic issues of client relationships, I will focus on a specific type of client – one for whom relationship issues are perhaps familiar territory. As for contractor relationships I will focus on those issues that arise after the client/contractor relationship has broken down. However, in both cases it should be noted that much of what follows has a wider relevance and application.
In my experience wealthy residential clients are, by and large, the most challenging, and their projects tend to suffer higher than average levels of delays, cost over‐runs and defects.
Typical characteristics of this type of client include:
It might be argued that any client is potentially a difficult one but recognising the characteristics described above should sound alarm bells.
There is no overarching solution to managing difficult clients but there are obvious areas where mistakes can be made and from which problems commonly arise.
The responsibility for agreeing and recording the client brief (and later revisions to it) generally falls to a project manager or architect (or both). If the client brief is insufficiently detailed then problems are certain to follow. In the case of wealthy clients it can be difficult to gain sufficient access to them for this exercise. Moreover, wealthy individuals are commonly more used to ‘hand waving’ than being pinned down for more exact information. There can also be a tendency for consultants to think that a wealthy client will be more tolerant of additional costs arising from late design development. The truth is that wealthy clients are often unsure of exactly what they do want but are very sure of what they don't want when they see it.
So, the first step in managing a difficult client is to properly define the client brief, including not only specific requirements but also the more general (as yet undefined) requirements and how future design and procurement processes will apply to them.
Difficult clients are generally impatient and often pressurise their consultants into accepting unrealistic timescales for design and on‐site construction of the works. For example, on a project for a fit‐out for a high end residential apartment, the interior designers (a well‐known practice) advised the client that the works (valued at circa £7 milllion) would take eight months from placing orders to final completion. This included manufacture of circa £2 million of bespoke joinery. Given the quality of the finishes expected by the client, the duration was tight with no float in the programme. The client however insisted that the project be completed in four months and when the interior designers explained this was not possible, their appointment was terminated immediately and without further discussion. A ‘one‐man band’ consultant was approached and, not surprisingly, appointed to manage and procure a contract to complete the works in four months. Needless to say, the works were not completed in 4 months, nor in 8 months, but in 12 months! The consultant and contractor are now in dispute with the client over claims and counter‐claims. The lesson to be learnt is that whatever resources might ‘thrown’ at a project, in particular those which include high quality finishes, there is always a minimum construction time.
My recommendation to any consultant or contractor faced with a client expecting an unrealistic period for the works would be to try and explain why a longer time period is necessary, failing which the sensible option would be to withdraw. Although this course of action may be unpalatable it is certainly preferable to the prospect of a future legal dispute.
The potential problem of clients with unrealistic programme expectations not only affects design and construction but can impact on cost control as well.
The task of a cost consultant (appointed by the client) in estimating/cost planning and cost control for a high‐end residential property can be challenging unless the design has been substantially completed. In my experience, this is very seldom the case with the specialist fit‐out elements of the works often being included in contracts as provisional sums. On one fit‐out contract where the client insisted that the works commence whilst the design was still in the concept stage, the cost consultant, not willing to stand up to or challenge the client, duly prepared a tender document. The lowest tender Bid was £12 million but this comprised £10 million of provisional sums. As the works progressed the client constantly changed his mind and massive variation costs led to the final account for the fit‐out works being agreed at £22 million. The cost consultant's role on the project became no more than reporting the costs. Once the project was completed, the client alleged the cost consultant had failed in their duty and a legal dispute followed – which still remains unresolved.
With regards to costing variations and/or changes to the scope of the works, it is significant that most fit‐out works are carried out by specialists who tend not to provide detailed cost build‐ups but rather lump sums. Unless the cost consultant has obtained cost breakdowns or rates prior to agreements being executed, post‐contract negotiations with these specialists can be difficult and they lead to protracted arguments. A cost consultant engaged for this type of project needs to be experienced enough to avoid being held to ransom by the specialist.
Quality control procedures are an important element in all projects. However, with high‐end residential projects, the need to implement effective quality control/defect remedy procedures is even more important. The finishes on high‐end residential projects are:
The need for quality control and defect remedial works go hand‐in‐hand. The importance of these needs to be explained to the client as this will also help manage his expectations. On one particular project, the client insisted, against all advice, on achieving completion of the project a week before the 2012 Olympics in London. The project was completed but with the quality of finishes being compromised. There then followed a protracted period of defect rectification culminating in a dispute with the contactor.
Many consultants would regard an appointment by a wealthy client to be prestigious. In my experience, consultants should only accept these appointments with their eyes open and a realisation that such clients are often:
This is not to say that one should not accept this kind of appointment, but if one does then expect it to be demanding and act accordingly.
A high‐end value client will often spend significant sums on the works and may even acknowledge the cost of variations. However, when it comes to claims there is often a lack of understanding and appreciation of their liabilities. Such clients often question why they are being asked to pay for something that is not tangible. Avoiding claims is therefore high priority with these clients.
Wealthy clients do not always understand the need to make regular payments; this situation being worse with clients who do not reside in the country where the project is located. In these circumstances it is advisable that a separate bank account with adequate funds is set up in the appropriate country.
Contractor organisations might develop a reputation for being difficult for various reasons including:
For the purpose of this chapter, I describe below a situation where a contractor that ultimately displayed all of the traits listed above took advantage of inadequacies in the consultant's performance.
The contractor, which I will refer to as ‘Cheap O’, was one of six tenderers invited to submit a Bid for a new high‐class residential building. The tender documentation was poorly prepared, with the scope of the works not clearly identified and with a significant value of provisional sums and elements where design responsibility was otherwise ambiguous. The tender documents required the successful tenderer to provide a performance bond.
Cheap O submitted a highly competitive tender Bid that was 10% less than the second lowest Bid and considerably less than the quantity surveyor's cost plan. Furthermore, the construction duration was 14 weeks less than the second tender and again less than the quantity surveyor's time estimate.
Each tenderer was requested to set out their Bid as a detailed contract sum analysis. Cheap O's contract sum analysis consisted of four pages of mainly one‐line items. The other tenderers provided more detailed and comprehensive contract sum analyses.
The quantity surveyor, rather than undertaking a detailed and in‐depth review of the tenders, recommended the appointment of Cheap O. The client accepted the recommendation, knowing the Bid to be highly competitive. Up to this point no financial check had been made on Cheap O. However, a request was made to provide their latest financial statement – this was provided, albeit that it did not reflect the current financial year. The information provided identified a significant loss in the preceding financial year. However, no further financial checks were made and a letter of intent was issued for the full contract sum. Whilst the contract documents were prepared, they were not sent to Cheap O.
Cheap O commenced work on‐site, based on a 45 week construction programme.
The works commenced extremely slowly, with Cheap O issuing numerous requests for information. The contract document was sent to Cheap O for signing but was never returned. Requests were made for provision of the performance bond but they were met with excuses from Cheap O.
At week 45 (the original contract completion date), less than 40% of the works had been completed. Some weeks later, Cheap O's contract was terminated, followed by Cheap O going into administration.
The works, on the date Cheap O left site, contained a significant number of defects. No contract had been returned and there was no performance bond.
The task of appointing a replacement contractor was challenging and a contractor was appointed on a ‘cost reimbursement’ basis. Some two years later, the project was completed with the final account being in excess of double Cheap O's tender Bid.
There are a number of steps that can be taken to mitigate the risks associated with difficult contractors.
It is essential to adopt an appropriate procurement strategy in response to the client's requirements. The RICS Guidance Note, Tendering Strategies 3 sets out practical advice for establishing a procurement strategy.
Every project will have a business case, with various factors such as:
Once the procurement strategy is established the chosen procurement route can be developed – be it a lump sum contract, design and build, construction management, or cost reimbursement.
Whatever procurement route is chosen, it is of the utmost importance that the tender documents align with the procurement route. In the case study above, the tender documents were not appropriate for a lump sum contract. The tender documents should have clearly identified the full scope of works with no opportunity for the tenderers to apply their own interpretation to ambiguity/gaps in the scope of works.
Whilst the review of tenders can be undertaken on a documents only basis, in the case study, there should have at least been a meeting(s) with the two lowest tenderers to discuss and clarify the tender Bids.
Before there is any acceptance of a tender, there should be financial checks and, where a performance bond is required, ensure a bond can actually be obtained. In the case study, limited financial checks were made and no enquiries made as to whether Cheap O could obtain a performance bond. In the event that a letter of intent is issued (which should if possible be avoided 4 ) then it should have a defined financial cap. This enables the contract status to be reviewed once the cap is reached.
Ideally the contract should be issued before commencement of the works, including provision of a performance bond and warranties. Once the contractor has commenced works, the client loses leverage to obtain these documents.
The contractor's progress should be monitored carefully. In the scenario above, even a simple review of the monthly application for payment would have revealed that the payment drawdowns were less than should be anticipated – a good indication of underlying problems. These problems could have been due to outstanding information/cash flow or resource issues. In the event that lack of progress is attributable to the contractor, then action should be taken. In the above scenario, action was in the form of low‐key meetings with hollow promises made by Cheap O. Had positive action been taken this may have resulted in the earlier termination of Cheap O's contract. This would have avoided the situation of allowing Cheap O to remain on site for months with minimal progress and poor workmanship. To allow Cheap O to continue on site in the hope that progress would improve was a totally unrealistic.
Managing a difficult contractor starts with the preparation of the tender documents that are appropriate for the procurement route. Careful review and analysis of tenders is essential and enquiries as to their financial standing should be undertaken. Attempting to manage a difficult contractor from a base of poorly drafted tender documents and inadequate tender analysis is a hopeless position. Letters of intent should be avoided and an executed contract should be obtained before the works start, together with any performance bond or other security that is required. The performance on site of Cheap O should have been adequately monitored and positive action taken at the appropriate time.
Anyone with experience in the construction industry will be aware that both clients and contractors can be difficult to deal with. The more experienced will have learned to recognised the warning signs early enough to establish a suitable management strategy or alternatively to decline an appointment. What would a suitable management strategy involve? The answer is unsurprising – adopting a rigid ‘best practice’ approach for your profession. If a consultant allows a client to pressure him into compromising standards then it is he who will ultimately bear the associated risks. The more difficult a client is likely to be, the more tightly the consultant needs to adhere to professional standards. Similarly, difficult contractors may seek to take advantage of clients and consultants who cut corners. Opportunities to weed out potentially difficult contractors at tender stage should not be missed. Thereafter, effective controls can only be applied by a rigid application of the contract – which is only possible if the contract itself has been properly established.