Contract form

The report of Hughes et al. (1997) was the only source of information that could be found in the open literature, which dealt specifically with the practices of procuring specialist works for building constructions. The study was based on a questionnaire survey of UK specialist and trade contractors where 16%, 22% and 61% of them specialised respectively in civil engineering (e.g. piling, ground work), services engineering (mechanical and electrical services) and building work (e.g. structural steelwork, curtain walling).

Table 7.4 summarises the incidence of different combinations of standard forms used for procuring specialist works. However, it is difficult to identify from the information given in the table which contract form is the dominant one, except that the prevalent combination is domestic subcontract (DOM/1), used in conjunction with the JCT80 standard form of contract, which involved also the use of collateral warranty (Hughes et al., 1997).

Sub-Contract Main-Contract Collateral Warranty Frequency (%) Value (%) DOM/1

7 Note: Con Own – contractor own; Dev Own – developer own; DOM – Domestic; NAM/SC – Named subcontract; NSC – Nominated subcontract; WC/2 – Works contract; FCEC/B, ICE, IFC; & JCT – references to various standard contract forms

Table 7.4 Standard forms used for procuring specialist works in UK

Other survey studies found in the literature review were on general practices of procuring building construction works. Based on a survey undertaken by the Royal Institute of Chartered Surveyors (RICS) in the UK, Harvey & Ashworth (1997) derived the distribution

7 The abbreviations shown in this report repeat those presented in Hughes et al. (1997), and their full names are inferred based on the best knowledge of the authors.

of contracts in use and that of the methods of procurement, as shown in Table 7.5. The survey covered 3,827 projects that worth almost £2.5 billions.

Contract form Number (%) Value (%) Note: JCT - Joint Contracts Tribunal; IFC - JCT Intermediate Form

Procurement method Year 1984 (% by value) Year 1993 (% by value) Bills of quantities

Table 7.5 Contracts and procurement methods in UK (Source: Harvey & Ashworth, 1997)

It is clear that “bills of quantities” was a common method of procurement while contracts based on prime cost were unpopular. There was an increasing trend of using construction management but an opposite trend in the use of management contract. Probably because of the increasing demand for design input from specialist contractors, the increase in popularity of design and build contract was obvious.

In addition, the findings of another study based in the UK (Holt et al., 1995), although using slightly different classification of procurement method, show a similar trend (Table 7.6).

Again, the use of contracts incorporated with bills of quantities was found to be common.

While construction management was not common in 1984, it recorded a significant increase in popularity in 1991.

Procurement method Year 1984 (% by value) Year 1991 (% by value) Lump sum – firm bills of quantities (BQ)

Lump sum – approximate BQ

Lump sum – specification and drawings Prime cost + fixed fee

Table 7.6 Procurement method in UK (Source: Holt et al., 1995)

On the procurement methods in the US, Eccles (1981) conducted interviews with 38 homebuilders in 1978 and found from the 26 usable interviews the following distribution of contract types between contractors and subcontractors:

Type of contract (%)

Fixed price contracts for the total job

Fixed price contracts on a unit of work basis Hourly rates and time and material contracts

71.6 25.1 3.3

Subcontracting homebuilding works through fixed price contracts was dominant. On the other hand, subcontracts on the basis of hourly rates were seldom used. Additionally, Eccles’s (1981) survey revealed the following modes of subcontractor selection:

Selection of subcontractor (%)

Competitive bidding

Negotiated selection and price Negotiated fixed unit price

Competitive bidding with discretion in selection Accept the price quoted by subcontractors

19.6 24.5 23.4 18.5 14.0

While selection of subcontractors based on competitive bidding (19.6%) and competitive bidding with discretion in selection (18.5%) accounted for more than one-third of the surveyed samples, selecting subcontractors involving negotiations and by means of inviting quotations from subcontractors aggregated to 55.9%, indicating their popularity in use.

Twenty years after the survey of Eccles in 1978, Costantino & Pietroforte (2002) compared the findings (percentage of cases) based on two surveys on 16 homebuilders and 23 general contractors (commercial contractors) in 1998-99. Table 7.7 summarises the results.

Homebuilders (%) General contractors (GC) GC1 (%) GC2 (%)

Best price from a proven subcontractor Sharing work to maintain business relationship

with subcontractors GC1: General contractor has a negotiated contract with owner

GC2: GC has a non-negotiated contract with owner

Table 7.7 Procurement method in US (Source: Costantino & Pietroforte, 2002)

Similar to the findings of Eccles (1981), competitive bidding or selecting contractors based on the lower bid were not commonly used for homebuilding or commercial construction contracts. Instead, contracts based on negotiation were widely used in the US.

The above highlighted the findings of some representative, although by no means exhaustive, surveys in the building construction industries of the UK and the US. Because the different surveys were conducted based on invariably different categorisations of contract types and procurement methods, their cross comparisons were infeasible. Nevertheless, the majority of

contracts between the contractors and subcontractors were generally formed on the basis of fixed price or lump sum with firm bills of quantity. Although the contracts were commonly procured through competitive tendering, price negotiations with the subcontractors were common in their selection.

7.6 Summary remarks

This chapter described an overview of the major industry-wide reviews conducted in UK, US, Australia and Singapore, as found from a review of relevant reports and articles in the open literature. Also, a summary is given of the findings from the literature review on the common procurement practices in UK and US.

Although there are issues of concern that are specific to individual countries (e.g. lack of skilled construction workers in Singapore), they have common concerns on a number of major issues, such as frequent occurrence of conflict and disputes in their construction industries and the needs for registration schemes for contractors in the industry and for regulatory controls over terms and conditions in contracts, especially payment terms, which are also highly relevant to the construction industry of Hong Kong.

Actions have been taken in Hong Kong along the lines of those taken in UK, US, Australia and Singapore, such as improvement of contract terms and conditions, the establishment of a voluntary subcontractor registration scheme and the enactment of the Construction Workers Registration Ordinance. The Australian and Singaporean contractor registration schemes should serve as good references when the Hong Kong Government considers expanding and enhancing the voluntary subcontractor registration scheme.

Reference should also be made to the legislative requirements in UK, NSW of Australia and Singapore on security of payment when Hong Kong proceeds to enact legislation on this issue for the local construction industry. The standard form for nominated subcontract for public works in Singapore also provides a framework for modification of the terms and conditions in nominated subcontract forms for use in Hong Kong.

7.7 References

ACA. PPC2000: ACA Standard Form of Contract for Project Partnering, UK: Association of Consultant Architects, 2000 (see http://www.ppc2000.co.uk).

ACA. Guide to the ACA Project Partnering Contracts PPC2000 and SPC2000, UK:

Association of Consultant Architects, 2003.

ACA, TPC2005: ACA Standard Form of Contract for Term Partnering, UK: Association of Consultant Architects, 2005.

AIA. You and your architect. American Institute of Architects, 2000.

Akintoye AS, MacLeod MJ. Risk analysis and management in construction. International Journal of Project Management, 1997, 15(1): 31-38.

Ashworth A, Hogg K, Added Value in Design and Construction, UK: Pearson Education Ltd., 2000.

BCA. Code of Practice on Buildable Design, Singapore: Building Construction Authority, January 2004a.

BCA. Approved Document, Acceptable Solutions, Singapore: Building Construction Authority, January 2004b.

BCA. Registered Contactor: Terms of Registration, Singapore: Building Construction Authority, January 2005.

BSJ. Payment rites, Building Services Journal, April 2000, p. 45.

Costantino N, Pietroforte R. Subcontracting practices in USA homebuilding – an empirical verification of Eccles’s findings 20 years later, European Journal of Purchasing & Supply Management 2002, 8: 15-23.

Chini AR, Valdez HE. ISO 9000 and the U.S. Construction Industry. Journal of Management in Engineering 2003, 19(2): 69-77.

CIBD. Raising Singapore’s construction productivity, Construction Productivity Taskforce Report, Construction Industry Development Board (CIBD), Singapore, 1992.

CIRIA, Specialist trade contracting – a review: special publication 138, UK: Construction Industry Research and Information Association, 1997.

Costantino N. and Pietroforte R. Subcontracting practices in USA homebuilding – an empirical verification of Eccles’s findings 20 years later. European Journal of Purchasing and Supply Management, 2002, 8: 15-23.

Constructing Excellence, Demonstrating Excellence: An Evolution of the Programme of Demonstrations, UK, 2004.

Daveport P. Partnering – the next step. Australian Construction Law Newsletter, Issue 36, 1994, pp.55-60.

Domberger S, Rimmer S. Competitive tendering and contracting in the public sector: A survey. International Journal of the Economics of Business, 1994, 1(3): 439-453.

Dorsey R.W. Project Delivery Systems for Building Construction, 1st Ed. 1997, Associated General Contractors of America, USA.

Eccles R.G. The quasifirm in the construction industry. Journal of Economic Behaviour and Organization, 1981, 2: 335-357.

Egan J, Rethinking Construction: the report of the Construction Task Force to the Deputy Prime Minister, John Prescott, on the scope for improving the quality and efficiency of UK construction, Department of the Environment, Transport and the Regions, London, 1998.

Gyles R. Final report of the Royal Commission into productivity in the building industry in New South Wales, 1992.

Harvey RC, Ashworth A. The construction industry of Great Britain, Reed Educational and Professional Publishing Ltd., 1997

HMSO. Housing Grants, Construction and Regeneration Act 1996, Chapter 53, UK, 2005 (available at: http://www.opsi.gov.uk/acts/acts1996/1996053.htm)

Holt GD, Olomolaiye PO, Harris FC. A Review of Contractor Selection Practice in the U.K.

Construction Industry, Building and Environment, 1995; 30(4): 553-561.

Hughes W, Gray C, Murdoch J. Specialist Trade Contracting – a Review, Construction Industry Research and Information Association, 1997.

Industry Commission. Competitive tendering and contracting by public sector agencies – overview. Commonwealth of Australia, 1996.

Konchar M. and Sanvido V. Comparision of US project delivery systems. Journal of Construction Engineering and Management, 1998, 124: 435-444.

Ling FYY, How project managers can better control the performance of design-build projects, International Journal of Project Management, 22(2004): 477-488.

Ling FYY, Chan SL, Chong E, Ee LP, Predicting performance of build and design-bid-build projects, Journal of Construction Engineering and Management, 130(1): 75:83, 2004.

Lim EC, Alum J. Construction productivity: issues encountered by contractors in Singapore, International Journal of Project Management, 1995; 13(1): 51-58.

Latham M, Constructing the Team: Final report of the government / industry review of procurement and contractual arrangements in the UK construction industry, HMSO, London, 1994.

Lyons T, Skitmore M. Project risk management in the Queensland engineering construction industry: a survey. International Journal of Project Management, 2004, 22: 51-61.

Macneil IR, The many futures of contracts, Southern California Law Review 1974; 47(688):

691-816.

Morton, R, Construction UK: Introduction to the Industry, Blackwell Science, 2002.

Oyegoke AS. UK and US construction management contracting procedures and practices: a comparative study. Engineering, Construction and Architectural Management, 2001, Vol. 8 (5/6), pp. 403-417.

Ruwanpura JY, Ariaratnam ST. Bonding procedures for North American and international construction contracts. Engineering Management Journal, 1999, 11(2): 28-34.

Uher TE. Risks in subcontracting: Subcontract conditions. Construction Management and Economics 1991; 9: 495-508.

Uher TE. Partnering in construction – a report. School of Building, The University of New South Wales, Australia, 1994.

US Bureau of the Census. 2002 Census of construction industries. US Department of Commerce, Economics and Statistics Administration, 2004.

8 Recommended Practices in Managing Specialist