The JCT Pre-Construction Services Agreement for two-stage tendering

A thriving construction market, such as the one witnessed in 2005 and 2006, encourages two-stage tendering. In such times, a shortage of capacity means the more prominent contractors have their pick of projects. For more complex, fast track developments, this means many employers have to turn to two-stage tendering to attract worthwhile bids.

Though the JCT has now launched its new Pre-Construction Services Agreement (PCSA) for two-stage tendering during tough times, renewed focus on keeping developments on budget means employers and contractors could still reap benefits from it.

In a two-stage tender, stage one involves the employer choosing a preferred contractor by competitive tender early during design development. Tenderers submit a fixed fee proposal for pre-construction services, a programme and method statement but instead of this being a lump sum price for the construction phase it is an offer only in respect of overheads, profit and preliminaries.

Once selected, employer and preferred contractor co-operate as the latter tenders the works packages for fixed price lump sums. When the majority of packages have been priced the contractor will submit its second stage tender and the employer will decide whether to accept this and enter into a lump sum contract for the whole of the works.

Contractors prefer two-stage tendering because it reduces bidding costs and provides time to identify and allocate risks. Given that one might expect a resurgence in single-stage tendering in the construction downturn, it may seem odd for the JCT to launch its PCSA only now. Its introduction could, however, be timely.

Increasingly, establishing cost certainty will be critical in determining whether a development gets the green light. The credit crisis means employers and development funders will subject construction risks to greater scrutiny in the knowledge that cost overruns can no longer be offset against rising development land values.

This is where a pre-construction services agreement comes in. It sets out the relationship between employer and preferred contractor for the pre-construction period, which begins with the latter’s appointment and ends with the signing of a construction contract. The contractor’s early involvement allows it to contribute to buildability and design and put forward proposals for value engineering. The tendering of works packages, often on an open-book basis, will help achieve cost certainty and establish whether it is economically advantageous for the development to proceed.

The JCT contract comes in two varieties. The “General Contractor” form is for the engagement of a main contractor to carry out pre-construction services. The “Specialist” version is appropriate when an employer or contractor intends to engage a consultant or sub-contractor.

One concern employers have with the pre-construction period is the potential leverage the preferred contractor has to raise the contract sum or renegotiate the terms governing how the works will be carried out. To address this, the parties agree in the PCSA’s Particulars the criteria under which the contractor must derive its second stage tender, including the form of construction contract (including any amendments) to be entered into.

Where the contractor is required to carry out design under the PCSA, it will have no design liability unless the construction contract is concluded. Employers may also query the absence of provisions governing third party rights or collateral warranties. The JCT’s view on both issues is that the construction contract will deal with them and if it is not entered into then they will be less relevant.

Elsewhere, there are standard obligations in relation to skill and care, prohibited materials, insurance, confidentiality and co-operating with the project team. The copyright licence is subject to payment. The PCSA does not, however, include any pre-construction services as these are generally project specific and it is intended to have the flexibility to work with either traditional or design and build procurement in a range of circumstances.

Inevitably, there will be projects where two-stage tendering is unsuitable. While the guidance notes claim that it can be adapted for a construction management structure, the necessity of a pre-construction phase could hinder this procurement strategy’s aim of getting works commenced quickly. Similarly, on projects where employers have a completed design and are well-placed to identify possible risk areas, they may be able to accurately forecast the expected contract sum without having to expend time and fees on a two-stage tender.

Nevertheless, two-stage tendering may become more important as a means of understanding project risks and costs. In providing a ready-made solution, the JCT has recognised this and it will be interesting to see how long it takes other contract publishers to follow suit.

A version of this article appeared in Construction News on 27 November 2008.