Two-stage procurement: some key considerations for PCSAs
In our previous blog post, we introduced two-stage procurement and two key options for documenting it (a pre-construction services agreement (PCSA) followed by a separate main works contract and a Combined PCSA/Main Contract) noting that the differences were generally presentational or mechanical. For the purposes of this post, we will refer only to the PCSA and main contract option, but please note that the same principles apply to the Combined PCSA/Main Contract.
By way of reminder, the PCSA governs the employment of the contractor during the pre-construction phase, setting out the contractor’s pre-construction services with the ultimate purpose of maximising early contractor involvement (ECI). Generally, it is more akin to a professional consultant’s appointment than a building contract and it is usually based on bespoke terms (particularly in the case of major building and refurbishment projects) despite the availability of industry standard forms of contract such as the JCT Pre-Construction Services Agreement (General Contractor) 2016.
In this post we explore some of the unique and commonly negotiated aspects of the PCSA and different ways of dealing with them.
As discussed in our previous post, by the end of stage one, the pre-construction contractor will likely be in a better bargaining position than its competitors for the stage two tender. There are various reasons for this, such as the employer not having had the time or resources to consider alternative contractors or the employer feeling wedded to the pre-construction contractor because it will have immersed itself in the project during the pre-construction phase.
To address the gradual weakening of the employer’s bargaining position against the stage one contractor during the pre-construction phase, the PCSA may include commercial drivers to keep the stage two price within the employer’s budget or at or under the employer’s target price. As mentioned in our previous post, any incentive mechanism should be clearly expressed so as to avoid an ambiguous situation like that in Almacantar (Centre Point) Ltd v Sir Robert McAlpine.
An example of commercial drivers in the PCSA is fixing elements of the main contract price, such as preliminaries, overheads and profits, commercial risk items (including rates of liquidated damages and amounts of any liability caps), mark-ups for any risk allowance (including on design development and inflation) and prices for defined enabling packages.
In the UK, it is common for contractors to sub-contract key aspects of the main works to sub-contractors (albeit some sub-contractors may be affiliated to the main contractor). As such, a good chunk of the main contract sum will comprise sub-contract prices.
A common feature of the PCSA is the requirement for the contractor to tender sub-contract packages on an “open book” basis. “Open book” is not a term of art; it refers to the expectation that the employer (including its agents) has oversight over the sub-contract tendering process.
In an open book scenario, the PCSA will likely put an obligation on the contractor to collaborate with the employer over the tender documentation and pre-qualification criteria and may prescribe specific tendering requirements, for example, in relation to the number of quotes to be obtained per package, the terms and conditions of the sub-contracts (often that they be no more onerous than the main contract terms), when bonds and guarantees from sub-contractors are to be requested and when liquidated damages are to be flowed down to sub-contract packages.
The contractor may make “soft” promises or commitments to the employer as part of its stage one tender submissions, which could be a contributing factor to its selection. These promises can be recorded in the PCSA, not with the purpose of making them overly legal but for reference and to act as a reminder long after the stage one submissions are out of mind.
“Soft” promises and commitments can vary depending on the project. They may include commitments to minimise the use of provisional sums and payments for off-site materials or to use consolidation centres to store long lead items (particularly to manage the escalation of prices in the current economic climate). We sometimes also see contingency plans being referenced for in the case of supervening events like project delays arising from market hardships or prevailing global political events.
Intellectual property rights
The PCSA will usually provide the employer with a licence to copy and use the contractor’s design output under the PCSA for the purposes required by the employer. This is particularly important where the employer does not progress the project with the stage one contractor as it could require the benefit of the design documents produced to date for the re-procurement process and the execution of stage two.
As mentioned in our previous post, two-stage procurement allows the contractor to assess the condition of the site and any existing structures during the pre-construction phase before committing to the main contract. This may result in the contractor carving out risks under the main contract that it would not have been aware of in a single-stage procurement process, but it should offer a preferable proposition to risk dumping by allowing the contractor to tender a more certain main contract price and by allocating the risk to the party best placed to manage each particular risk.
A way to address site condition risk contractually in two-stage procurement is to include in the pre-construction services an agreed list of surveys that the contractor is to undertake during stage one, and to refer back to the results of these surveys in the main contract as items that the contractor has taken into account in its price and programme.
An effective PCSA requires buy-in from the contractor that the anticipated budget for the main works (whether prepared by the contractor or the employer) represents a comprehensive and workable estimate of the cost of completing them. Without consensus on the budget at the outset there will inevitably be difficult discussions at the end of stage one.
We would expect to see the PCSA specify that any changes to the budget during the pre-construction period are with the employer’s consent, as it is the employer who needs to foot the bill.
Early works and procurement of long lead items
In addition to the pre-construction services, the contractor may be instructed under the PCSA to undertake early preparatory works and order long lead items to help the project run on time and to manage escalating costs in materials. It is often helpful for the parties to include a clear mechanism in the PCSA for instructing these works and managing the process, which records agreed cancellation costs where the sub-contracts are terminated, together with the right for the employer to call for the transfer of the sub-contracts where the stage one contractor does not progress to the second stage.
In a design and build procurement model, to maximise ECI, the employer may expect the contractor to assume the lead role on design development and co-ordination during the pre-construction phase. In this scenario, the contractor may wish to take over the appointments of the employer’s design team during the pre-construction period in order to have control (subject to the terms of the PCSA) of the design team. The employer would then want the right under the PCSA to recall the appointments in the event of the re-procurement of the works.
If the stage one contractor is appointed for stage two and released from its obligations and liabilities under the PCSA upon the execution of the main contract, we would expect to see the PCSA being subsumed into the main contract, resulting in the services and any early works under the PCSA being governed by that contract.
There is often reluctance to settle the insurance provisions in the main contract upon entry into the PCSA where the project policy has not yet been procured. In this scenario, the PCSA could include a “benchmark” project insurance summary, which the procured policy must align with in order for the insurance provisions of the main contract to apply. Where the procured policy ends up being on less beneficial terms, the parties can then re-visit the insurance provisions.
Don’t lose focus on the overriding objective of the PCSA
In the thick of legal negotiations on the terms of the PCSA and main contract, it is easy to lose sight of what the PCSA is trying to achieve. ECI benefits the project by promoting early collaboration with a key member of the team and it is important that the PCSA is up to the task of helping the parties deliver the intended benefits of ECI.
This article was first published on The Practical Law Construction blog on 1 November 2022.