16 Sep 2009

Relationship contracting: the managing contractor model

by Nicholas Tsirogiannis, Marko Misko

A key benefit of the managing contractor model is that it facilitates the early involvement of the contractor on a project. This makes it particularly suitable where the scope of work is too uncertain to let a contract on a more traditional fixed time/fixed price basis.

Following the release of the Federal Government's stimulus package, government departments and agencies have been focused on fast-tracking delivery of infrastructure projects, particularly those funded through the stimulus package. In doing so, they have often considered a range of delivery models including the various forms of relationship contracting that are available.

One example of relationship contracting that is proving to be popular in this context is early contractor involvement in the form of the managing contractor model. This article looks at the origin of the managing contractor model, its key features and benefits and when it can be used effectively.

Origin of the managing contractor model

The managing contractor model was developed by our Major Projects and Construction partners for the Department of Defence in the early 1990s and was significantly remodelled in 2003 to take account of industry consultation. The model was specifically designed for early contractor involvement and to also remove some of the adversarial tension associated with traditional forms of delivery. It has been used by the Department of Defence on most of its large complex multi-element projects and also by the public and private sectors.

As a result, although the Department of Defence MCC-1 2003 is generally regarded as the standard form within Australia, there are many variants of the model. It was recently used by the Victorian Bushfire Reconstruction and Recovery Authority in the bushfire clean-up and demolition operation and proved to be an outstanding success.

A two-stage contract

The managing contractor model generally involves a two stage contract. The first is the planning stage during which the contractor is engaged to assist the owner with scoping, risk reduction studies, design development, cost planning, programming and obtaining any approvals that may be required (such as planning approval). The target date for completion, the target cost, the scope of the work, the contractor's fees for the delivery stage and the KPIs and incentives (if any) are all agreed before the end of the planning stage.

The second is the delivery stage. If the owner decides to proceed to this stage (based on the outcomes of the planning stage), the contractor completes the design of the works (if not completed during the planning stage) and then proceeds to construct, commission and handover the works.

Managing contractor compared to traditional delivery

Contractor's role - the role of the contractor is to manage the design and construction process as opposed to designing and constructing the project itself. Accordingly, the contractor subcontracts all of its design and construction obligations. This is similar to traditional delivery, as modern design and construct contractors tend to subcontract most of their obligations - the key difference is that under the managing contractor model, this is done on a fully open book basis in close consultation with the owner, who has the ultimate right to decide on which subcontractor is used.

Remuneration regime - the traditional lump sum fixed price is replaced with a remuneration regime that consists of both reimbursable and lump sum components. The reimbursable component covers the actual costs payable to subcontractors to design and construct the works. However, unlike some other forms of relationship contracting, not all costs are reimbursable: only those costs that have been properly incurred will be reimbursable.

The lump sum fees cover the services and work performed by the contractor during both stages and include an amount for overhead and profit. They will therefore cover services such as scoping, cost planning, programming and managing and supervising the contractor's design consultants and subcontractors. The fees are generally only adjusted if there is a variation to the scope of the project or the project is delayed by the conduct of the owner.

The remuneration regime may also provide for an incentive payment to be made available to the contractor. The purpose of the incentive payment is to align the interests of the contractor with those of the owner and to reward the contractor for genuine exceptional performance (not just business as usual). For example, the contract may provide for an incentive payment to be made if the project is completed by the target date and for less than the target cost or if other KPIs are met (eg. minimising disruption to existing operations).

Obligations relating to time and cost - unlike traditional delivery, the contractor does not have a hard obligation to achieve completion by a specified date and, therefore, there are no liquidated damages payable if timely completion is not achieved. The contractor's obligation as to time is to use its best endeavours to achieve completion of the project by the required completion date. Although not a strict obligation, it nevertheless requires the contractor to, among other things, prepare programs, maintain progress against target dates and carefully co-ordinate and administer subcontracts.

The managing contractor model takes a similar approach with cost as the contractor only has a best endeavours obligation to achieve completion of the project within the target cost. Again, although not a strict obligation, it nevertheless requires the contractor to, among other things, prepare cost plans, implement a system of cost control and diligently administer subcontracts.

Quality - while the managing contractor model does not impose hard obligations on the contractor in relation to time and cost, it is similar to traditional design and construct delivery in respect of obligations relating to quality. The contractor warrants fitness for purpose of the design and the completed works and remains fully responsible to the owner for the quality of the design and construction.

Benefits of the managing contractor model

One of the key benefits of the managing contractor model is that it facilitates the early involvement of the contractor on a project, making it particularly suitable in circumstances where the scope of work is too uncertain to let a contract on a more traditional fixed time/fixed price basis. The benefits that flow from this early involvement include use of the contractor's expertise to develop the design, allowing buildability issues and whole of life considerations to be addressed during the design phase and use of the contractor's knowledge and skill to plan the project.

In addition to the benefits associated with early contractor involvement, other benefits of the managing contractor model include:

  • the owner retains a higher degree of control over the management of the project - it has the ultimate right to choose which consultants and subcontractors are used and also has final say over the design;
  • the contractor has a clear incentive to come up with the best solutions during the planning stage (from a cost, program and scope/design perspective) to maximise its chances of being appointed during the delivery stage;
  • the absence of fixed time/fixed price tension provides greater flexibility for the owner to vary its requirements;
  • payment of design and construction costs on a reimbursable basis translates into greater transparency of project costs;
  • if the KPI and incentive regime is carefully negotiated, it can provide an incentive for exceptional performance in areas that really matter to the owner; and
  • there is a single point of responsibility for the design and construction of the works including fitness for purpose.

When to use the managing contractor model

The managing contractor model is particularly suitable for projects where:

  • the owner wishes to utilise the expertise and skill of a contractor to plan the project;
  • the scope of the project is too uncertain to let a contract on a traditional fixed time/fixed price basis;
  • traditional forms of delivery are unlikely to be cost-effective due to the complexity of the project - ie. tender prices under a traditional form of delivery are likely to include contingencies for a number of risks that may not eventuate;
  • the owner wishes to have greater flexibility to vary its requirements;
  • the owner wishes to retain a high degree of control of the management of the project; or
  • the owner wishes to avoid the adversarial tension associated with traditional forms of delivery.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.