Case Study

Question 1

How does the letting of the Fit-Out Contract fit into the Shell and Core Contract? What’s the mechanisms of the contract

Answer 1

The Fitout was included as a defined provisional sum under the S&C Contract. Instructed into the main contract through a deed of variation.

Question 2

What was the advanced payment for?

Answer 2

It was the mechanism used to reduce inflationary costs received within the tender returns. In relation to my package it was used for the purchasing of stone.

The advanced payment was £4million, and this saved (£300,000)

Question 3

Why was a deed of variation needed?

Answer 3

In terms of monetary value and scope, this instruction of the fit out works was far too large to be instructed under a simple JCT D&B variation. This was also the mechanism under the contract, so we had to use it.

Question 4

What does a DOV do?

Answer 4

It amends the existing contract terms due to the large scale nature of the change. Typically this will include;

• date for completion
• any update of LD’s
  -the change of the scope of work
  adjustment of contract sum

Question 5

When you were first appointed, what was the personal advice that you gave the Client? (Before the returns)

Answer 5

Carried out a very high-level review to advise how much I believed the returns would be over the pre-tender estimate and why.

Question 6

When you got the tenders back, you had this one at 43 million and one at 42. What was the difference between this?

Answer 6

• Not solely because the incumbents had priced with inflationary costs.
• Errors were identified, for example there was a doubling up of prelims which removed £250k
• The £42m had missed some areas of scope that the £43m had included, for example FF&E.

Question 7

Was this completed stone, or what was the status of it? What measures/process did you take to ensure the money was protected.

Answer 7

We had the vesting process which is fully documented, so there are monthly visits to the factory, the visits are recording finished stone and recording the selection of blocks from the quarry, slices after it, book matching and dry laying before it goes into final manufacture. There is an off-site inspection regime with the clients, contractor, stone manufacturer.

Stone is specified by its name, we specified stones from certain/known quarries which set the qualitative level, we then had the right to select blocks but not an infinite amount.

Question 8

What legislation affects the number of cubicles you mention in your case study?

Answer 8

Building Regulations - Part T was introduced in 2023 but nto clear which one would be before that.

Question 9

How did you go through identifying what went wrong?

Answer 9

• Reported on the fact that the PTE was done perhaps a little too early in May 2022.
• Used Gleeds extensive market analysis.
  -Used my previous project experience of working on bespoke luxury hotels.

Question 10

What was Gleeds, PTE and market predicting for inflation?

Answer 10

*PTE by incumbents was 8%
*Gleeds were forecasting in excess of 10% but it was fluid market depending on the sector. I had been seeing variances between 10-15% for some packages which enabled me to raise concerns.
*BCIS was 8%

Question 11

Were you able to identify the inflation costs to confirm if this was worse than the prediction?

Answer 11

I did see inflation costs in the tender returns and they were higher than the G&T one, but we didn’t ask for them for what their ‘inflation costs are’ we said what is your price for fixing, i.e buying the risk. This was a singular line item. Give us a price excluding inflationary costs and below include the cost for fixing, which is what led us into the discussion of advanced payments (example buying sanitary ware, light fittings, custom made brass taps).

It wasn’t the labour that was a concern for inflationary costs, it was the cost of the material that was a concern for the contractor.No, built into the cost.

Question 12

I assume the £40m was procured over various packages? What was your role in ensuring value for money?

Answer 12

No, not separate packages. Through the D&B we went to a fit-out contract who then went and got the prices from all of the trades (plumbers, dryliners etc) and then the main contractor put his percentage on top for managing it all. I was fully cognisant that there was a degree of doubling up, but given programme requirements it was better to de-risk the projects profile. The certainty of delivery and single point responsibility justified it.

Question 13

How do you calculate tender inflation?

Answer 13

Using BCIS TPI

Question 14

How do you calculate to mid-point construction inflation?

Answer 14

Using TPI

Question 15

How was inflation bought within the packages?

Answer 15

We asked for a lump sum fixed price for the full duration.

Question 16

What other solution could you have offered the client as a solution to the deed of variation?

Answer 16

There was none.

Question 17

Was there the risk that if the budget didn’t come back in line and you couldn’t progress with the Fit Out, would there be a potential loss for the contractor?

Answer 17

The contract included the works for the prov sum but there was a get out clause that if we don’t instruct you against the prov sum by a certain date, then we have the right to omit it without incurring loss and expense. So we made an adjustment to the profit, prelims and programme with MPX.Yes, under the S&C contract MPX could claim for loss and profit which was capped.

Question 18

Can you state when the original PTE was undertaken and what allowances had been made for inflation, and assumed start on site.

Answer 18

Original PTE done in May 2022.

Question 19

What happened with the clients contingency pot from RIBA Stage 3 to Stage 4 once in contract? How was this protected?

Answer 19

I used the risk register to quantify the contingency e.g additional risks, however this was very sparse. I spoke to the client and asked what they wanted me to do. They said they was setting a side a continegncy budget which only they would have sight of.

Question 20

Was acceleration thought about? In terms of bringing the programme forward, had the site been handed over the to the fitout contractor, had they contractually been given the date of possession, how was access granted to them, how does this work with insurances?

Answer 20

No, it wasn’t because it would’ve added more cost. Tenderers were asked to provide a cost on programme as part of a compliant bid, they were asked to provide an alternate programme to reduce their programme risk which would take longer. They all thought the programme was do-able.

Question 21

What is a defined provisional sum?

Question 22

What is an undefined provisional sum?

Question 23

Can you give some examples of provisional sums that were included?

Answer 23

All related to finsihes.

Question 24

Was a PQQ used?

Answer 24

Yes, however this was before my time on the project.

Question 25

Was another procurement route not thought about?

Answer 25

Yes, I did propose exploring construction management in order to bring costs down.

Question 26

What was the original prov sum value in the existing contract and how did this differ from the PTE?

Answer 26

Original prov sum was just shy of £22 million.

Question 27

Can you give me some examples of the rates that were inflated?

Answer 27

Stone and joinery.

Question 28

Why did the Client terminate the previous cost consultants?

Answer 28

Not satisfied with their professional service. It is also worth mentioning that the incumbent cost managers is the same company as the existing PMs

Question 29

What is an advanced payment?

Answer 29

Generally, a lump sum payment made prior to any works being commenced to assist in the cashflow of the project and provide security for the contractor.

Question 30

How does the advanced payment work with reimbursing the client?

Answer 30

The contract said there will be a pro rata calculation, there is a formula showing what percentage of recovery we get.

Question 31

How can you de-risk advanced payments?

Answer 31

Advanced payment bonds. This operates such that if the contractor should default on their contractual obligations, the bond issuer will pay back the employer the amounts made as advanced payment.

This is an important point to watch out for, as the contractor will want to offer an advanced payment bond that is the most economical to them but may not offer the most protection to the employer. Ensure that your contracts are drafted such that you have a right to veto the proposed conditions or supplier from the contractor.

Question 32

How can you de-risk advanced payments?

Answer 32

Linking advanced payments to vesting agreements. certain conditions will be attached to the certificate of vesting e.g. it should be properly identified, separately stored away from similar materials that be manufactured at a yard, securely stored and insured. If the worst case scenario occurs, you will need to demonstrate to an administrator which of the materials stored are yours and therefore cannot be counted as an asset to creditors.

We had the vesting process which is fully documented, so there are monthly visits to the factory, the visits are recording finished stone and recording the selection of blocks from the quarry, slices after it, book matching and dry laying before it goes into final manufacture. There is an off-site inspection regime with the clients, contractor, stone manufacturer.
Another is, it’s not formal, but we are making a payment to the main contractor who then in turn is making it to the subbie, and that’s where the bonds come in.
Stone is specified by its name, we specified stones from certain/known quarries which set the qualitative level, we then had the right to select blocks but not an infinite amount.

Question 33

Can you give me an example of case law on advanced payments?

Answer 33

Mirimskaya vs Evans 2007, which involved a fixed price contract, the employer agreed to making advanced payments, but when the works were not progressing, the employer wrote to the contractor stating they would no longer be making payments. The contractor made a claim against the employer for breach of contract. The case was brought before the Technology and Construction Court who determined that due to lack of any works starting against the works in question, there had been a ‘total failure of consideration’, which meant the employer did not have to make payment for works not started. However, the contractor was able to claim damages for the breach of contract, which included the loss of profit on the unpaid amounts.

Whilst the above ruling seems harsh on the employer to pay any amount of value for works that have not even been started, it is for this reason that in the event of termination the contract should adequately describe how to treat any advanced payment.

Question 34

What did the DoV consist of?

Answer 34

• Background to the DoV (e.g the existing contract).
• An updated execution page (still as a deed)
• Then move down to the contract particulars.
• Updating of sections, LADs etc.
• All the Annex’s including the revised contract sum
• Employers Requirements
  -Access regime

Question 35

Why did the client choose to put the Fit-Out as a prov sum under the S&C contract and not just have two separate projects?

Answer 35

Could not get a fixed price, so the client made the decision to instruct the designers to develop the design and re-tender when the time was right.

Question 36

What do you need to de-risk about an advanced pyament bond

Answer 36

need to read the cover and what triggers them and what actions we have to do ourself to protect our interest. We had to prove how the calculation was built up, if you pay upfront, then you save X amount. We made payment to MPX and MPX made that payment to the subcontractor. Contract exists between MPX and the sub-contractor. MPX offer a bond to justify the payment, MPX get a bond from their sub-contractor.

Question 37

How was professional fees dealt with?

Answer 37

Designers have already completed RIBA 4, we then value engineered it so they have to draw it, so costs. Post contract VE, the architect may have additional fees to ensure the contractors re-design meets the employers. Architects novated over. Client also has a clients monitoring team.

£40 million just construction costs, so clients design fees (novated), sub-contractor design fees were part of the subcontractor fee. This was dealt with by a separate pot.

Question 38

Whats inflation currently at?

Answer 38

2.3%