As the City of London office market gradually picks up, we are involved in a number of projects that are following the construction management (CM) route. Are these isolated examples of the use of CM, or is this the start of a trend? And should other developers think about joining the CM bandwagon?
CM first became popular in the late 1980’s on projects such as Broadgate, Ludgate and Stockley Park. These projects showed that CM could be used effectively by an experienced client to deliver a fast track project. Since then it has been used by a variety of clients on a range of projects, with varying degrees of success.
However, in recent years it seems to have fallen out of favour among all but its most ardent advocates. Experience over this period has shown that CM is not for everyone. Before taking on CM it is worth thinking about the key issues which can arise and whether it will suit your needs.
Is it right for me?
- How experienced are you? Clients who successfully use CM usually bring to the table a considerable amount of previous experience in this type of procurement. For example, Stanhope has amassed a large CM portfolio and understands how to get the best out of it. Their team now have a depth of experience to call upon. They have significant buying power and strong relationships with their regular trade contractors.
- Are you risk averse? You may feel exposed without the comfort of a design and build contractor to wrap up overall risk. Responsibility for design, workmanship and delivery would be split between the professional team and various trade contractors. The client bears the design interface risk and insolvency risk. A few years ago, on a major city of London office development, the cladding trade contractor became insolvent midway through its work. The client faced serious time and cost impacts and had to work quickly with the construction manager to appoint a new trade contractor to finish the work. Would your organisation be willing to take this risk and would you be able to handle this type of situation?
- Are you bank funded? CM is unpopular with risk averse funders. Funders are often unwilling to lend on a CM project unless the client has successfully used CM before.
- Do you need cost certainty? If cost certainty is a key concern for you, CM may not be suitable. The total cost of a CM project will only become clear as each trade package is let. Inflation or raw materials price fluctuation may mean that trade packages that are let at a later date are more expensive than originally anticipated.
- How strong is your buying power? To obtain a good price from trade contractors, the developer needs to command a strong position in the market. Clients who are experienced in using CM will have developed relationships with trade contractors who will be keen to work with them again. A client who usually uses design and build procurement may not have developed these relationships and may struggle to obtain the best available prices.
- Can you make decisions quickly? A bureaucratic organisation may fail to get the best out of CM. Those clients who successfully use CM know what they want from the outset and can make and implement decisions quickly. When CM was used on the construction of the Scottish Parliament, the project became paralysed by slow decision making and came in vastly over budget.
- Can your organisation cope with the administration of CM? CM involves clients managing monthly payments to the professional team and numerous trade contractors. Regular CM users will have the systems in place to handle this. A client lacking these resources can quickly become swamped by this administrative burden.
- Decide early: clients tend to get the most out of CM when they decide to use it from the outset of the project. CM gives the advantage of being able to get on site quickly and means the design can be developed in tandem with construction. However, you will only reap this benefit if you are focused on a CM approach from the start.
- Professional team: your choice of professional team may be affected by your decision to use CM. Ideally your professional team will be very familiar with the disciplines of CM and the individuals working on the project will have previous CM experience to draw on. The obligations imposed on the professional teams should be consistent with the use of CM and should facilitate the process. Equally, the client should be wary of being forced down a certain procurement route simply because the professional team have a preference for that particular route.
- Insurance arrangements: be aware that CM will usually involve the client taking out insurance for the works and the building. Consider and price this from the outset.
- Third Party Rights: where large numbers of specialist trade contractors are to be appointed, clients should consider the administrative burden of procuring collateral warranties for purchasers and/or tenants. Third party rights may be a better solution in these circumstances.
Is it for you?
When used effectively, CM can help fast track a project and avoid the need to pay a design and build premium. In the meantime, it will be interesting to see whether this small resurgence in the popularity of CM continues and whether the projects currently using CM are successful.