Many residential developers are choosing to manage their own construction projects either by choice or necessity. Construction solicitor Matt Grellier looks at the pros and cons of taking back control.
In December last year Greater Manchester-based Bardsley became the latest regional construction firm to go into administration. According to reports the firm, which employed 200 staff, recorded a turnover of £68.6m and a pre-tax profit of £340,000 in the year to December 2017. It was building a number of high profile city centre residential developments, all of which came to an abrupt standstill.
Bardsley apparently had nearly £9m cash in the bank and had just been appointed to a £130m framework contract to build residential units for Sheffield-based housing consortium EN Procure when the announcement was made.
Bardsley’s collapse sent shockwaves through the housebuilding industry, especially across the North West, following as it did the bleak news for other well-known regional contractors such as West Midlands contractor Shaylor, Cheshire-based Pochin and Lincoln builder Simons who all collapsed into administration during 2019.
It was perhaps the tipping point for many residential developers to begin investigating a change of direction – managing their own construction projects, without a main contractor and employing individual trade contractors directly. This may be a direct consequence of a contractor’s demise or a strategy believed to offer protection against future sites grinding to a halt.
On the face of it, there are many perceived benefits of the construction management procurement route.
Once a developer has appointed a good construction manager as a consultant to manage and coordinate the activities of trade contractors, a number of cost and time saving measures may come into play.
Design can be developed in parallel with construction, which can decrease the time it takes to get a scheme underway and progressed.
With a more hands-on approach, the developer has greater control over the works and may be able to obtain the best prices directly from trade contractors and without any main contractor overhead and profit on sub-contract packages to cover.
When residential sale prices remain consistent or increase, all of these simple sounding cost measures should have the effect of dropping straight onto the bottom line. Result!
Or is it?
The construction industry can often be a difficult ship to turn and convincing all stakeholders that a construction management approach is the best course can often be difficult at best and at worst, impossible. That’s because some schemes may simply never get off the drawing board. Without a successful track record of construction management, some funders would be reluctant to lend. A typical catch 22.
For those with a funder willing to back a construction management scheme, securing appropriate insurance will be the next hurdle to overcome.
Where construction management is used, the developer will usually need to take out insurance for both the works and the building. With funding secured, a construction manager on board and insurances in place surely that means the scheme progresses nice and quickly and profits increase in line with all the aforementioned benefits, right?
Not quite!
There’s an old saying about the hardest thing in any type of business being managing people. Taking on construction management procurement means waving goodbye to the single point of responsibility that a developer hopes to achieve when employing a design and build main contractor. Because now, responsibility for design, workmanship and delivery would be split between the developer’s professional team and various trade contractors.
The risk of employer/client under each trade contract and the risk of each trade contractor’s default now sit with you, the developer.
Are you really comfortable with that prospect?
I mentioned earlier that an employer may be able to strike a better bargain directly with trade contractors using construction management procurement. However, going down this route can often lead to cost uncertainty. The total cost of a project will only become clear as each trade contract is entered into. You as the developer will also bear the risk of individual trade contractor insolvency (or contract termination) and will need to work quickly to appoint a new trade contractor to finish the work if these scenarios arise. Is this really something you have the know-how and resource to do quickly and cost effectively?
Finally, the developer must be comfortable there is sufficient administrative support in house and a clear plan for decision making to avoid construction management becoming an onerous burden. The appropriate systems and resources to manage multiple consultant and trade contracts must never be overstated and learning this ‘on the job’ could be a painful and expensive experience.
My warning to developers considering going down the construction management route, either by necessity or choice, is to ensure that procurement options are first properly considered and all contracts are run through a fine tooth comb. Taking appropriate advice from a specialist construction contracts solicitor with the experience of large scale development can ultimately be the investment that will ensure the future security of your business.
Matt Grellier is Head of Construction and Engineering at Slater Heelis LLP and is a Recommended Lawyer and Rising Star in the Legal 500. He has experience advising on contentious and non-contentious matters and acts for clients including developers, contractors, sub-contractors and professional consultants in a range of industry sectors.
Matt Grellier, Head of Construction and Engineering at Slater Heelis LLP
