Management contracting

What is management contracting?

The JCT Management Contract is a form of contract that we rarely see used, particularly when compared to the traditional or design and build forms. Nevertheless it remains an alternative form of procurement on projects which require an early start on site prior to completion of the design. However, employers need to be aware of the implications of using this procurement method given its differing risk profile compared to the more common procurement options. This article provides an overview of the key provisions of management contracting.

Structure

Under a management contract, the Employer appoints a Management Contractor and the Management Contractor then appoints the trades direct, through a number of works contracts. It would be easy to look at the structure of management contracting and equate it to a traditional contracting model but in practice the risk profile for an Employer is very different, for the reasons we have set out below.

The Management Contractor's Role

Unlike a traditional or design and build procurement, the Management Contractor is not required to carry out any construction works but instead is paid a fee to manage construction works carried out by others. The Management Contractor in effect provides services and not works. Whilst the Management Contractor enters into and enforces Works Contracts, crucially, they are not responsible for the Works Contractor's performance.

The key elements of the Management Contractor's role are:

• to develop a programme for construction with the consultant team and help with costings and tender arrangements
• to let the works competitively in works packages and to enter into works contracts with the works contractors
• to enforce the works contracts
• to ensure that the project is carried out in a proper, economical and expeditious manner, and
• not to carry out design, but to supervise the works contractors' submission of design through the design submission procedure set out in the contract.

Payment to the Management Contractor

There is no lump sum fee payable to the Management Contractor, instead the Management Contractor's remuneration is based on the cost of the works packages plus agreed fees (to cover the Management Contractor's overheads and off-site activities), so it is similar to a 'cost plus' arrangement. Construction will often start prior to the point where many of works packages are tendered and let and, as a consequence, there is cost uncertainty at the outset of the project for the Employer.

Budget and Programme

Where the works run into delay, the Management Contractor is liable to pay liquidated damages to the Employer if the completion date is not met, but is reimbursed by the Employer to the extent that the delay is not the fault of Management Contractor and sums cannot be recovered from the relevant works contractor (or works contractors).

If one works contractor affects another works contractor the Management Contractor can recover from the Employer the cost of pursuing the defaulting works contractor and of defending itself, provided that the Management Contractor is not in breach of contract itself. In addition, the Management Contractor is responsible to the Employer only for the amounts recovered from a defaulting Works Contactor.

Liability for defects rests with the Employer unless it can be established that the Management Contractor was negligent in carrying out their services.

So why would an Employer choose to use management contracting?

Advantages for the Employer

• The Management Contractor is brought in to a project at an earlier stage than a design and build contractor would be, and is therefore able to provide specialist input into the procurement process and provide advice on 'buildability', and on the interface of the works packages.
• The Employer has flexibility to start the works on site at an earlier stage whilst the design is still being progressed, as works packages for the latter part of the works do not need to be procured until they are required. This contrasts with the design and build route, where the scope of works to be carried out by the design and build contractor is set at the outset.
• The Management Contractor takes on the responsibility for putting in place the many works contracts which eases the bureaucratic burden on the Employer.

Disadvantages for the Employer

• Whilst the Employer is in contract with the Management Contractor, the Management Contractor is only responsible for discharging its own obligations, and the risk of delivery is disaggregated across the suite of works contractors.
• The Employer takes the risk of insolvency of the works contractors. With either design and build or traditional procurement the risk of subcontractor insolvency sits with the main contractor.

In practice, the risk profile of management contracting is more akin to construction management, the key difference being that, unlike construction management, the Employer does not appoint the works contractors direct.

Summary

Management Contracting is an alternative procurement method for use by employers. The Management Contractor plays a key role of supervising the separate works contractors and for overseeing delivery of the project, but prior to the use of the JCT Management Contract, employers need to be aware of, and be comfortable with, the differing risk profile introduced by management contracting compared to other procurement routes.