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If your business is thinking of undertaking a construction project with a high level of complexity or an uncertain scope, you may want to consider engaging a skilled contractor involved early on in the project, known as a managing contractor. Using a managing contractor model can save costs if complicated design issues are resolved towards the beginning of a project. This article explores:

  • what the managing contractor model is;
  • how it differs from traditional construction models; and
  • when it is the right fit for a particular construction project.

What Is a Managing Contractor Model?

The managing contractor model is a procurement method that has been traditionally used for government construction projects. The model involves a principal (or client) engaging a highly experienced contractor from early in a project. They then collaborate with the management contractor throughout all stages of the project, including the feasibility, design, procurement and construction. The model allows for the principal to obtain the contractor’s input on design related items, and collaborate with design consultants engaged on the project, including:

  • architects; and
  • engineers.

When it comes time for construction, the contractor is responsible for engaging its own subcontractors to carry out the construction works. This contractor, however, typically takes on more of a project management role, as opposed to carrying out the works itself. The principal controls choosing which subcontractors the managing contractor engages.

The scope of the managing contractor’s engagement will depend on the project. It can include involvement in the following stages:

  1. feasibility: the managing contractor may coordinate a feasibility study in relation to the proposed construction project. This can involve engaging a design team and providing advice to the owner on the viability of the project;
  2. design: the managing contractor will usually prepare a design brief and tender out the design work. The owner is involved in approving designs and tenders;
  3. construction: the managing contractor will manage the tender process for subcontractor worker. They will then engage them directly for the construction work, supervise the construction works, and manage construction costs; and
  4. completion: the managing contractor will coordinate the final handover of the project. It also ensures its subcontractors rectify any defects during the defects liability period.

How Does This Differ From Traditional Procurement Models?

The managing contractor model varies from traditional procurement models (including design and construct engagements) in a number of ways. This model is similar to a design and construct model, in that the managing contractor takes on the legal responsibility for the design and construction of the project, but it differs as their key role is to be a project manager. They also have less exposure when it comes to time and cost than a design and construct contractor.

Stage of Engagement

The managing contractor is engaged much earlier than a design and construct contractor. In contrast, they would typically be engaged only once the design brief has been prepared.

Subcontractors

When it comes to selecting subcontractors, the principal will be able to make the ultimate decision on which subcontractors are engaged under the managing contractor model. This is not always the case in a design and construct engagement. 

Cost Risk

Unlike design and construct engagements, which are more often than not on a lump sum basis, the managing contractor will typically be reimbursed for amounts it incurs in engaging subcontractors. We discuss this further below. 

Time Risk

Under the managing contractor model, there will often be a targeted date for completion. For the most part, the managing contractor will not be liable for failing to complete the project by this date.

This contrasts with a design and construct engagement. Here, the contractor will may liable for liquidated damages if it fails to complete the work on time.

What Is the Cost Structure?

The cost structure under the managing contractor model is a mix of fixed amounts or rates and reimbursements. The managing contractor will usually receive a fixed price for the project management services it carries out and any facilities that it sets up on-site.

For example, a site office.

The managing contractor will then receive reimbursement for the amounts its subcontractors or consultants receive (provided that they are reasonably incurred). There are certain restrictions on costs that the managing contractor can incur. This effect of the cost structure is that the cost risk is ultimately borne by the principal.

What Are the Advantages of This Model?

The model is appropriate for projects involving complex design issues, where input from an expert design and construct contractor will assist in identifying issues and attempting to establish solutions early on in a project timeline. It can result in innovations and alternative ideas that can result in cost and time savings when it comes to the construction phase. 

The level of control over the selection of subcontractors throughout the tender process is a further advantage for a principal.

The model is collaborative in nature. Given that the contractor is not solely responsible for time and cost risk, it generally attracts high quality and reputable contractors. It also can generate increased cooperation and less antagonism between the principal and the managing contractor than a traditional construction model.

What Are the Disadvantages of This Model?

As mentioned above, the cost and time risks generally shift to the principal. This model is not suitable where a principal wants certainty on time and cost, or for projects where the scope of work is relatively uncomplicated.

Key Takeaways

A managing contractor model is a method of procurement common in government and complex private-sector construction projects. The model allows for the early involvement of a design and construct contractor in the feasibility and design stages. The principal retains a considerable amount of control during the project, including to approve designs and the engagement of subcontractors by the managing contractor. However, the principal bears the time and cost risk on the project. If you have any questions about the managing contractor model, contact LegalVision’s construction lawyers on 1300 544 755 or fill out the form on this page.

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