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Flashcards in DSJ - SoE - Contract Admin Deck (37)
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1
Q

With regards to development monitoring, what types of project structure are there? What was the project structure in Shrewsbury?

A

Usually either:

Involve the lender providing debt through a loan agreement directly to a company or institution or individual who will then pay project costs directly, e.g. building contract costs and professional team fees, among other things.

The lender may provide debt through a loan agreement to a development company or similar special purpose vehicle (SPV) set up to deliver the development and capture the associated liability, thus isolating the SPV from unlimited liability. The SPV will contract a builder to undertake the works and will appoint the professional team. - less risk?

2
Q

What is are SPVs? Why would they be used?

A

Special Purpose Vehicles (SPVs) are legal entities designed to prevent adverse risk being transferred to or from the owners of the SPV, the operations of which are limited to the acquisition and financing of specific property assets.

Most commonly, the SPV is in the form of a subsidiary company with an asset, liability and legal status that ensures independence and makes the SPVs obligations secure even if the parent company were to become insolvent. Conversely a parent company can use an SPV to finance a large project without putting the entire business at risk.

SPVs can also be used for partnering and joint ventures with the shareholding reflecting the participants contributions. It can also allow investors opportunities which would not otherwise exist, creating a new source of revenue generation for the sponsoring firm.

3
Q

What is Senior Debt?

A

In finance, senior debt, frequently issued in the form of senior notes or referred to as senior loans, is debt that takes priority over other unsecured or otherwise more “junior” debt owed by the issuer. Senior debt has greater seniority in the issuer’s capital structure than subordinated debt.

4
Q

What are the different Controls and limitations which banks providing senior debt may impose?

A

Loan to value (LTV) - establishes a limit to the debt facility by a percentage of the value of the completed development. For example, the bank may require that the debt facility be less than 55% of the gross development value.

Loan to cost (LTC) - establishes a limit to the debt facility based on the total estimated development costs as agreed between the lender and the borrower. What is included in the total costs may vary project to project. The LTC may, for example, require that the debt facility be less than 60% of the agreed total costs.

Peak spend limits - for example, on a private house building project where construction spend is offset by revenue from unit sales. A cash limit of peak net spend may be used against what may be drawn at any time, i.e. maximum amount does not exceed the ‘commitment’. The IMS may be required to track net spend against such limits month to month.

5
Q

What are the stages of an relevant to IMS?

A

The role of the IMS has various key stages, including:

Appointment
Technical Due Diligence 
Financial Close
Construction 
Completion 
Exit
6
Q

What was your involvement in Shrewsbury?

A

During Stage 2 - Technical Due Diligence

Review all the technical risks of the project (following the structure and focus of the agreed scope of service), with a view to potentially signing off the project often as a condition precedent to the lender’s debt facility agreement.

• establish lines of authority and communication routes
• issue to the borrower a required list of information
(tailored to the scope of service)
• meet the borrower and chair a kick-off meeting
• visit site and consider the development in context
• prepare an interim report with preliminary observations
• review, comment on and cross-reference incoming information, raising queries as required
• liaise with the borrower on any actual or perceived risks; and/or
• liaise with other lender advisers, e.g. legal, financial, valuation and/or insurance advisors.

Stage 3 - Prepared and initial report summarising findings from above.

7
Q

What were the main risks that were identified?

A

The costs had not been prepared by a chartered quantity surveyor.

Planning status drawings no pre-tender estimate based on detailed design.

Not priced under an agreed building contract.

Design concept and materials seemed reasonable.

Space around site limited

Economic conditions - COVID PANDEMIC

Construction management procurement route.

8
Q

Did you assess proposed costs of the project? If so, how?

A

Benchmarking the construction costs, whereby the estimated construction costs are expressed as a £/m2 rate and compared to appropriate historical data from similar projects, which may be taken from in-house data that the IMS may have or external industry data sources such as the Building Cost Information Service (BCIS).
It is important to adjust the project figures to ensure a like for like comparison with the benchmark data considering, for example:
• base date, e.g. using the BCIS Tender Price Index • location, e.g. by reference to BCIS Location
Adjustment Factors
• ground conditions – informed by the various site investigations; and
• external works – depending on the site wide requirements.

9
Q

When benchmarking, what key figures did you focus on?

A
The level of cost certainty should carefully consider where costs are not fixed; the potential risk of cost increases of such project elements should be identified. These may include:
• budgeted allowances
• provisional sums
• prime cost sums; or
• general contingency.
It is also common to consider the sufficiency of costs associated with, for example:
• enabling works
• utilities connections; and
• miscellaneous site preparation.
10
Q

What are the risks associated with the construction management procurement route?

A

???

11
Q

When liaising with the borrower, how did you advise on how risks could be managed?

A

Change in procurement route - e.g. D&B

Obtain further details with chosen Contract documents;

Are there any means of protecting against non-performance of contractors? e.g. Performance bonds, Advance Payment Bonds

LADs?? Has an accurate pre-estimate of loss been calculated. How might a delay with one package affect the others.

Who will be manage the works (Construction Manager) and what is their experience. How can they ensure delivery on budget and time.

12
Q

What advice did you give to the bank about potential risks?

A

Advised on the risks associated with the contractual structure of the project.

Design and Build would be a more preferable approach.

Assessed price on a £/m2 basis - compared to appropriate historical data from similar projects and external industry data sources such as the Building Cost Information Service (BCIS).

13
Q

What is Construction Management?

A

Procurement route whereby designers design, trade contractors detail and deliver their packages, and where the construction manager manages the process, leaving the client to lead and accept the risk on a project for which they are ultimately responsible.

14
Q

What are the risks associated with Construction Management?

A

The central role of the construction manager in managing the project and in providing administrative support to the employer.

No single point of responsibility related to the delivery of the project.

The greater role of trade contractors in the completion of their design work and co-ordination of their work with other packages.

The direct relationship between the client, consultants and trade contractors.

The importance of coordination and management at interfaces between different trade packages.

15
Q

What does JCT-CM include?

A

JCT-CM comprises a range of different documents – Construction Management Appointment (CM/A), and separate Construction Management Trade Contracts (CM/TC).

16
Q

Who prepares the design in CM?

A

The design is provided by the employer, often developed by an architect or design team working on behalf of the employer. No single point of liability!!

17
Q

Had a CM been appointed at an early stage?

A

The construction manager is generally appointed early in the design process so that their experience can be used to improve the cost and buildability of proposals as they develop, as well as to advise on packaging, and the selection of trade contractors.

In this case, the CM was not appointed during the design stage, which a stated was a risk in my initial report.

18
Q

What is the role of the Construction Manager?

A

The construction manager is appointed by the employer to oversee the completion of the works in the capacity of employer’s agent.

The CM has no contractual links with the trade contractors or members of the design team.

Their role includes preparation of the programme, determining requirements for site facilities, breaking down the project into suitable works packages, obtaining and evaluating tenders, co-ordinating and supervising the works.

19
Q

What is JCT-CM?

A

The Joint Contracts Tribunal (JCT)’s Construction Management Contract (JCT-CM) is designed for use on projects where separate trade contractors are appointed by the employer, with separate contractual responsibilities to construct the works.

20
Q

What is the difference between CM and MC?

A

Construction management differs from management contracting, in that management contractors place contracts with works contractors (equivalent to trade contractors in construction management) direct, whereas construction managers only manage the trade contracts, the contracts are placed by the client.

21
Q

What risk does the client take on in CM over MC?

A

Construction managers are effectively acting as a consultant to the client, the client takes the risk for the trade contractors’ performance. In legal terms the management contractor is acting as a principal whereas the construction manager is acting as an agent.

As the client is required to place and administer the trade contracts (of which there may be a large number) and perhaps to accept price uncertainty, construction management is only appropriate for experienced clients.

22
Q

What are the benefits of appointing a CM early in the process?

A

Construction manager’s are often appointed at the end of the concept design stage.

Their experience can be used to improve the cost and buildability of proposals as they develop, as well as to advise on packaging, the risks of interfaces between packages, and the selection of trade contractors.

Appointing a construction manager enables some trade packages to be tendered earlier than others, and sometimes, even before the design is completed. For example, piling might commence whilst the detailed design of above ground works continues. This can shorten the time taken to complete the project, however, it means that there will be price uncertainty until the design is complete and all contracts have been let.

23
Q

How are Construction Managers paid?

A

Construction managers are likely to be paid based on reimbursable costs (such as site facilities, staff costs, statutory fees, offices, and so on), and a management fee, comprising pre-construction and construction fees, which may be fixed, or calculated based on an agreed formula. It is important to establish what is included in the construction manager’s price (for example, insurance requirements or payment of statutory fees) and to agree the limit of the construction manager’s delegated authority in issuing instructions which affect the cost of the project.

24
Q

What additional requirements are there for a Construction Manager as opposed to a Contractor in the traditional sense?

A

As a construction manager performs a consultancy and management role (unlike a traditional contractor), their appointment may be on similar terms to the consultant team. They may be required to hold professional indemnity insurance and to provide collateral warranties for tenants, purchasers or funders, and collaborative working with the consultant team will be vital to the success of the project.

25
Q

What are the advantages of Construction Management?

A
  • Overall project duration reduced by overlapping design and construction
  • Construction manager can contribute to the design and project planning processes
  • Roles, risks and relationships for all parties are clear
  • Changes in design can be accommodated without paying a premium
  • Prices may be lower due to direct contracts with trade contractors
  • Client has means of redress to trade contractors through direct contractual links
26
Q

What are the disadvantages of Construction Management?

A
  • Price certainty not achieved until last trade package is let
  • Changes to later packages may adversely affect packages already let - expensive
  • Need an informed, pro active client
  • Client has a lot of consultants and contractors to deal with – not just one – more fees
27
Q

What is CMAR?

A

Construction manager at-risk - a type of construction project delivery method that can offer an alternative to the traditional process.

The role of the construction manager in the CMAR process is to act as a consultant to the client during the pre-construction design development stages, and then as a construction manager (and sometimes as the contractor) during the construction stages. The construction manager commits to deliver the project within a guaranteed maximum price (GMP), and any costs that exceed the GMP which are not considered to be change orders are the liability of the construction manager. As a result, the construction manager will become very involved in every stage of the project, taking action to keep costs under control.

28
Q

What is CMAR?

A

Construction manager at-risk - a type of construction project delivery method that can offer an alternative to the traditional process.

The role of the construction manager in the CMAR process is to act as a consultant to the client during the pre-construction design development stages, and then as a construction manager (and sometimes as the contractor) during the construction stages.

The construction manager commits to deliver the project within a guaranteed maximum price (GMP), and any costs that exceed the GMP which are not considered to be change orders are the liability of the construction manager. As a result, the construction manager will become very involved in every stage of the project, taking action to keep costs under control.

29
Q

What are the disadvantages of CMAR?

A

The drawbacks of the CMAR process is that the construction manager may lose out financially if cost over-runs occur. Also, they may compensate for the risk of financial exposure by changing the works to fit the GMP.

The client remains at risk for any exclusions or inconsistencies in the contract documents, as well as the risk that they may not receive the best possible bid from contractors if the GMP is established before the design phase begins.

30
Q

What effect does CMAR have on the overall design?

A

Before the completion of the design, the construction manager is involved with estimating the costs. This increases the flexibility and adaptability of the design and scope, since the project can be modified as cost, schedule and quality considerations are balanced. The client is also able to make adjustments before pricing is fully completed. This tends to make projects more collaborative, and design solutions tend to have better ‘buildability’.

31
Q

What is Guaranteed Maximum Price?

A

A guaranteed maximum price (GMP) is a form of agreement with a contractor in which it is agreed that the contract sum will not exceed a specified maximum.

Typically, this is a mechanism used on design and build contracts where the contractor has responsibility for completing the client’s design and for carrying out the construction works, so they are in a good position to control costs.

32
Q

What happens if the Guaranteed Maximum Price is exceeded?

A

The contractor must bear the additional cost

33
Q

What happens if the Guaranteed Maximum Price is exceeded?

A

The contractor must bear the additional cost.

34
Q

What is the advantage of the GMP mechanism?

A

Contract transfers risks for delivering the project from the client to the contractor. For example, if events such as exceptionally adverse weather or strikes occur, or if items that might otherwise have been the subject of provisional sums (such as complex groundworks, the nature of which cannot be determined until the ground is opened up), which on other forms of contract might have resulted in a claim by the contractor for loss and expense, on a guaranteed maximum price contract, the contractor has to bear any additional costs.

35
Q

What is the advantage of the Guaranteed Maximum Price?

A

Contract transfers risks for delivering the project from the client to the contractor. For example, if events such as exceptionally adverse weather or strikes occur, or if items that might otherwise have been the subject of provisional sums (such as complex groundworks, the nature of which cannot be determined until the ground is opened up), which on other forms of contract might have resulted in a claim by the contractor for loss and expense, on a guaranteed maximum price contract, the contractor has to bear any additional costs.

36
Q

What are the potential issues with the Guaranteed Maximum Price?

A

The contractor is likely to tender a higher price. Effectively they price the risks that they are taking on. This may be acceptable to the client if their priority is certainty rather than the lowest possible cost, for example, if the client has fixed funding available that cannot be exceeded.

However, a guaranteed maximum price is not a panacea, and the price is not necessarily fixed. If the client requests ‘extras’, for example, if the scope of the works increases, then the contract must provide for the price to be increased. Similarly, if work is omitted, then the price should be reduced.

There is obviously scope here for disagreement about what constitutes a change that should result in a price adjustment, and there is the potential for the contractor to use the valuation of changes to recover costs they have incurred elsewhere. This can cause tension in a form of contract that was selected to provide certainty.

37
Q

What mechanisms are available within the CM contract?

A
  • This contract is for use between an employer and a trade contractor where a Construction Manager engaged under a Construction Management Appointment (CM/A) is managing the project and administering the conditions.
  • The price of the contract is based on a lump sum or re-measurement with interim payments.
  • Works can be carried out in sections.
  • Provisions are included for collborative working, sustainability, advance payment, bonds (advance payment, off-site materials, retention), third party rights and collateral warranties.
  • For use on both private and public sector projects.
  • Pre-Construction Services Agreement (General Contractor) can be used with this contract.
  • This contract can be used with the Framework Agreement (FA).