Index of Content

Construction Management - Riskier Than You Think

Construction management is a popular topic of discussion at present. The approach was used with apparent success in Macau on the Sands and is being used on a number of other projects. It is also being used in China to overcome some of the problems faced by contractors in securing regulatory approvals.

In general terms a construction management approach involves the construction manager entering into a management agreement with the client to, as the name suggests, manage the construction process. The client then enters into direct contracts with the works package contractors for the execution of the works. This approach is widely considered to expose the construction manager to a significantly lower level of risk than is the case under a traditional form of construction contract. It may also be attractive to a client, because it permits the client to secure the input of the construction manager at an earlier stage in design development than might be the case under a traditional approach and provides him with an additional level of technical assistance. The construction manager undertakes to plan, programme and organise the project and the trade contractors who actually carry out the work. The disadvantage from the client's point of view is that he contracts directly with many trade contractors and retains the risk as to time and cost.

It should be noted that there are no standard forms of construction management contract. This means that any contract that is let using this approach, requires extensive adaptation of one of the standard forms of contract or the preparation of a bespoke form. One such form of contract was considered in detail in the case of Great Eastern Hotel Company Limited v John Laing Construction Limited. The Great Eastern Hotel Company Limited let a construction management contract in respect of the refurbishment and extension of the Great Eastern Hotel, which abuts Liverpool Station in London. Unfortunately, during the course of construction a number of difficulties were encountered. These resulted in a significant cost overrun. The ultimate cost was approximately twice the original budget and was delayed by almost one year. The case considered the construction manager's responsibility for the delays and cost overruns.

The starting point from the construction manager's perspective was that they were not liable. The client's starting point was the opposite extreme position, namely that the construction manager had undertaken an absolute unqualified obligation to ensure the regular and diligent progress of the project and the completion by the due date. At first blush the employer's argument appears an extreme one, however in one of the few previous decisions relating to construction management John Mowlem & Co v Eagle Star and Others a similar argument had succeeded. The judge rejected both propositions stating that the construction manager's responsibility was confined to the use of reasonable skill and care and due diligence in the deployment of the powers provided under the relevant contracts. Having made this general determination as to the level of the standard which was to be applied to the conduct of the construction manager, the learned Judge then proceeded to apply this test to the facts.

A wide range of complaints were made against the construction manager, we highlight two: delay caused by the approach taken to the design of the temporary roofing and deficiencies in the scoping of works packages.

With regard to the temporary roofing, the trade contractor adopted a sequential approach to the design. The construction manager was criticised for not having realised sufficiently soon that this approach would inevitably result in delay to the erection of the roof. This was considered to be a breach of their obligations in respect of the management, administration planning and co-ordination of the work of trade contractors. They were held liable for the damages suffered as a result. It is noted that there was no liquidated damage provision in the contract. Consequently they were exposed to the whole of the employer's losses.

With regard to the scope of the packages, the judge observed that although the trade contracts were at the risk of the employer, the construction manager was not in the clear. There was a responsibility for the construction manager in selecting the trade contractors, developing the scope of their packages and the exercise of the controls given to the construction manager to minimise the risk to the employer. For example if, in negotiating a trade contract, the construction manager failed to secure a mechanism which would protect the employer or had selected an inappropriate trade contractor, it would make him more vulnerable to an allegation that he had breached the construction management contract.

A number of tentative conclusions might be reached from this decision. First, construction management involves a higher level of risk for the construction manager than might hitherto have been considered the case. When negotiating a construction management contract the manager should be alert to identify the scope of his liability and where appropriate agree terms to limit that liability. Second, the construction manager is obliged to use the tools provided to it, pro-actively to address problems which it is anticipated will arise. Restraint on its part must be communicated to the employer. Third, the construction manager should critically review and comment upon the scope of works packages, even where negotiation has been commenced by others. Fourth, reporting is seen as being a key element of the construction manager's duties - it should be discharged with care and diligence.

Lovells Newsletter
June 2005

Back to top