Common problems with design and build contracts

Written by Almanzo Boakes | Jan 12, 2022 8:11:17 PM

Very often when a business owner embarks on building a new premises they are thinking of going to a construction company to provide a design and build ‘turn-key contract’.

This can be a great way to structure the project but it is not the only contract method and it is well worth understanding the pros, cons, and potential pitfalls.

Often you can feel pressured by a construction company to go with a design and building option and sign up to a bulk sum - turn-key - fixed price - no extras type proposal. However, this may not be the best way to do a project and it may not be as ‘all inclusive' as you think.

Below we explore the way a design and build contract is structured in the industry and we also explain a few other ways to go about it so you can work out what is best for your circumstance.

What is a design and build contract?

Simply put a design and build contract is when a construction company is engaged to look after the full design and construction of the project. Usually, you will have a couple of points of contact at the construction firm who will relay the details and organise all parties. This can be great as it can free up your time, but when responsibility is abdicated so is control.

There are a lot of benefits to a design and build contract and it can certainly be a great way to do a project. However, it is always wise to go into a decision as large as a new building with your eyes wide open as to where things can go wrong.

Design and build feature	Potential pitfall
You as the owner do not have to liaise with architects, engineers, and all other consultants which saves time and ‘leaves it to the experts’.	If the construction company is not particularly adept at navigating the minefield of compliance and consultants this can result in confusion. It can also restrict your access to talking to the experts directly meaning information can be diluted or lost in translation.
You get one fixed number for the project.	It can be very hard to see the different aspects of the price (where cost is or isn't). It can also be an area where a lot of margins or ‘fat’ can be hidden in the projects.
No hidden extras.	This is only true to the extent of the fine print and terms and conditions. If something is ‘tagged out’ it might not be regarded as a hidden extra even when it may be an area that will need to be covered later on.
Less chance of cost blowouts.	This can be true but again it comes down to the fine print. Often in the current market, there are price escalation clauses if materials increase. If this happens, how do you have confidence the builder is only adding on what is fair and reasonable? Also, what are the extras for variations? If you are tied into a fixed contract with the builder you have much less leverage for negotiating extras.
I don't have to project manage the building.	This is correct but no building project is completely hands-off. There are still many selections and decisions to be made by the owner along the way. You also need to ensure you are 100% confident with the project manager as a poor project manager can result in you having to chase them along and follow them up to make sure things are happening. Often times it can be frustrating to rely on a project manager to relay information and instructions to sub-trades.

What is a design and tender contract?

The other most common contract style is for the building to be designed and then the complete drawings are tendered out to the construction market. If this is done right it can be a transparent and cost-effective method.

These can be tendered in 2 ways:

1. To a head contractor/builder who is going to price out the full project.
They will manage the full onsite project management, health and safety, and all sub-trades. It is very similar to a design in build apart from they do not look after the design as this is already done. The head contractor can present their quote/contract in 2 ways:

1. Lump-sum: This is a single figure for the whole construction, with their margin worked into the total price.
2. Open book with a declared margin: This way of presenting shows you the full cost breakdown and a declared margin on materials and trades - which is between 5 and 15% depending on the size and nature of the project. This provides a lot of transparency to you, the landowner. It also allows multiple trades to be priced and checked in a very open way.

2. The design is tendered directly to sub-trades and the project is managed by the owner.
This means the landowner breaks the project up into all the trades and sends it to each contractor for pricing. The owner then selects the contractors and they work on his behalf. This works well if you are adept and experienced at managing construction projects and can save a lot of money. The other upside is you do get full hands-on control on the quality and people/trades on your site. But you do take on the responsibility for managing all trades and health and safety on the site and need to have the time to do this.

Sometimes it is a combination of the above. For example, a head contractor will look after the build and the office fit-out, or the exterior works/landscaping is organised by the landowner.

Generally, we find that business owners are best served by option 1 (unless they are in the construction game) and property developers who have a good understanding of construction and project management are best served by option 2.

The benefit of a design-tender project is you have much more cost transparency than a design and build project which typically leads to greater savings and fairer pricing. This is quite apparent on complex projects with many variables. A design and build contract for a complex project will usually have a large contingency built into the price, or a lot of areas tagged out that then come along as variations.

It is also a great method if you have contacts in the construction or supply industry. Most head contractors in an open book contract are happy for you to bring in preferred contractors or suppliers. These can either be put under the management of the builder - or taken out for you to work with directly.

There are a few downsides to splitting the design from the build - but like most things, this can be mitigated.

What if the building is not value-engineered? The proponents of design and build maintain that as they are managing both parts they have to design to a budget and this prevents architects or engineers from designing aspects of the project. This is a very valid point as architects and engineers are often quite disconnected from the current cost drivers in a project and can design things to be much more expensive than they need to be.

The ways to mitigate this are:

Select a design company that has a thorough understanding of the cost drivers and can provide some level of price surety around the structure.
Get a preferred builder on board with the open book pricing model, they can then have input onto the cladding types and construction details in the design phase to ensure efficiency.
Get an estimated price on the project before the detailed design is completed. This can be done by your preferred builder or a Quantity Surveyor. A word of warning on using a Quantity Surveyor in a market where prices are increasingly volatile - if they are working off ‘standard rates’ there is a good risk these are outdated.

The question then remains as to what is the Attika contract structure? The answer is whatever best suits you!

Our process is to work through the above to see what is going to best suit your project in terms of building type and your level of involvement.

If you want a turn-key contract, we can offer this in most places around NZ - if we can't, we will recommend you to a company we feel best suits your needs.

If a design-tender process is best for you, we can offer this anywhere in NZ. The in-house design team at Attika will cover the full design and compliance package and then work with you to tender the project installation to local builders.

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