CONSTRUCTION MANAGEMENT AS A PROCUREMENT METHOD

A NEW DIRECTION FOR ASIAN CONSTRACTORS

Patrick T.I. Lam, Department of Building and Real Estate,Hong Kong Polytechnic

Albert P.C. Chan, School of Building and Planning, University of South Australia

KEYWORDS

Procurement method, Construction Management, Asian contractors, AIA Forms of Contract

Construction Management (CM) has been widely used in the United States and sometimes in Australia. However,
it is a relatively new procurement method for Asian countries. The system is based on the arrangement where a
client appoints a Construction Manager on a fee basis to manage and co-ordinate the design and construction
phases of a project. The Construction Manager becomes a member of the professional team, contracting to manage
rather than to build. The client enters into direct contracts with contractors for construction works.

This paper examines the roles of a Construction Manager. It analyses the similarities and differences of approaches
in organisation structure, responsibilities of the parties involved and the lines of communciation, when compared
with the traditional procurement method. Since this system originates from the United States, the American
Institute of Architects (AIA) Forms of Contract drawn up specificially for this method are examined, with a view to
assessing their adoptability in Asia. A case study of a completed project in Singapore using the CM method is also
included in the paper.

Introduction

The management of the building process is traditionally undertaken on a client's behalf by the architect who then
acts as team leader and coordinates the work of other consultant members of the design team. The contractor is
selected on some basis of competition. In terms of timing and responsibility, design is separated from construction.
The traditional method may be characterised as a sequential approach; conception, development and
implementation phases are each completed and approved before proceeding to the next (Kwakye, 1990). Figure 1
illustrates the traditional management structure.

The increasing complexity of buildings, the need for a greater degree of financial planning, the need to reduce
design and construction periods and the increasing burden of contract administration has brought pressure to find
other ways to deliver the project. Many clients are becoming increasingly dissatisfied with the traditional form's
operational characteristics and seek other methods of procurement. In recent years, there has been a growing trend
towards supporting innovative and novel non-traditional processes of procurement which can realise far greater
rewards (Griffith, 1989).

Construction Management (CM) is one such approach, in which the clients appoint an external organisation to
manage and co-ordinate the design and construction phases of a project. The CM organisation may provide
specified common user and service facilities but does not normally execute any of the permanent works, which are
undertaken by construction contractors.

CM has been described as being able to accelerate project duration, improve overall buildability, encompass
flexibility and facilitate price competition (Sidwell et a1 1987, Hughes 1991). However, its emergence has not been
trouble free and its growth has been limited by a number of factors. This paper considers the CM method of
building procurement amidst the industry's increasing expectation of innovative and improved methods, identifies
potential benefits &d problems of application and addresses the likely implications for a building contractor in the
Asian context.
 - - A Design Consultants ]

Figure 1 Traditional Management Structure (Waldron, 1993)

Definitions of CM

Providing a single definition of CM is difficult, as there are many varying interpretations of the concept. These
differences reflect the continual changes that occur worldwide in the construction industry. Bennett and Grice
(1990) define CM system as a project delivery method where "the client appoints design and cost consultants and a
contractor or consultant to manage construction for a fee. Specialist contractors are appointed to undertake the
construction by negotiation or in competition". CIRIA (1983) gives a similar definition, viz: "CM systems are
arrangements in which the client appoints an external organisation to manage and coordinate the design and
construction phases of a project. The CM organisation may provide specified common user and service facilities
but does not normally execute any of the permanent works, which are undertaken by construction contractors".

There are two basic forms of CM. In A g e n q CM, the management role is taken by an individual or orgainsation
acting on behalf of the Employer, purly as an agent. This agent can be practising as a contractor or a professional
consultant. Trade contracts (or Works Contracts) are made directly with an Employer. In Direct CM (also called
Management Contracting in the U.K.), the management role is provided by a general contractor, who enters into
trade contracts for construction works.

Development of CM

There tends to be disagreement as to when CM was fust used, largely due to the many variations of CM used
worldwide. Lammers (1970) claims that owner-builders have been providing essentially a CM service since the
early 19001s,as architects and consultants have been employed in the same building organisation. Alternatively
Scott (1986) highlights the World Trade Centre (1966) in the USA as the fust usage. Sidwell et al took a random
sample of offices and hotel projects in the US in 1986 and found that 80% of these private sector projects were
being organised on the basis of CM (Sidwell 1987).

In the UK arena, Sidwell(1983) suggests that the Horizon Factory in Nottingham (1969) as the fust usage of this
procurement method. A recent RICS survey (1993) indicates that CM has been used increasing in the UK, with
contract value percentages rising from 6.89 to 19.36 in 1989 and 1991 respectively. The system had also been
spread to Australia, with the New Parliament House being a typical example.

The motivation behind the search for an alternative procurement method is generally believed to have come from
building clients, who were dissatisfied with the cost,
time and quality performance levels obtained when using traditional contracting. The lump-sum method displayed
inadequacies when placed under pressures of modem day construction techniques. Construction clients decided
that alternative procurement methods were required to improve the viability of undertaking a new project, CM
being one of the several possibilities.
Organisational structure

The use of CM results in significant alterations to the contractual arrangements between the project team members.
The most obvious difference between the CM system and the traditional building contracts is the altered contract
between the client and the main contractor. In traditional contracting the builder is invited to tender for
construction work. This involves estimating the'building costs, according to the requirements of the supplied
tender documents and specifications and then submitting a fum price that includes construction costs, builder's
overheads and a profit margin.

CM provides an alternative in that the contract between the builder and the client consists of a pre-determined fee,
ranging from fured, percentage or a combination of percentage profit plus reimbursable overhead costs. The
Construction Manager becomes an employed agent of the client and not an independent business entity. This
results in the builder being remunerated in a similar manner to an architect, engineer or other consultant.
Professional responsibilities must therefore be assumed, that is, the Construction Manager is legally obligated to
work for the betterment of the client, not himself. Figure 2 elaborates this contractual relationship.

SEVERAL TRADE CONTRACTORS (TENDERS)

Figure 2 Construction Management:

Source: Boulderstone Hornibrook, 1988

Early Appointment of the Construction Manager

Traditional procurement methods see the main contractor appointed after the design and specification is complete,
and after a lengthy tender process has occurred. CM's different contractual arrangement allows the appointment of
the Construction Manager at or during the design stage. This results in the following benefits due to the
Construction Manager's new role as an information source to the design team.

Construction Manager's greater knowledge of buildability will result in a more cost efficient design.

"Hands-on" experience of actual costs, time considerations and construction procedures.

Identification of items with long lead times early in the project's life.

Concepts of "Value management" can be applied due to the feedback properties of an integrated project team
(Chan, 1993).

Carehl pre-construction planning of building methodology should result in a quicker site start-up period.
The view that the Construction Manager needs to join the project team at the early stages of the design phase to
achieve CM's full potential is upheld in most articles relating to CM (CIRIA, 1984) (Collins, 1987) (Curtis et al,
1991) (Masteman, 1992) (Naoum, 1991) (Turner, 1990). The owner's interests are usually best served in this
instance because the greatest benefits are realised when the design and construction phases are integrated
(Rawlinson, 1984).

--track construction

CM allows the concept of "fast-tracking" to be used on a project due to the early involvement of the Construction
Manager (Kwakye, 1991). Figure 3 shows how this might be possible because of the overlapping of planning,
design, tender, award and construction.

Traditional Construction Method

Appointment: ArchltecWEnglneenr1Pro)ectManager

--
documentation^--
Design
Development
Tender Consl~clion
...--- 1
(Single Construction Contract)
Constructlon Management Method

Appointment: ArchltecWEnglneenrlConat~ctlonManager

Documentation
Development

Vanable Separate Constructron Contract

(Tenderedcompetitively as appmpnate) 1 Timesaving

This method is opposed to traditional linear project development, where each stage of the project is reliant upon the
successful completion of the previous phase. Traditional tendering requires almost completed design when it is
sent out to tender. There is also the situation where prices are required for trades such as wall finishes or
landscaping, well before work in that particular section commences. Compensating for price and economic
changes becomes difficult and frequently results in large risk contingencies being added to tendered prices, or
errors being made.

CM sees the use of trade or work packages, where specialist contractors are asked to tender for particular sections
of work, much like a builder appoints a subcontractor. Trades such as demolition and substructure footings, which
are tendered and usually fmalised early in the design process, can be documented, tendered and started while
finishing trades are still in the documentation stage. Construction therefore commences at the earliest possible
time, with the object being to shorten the overall project time (NEDO, 1985).

Project team relationships

The CM procurement method is also characterised by the altered relationship between the builder, now adopting
the role of the Construction Manager, the project team members and the building client. Although CM is now used
with greater kequency in the construction industry (Trenordan, 1985), it represents a change to the traditional lines
of authority between builder and consultants. The builder is now appointed at an equal rank with other design team
members. The many alterations created by the builder in adopting a professional instead of commercial role has
caused CM to be met with scepticism amongst some traditional building professionals.

Advantages and Disadvantages of C M

The selection by a client to use CM must be a careful one. There are both positive and negative factors to be
considered, depending on client's requirement, project needs and other contingency variables. The major attributes
are outlined below:

Construction cost

Final cost is unknown at the initial stage.

CM firm's fee is generally less than general contractor's profit (Lammers, 1970) (Nahapiet & Nahapiet, 1985).

Some studies have shown that total construction costs have been reduced (Adrian, 1981), others dispute this
(Naoum & Langford, 1991).

Varying ideas of cost reliability. NCDC (1987) found that cost estimates were more reliable due to
progressive adjustments to the scope of the works. This is supported by Naoum and Langford (1991).
However the General Services Administration (GSA) in the US experienced substantial cost over-runs (Scott,
1986).

Construction time

Nearly all studies concerned with CM have recorded reduced construction time (CIRIA, 1984) (Collins, 1987)
(Curtis et al, 1991) (Masterman, 1992) (Naoum, 1991) (Turner, 1990). This was attributed to the use of "fast-
tracking" techniques and specialist trade contracts (Kwakye, 1991). It is felt that the time savings are created
by overlapping design and construction. The actual time spent on constructing may well be similar to
traditional contracting.

Construction quaIity

Little has been researched on this topic but the aim is to maximise or at least maintain the project quality.
Indeed, "acceptable if not optimal" levels will be reached (Adrian, 1981).

Project suitability

CM is most beneficial when it is used on large, complex projects (Naoum, 1991). However this does not
preclude CM from being used on lower cost buildings (Nahapiet & Nahapiet, 1985). Projects like industrial,
commercial, schools, universities and hospitals have proved to be successful with this procurement method
(Sidwell, 1982).

Projects that have tight time constraints.

Client suitability

Organisations which do not have specialist "in-house" staff; or inexperienced clients (Nahapiet & Nahapiet,
1985).

. Public agencies, with their need for futed costs, may have difficulty adopting CM, as reflected by GSA (Scott,
1986). Private organisations may not have such tight regulations and may make greater use of CM's
flexibilities (Sidwell, 1985).
Client's liability

Because fast-tracking is used, there is no guaranteed final cost when the project begins. This is the client's
greatest risk. Cost over-runs in the later stages of the project are borne by the client (Sidwell, 1985). Because
CM fm acts as a professional agent, the client bears responsibility for the poor performances of any trade
contractors.

Selection of Construction Manager

The CM fm must have the suitable staff, resources, skills and experience.

Need to be able to provide a professional, rather than commercial role.

They should have "hands-on" experience in construction, to give the necessary cost of buildability information.
An understanding of the design process is also imperative.

For these reasons, f m s with a general contracting background are frequently, though not always, a sensible
choice for Construction Manager (Lammers, 1970). This opens up a new and challenging role to building
contractors.

Construction Manager's fee

Three main methods are used:

Fixedfie: best applied when the projects scope and size are well defined. Significant changes in the
project should see an appropriate adjustment to the fee. Best chance for a CM fm to supply an unbiased
agency role.

Fixed fee plus reimbursable costs: frequently used method, with the CM f m ' s overhead costs on site
being reimbursed. Due to self interest, however, there is a possibility that high quality site facilities will
be used at the client's expense (Sidwell, 1983).

Percentage of cost: not a preferable choice because it promotes inefficiency and lack of motivation.
There is a bonus for increasing costs (Adrian, 1981).

The Role of Asian Contractors in CM

Having cited the pros and cons of the CM procurement approach in gereral, it is worth considering whether this
method, which found favour in the US and the UK, can be equally well received in the Asian construction industry.

Countries in Asia are often differentiated by the labels of "developed countries", "newly industrialised countries
(NIC)" and "less developed countries (LDC)" according to the status of their economies and growth rates. The
expertise of contractors in these countries differs more or less to the same extent as their labels would imply. Japan,
for example, has developed sophisticated construction know-how, which they export. On the other hand,
contractors in countries like Cambodia and Myanmar are still using labour-intensive technology.

Given this divergent situation, CM is more llkely to find application in developed countries, where general
contractors, due to their extensive use of subcontracting,
have effectively become managers, rather than traditional builders. In developing countries, clients may be
reluctant to adopt the CM approach since the risk of individual works contractor defaulting is high. Yet, the recent
construction boom occurring in developing countries due to their infrastructure needs have prompted many
international contractors to penetrate into their markets. These contractors usually fonn joint ventures with local
partners. Hence, there is a growing opportunity for local contractors to absorb the technological and managerial
know-how from their overseas partners. Therefore, in the not-distant future, these local partners can build up their
strength to act as Construction Manager (CMr). However, they still need to market their management skill to clients
to alleviate their wony about contracting directly with smaller package contractors.
Contracts for Construction Management

There are several standard forms of contract written specifically for use with CM in the US and Australia. A series
of forms being commonly used in the US are published by the American Institute of Architects (AIA). Amongst
the series are the Standard Form of Agreement Between Owner and Construction Manager (Form B801) and the
General Conditions of Contract for Construction - Construction Management Edition (Form A201/CM). The
former document binds the Owner and the CMr, who provides professional management services in parallel to an
Architect. The latter document binds the Owner and the Contractor, who undertakes an individual work package.
The salient aspects amongst the provisions of the B801 Form are as follows:-

* The CMr's duties are divided into Pre-construction Phase and the Construction Phase.

* Specific duties are imposed on the CMr to develop construction budgets and a project schedule.

* The CMr has the duty to inspect the Contractors' works against defects and deficiencies but no liability
falls on the CMr if any Contractor fails to perform the work in accordance with the contract documents.

* The CMr is to review the Architect's design during its development when this advice is sought.

* The Owner is required to furnish to the CMr reasonable evidence that funds are available to cover the cost
of the project.

* Delays by the Contractors entitle the CMr to compensation but delay by the CMr in performing his duties
is not addressed.

The A201/CM Form resembles the form used in traditional contracting except that the management role of the CMr
is addressed in parallel with the Architect. Salient aspects of the CMr's role as provided in the Form include:-

* The CMr assembles and reviews all payment applications before recommending to the Architect for
certification.

* The CMr can approve the individual Contractors' Construction Schedules and co-ordinate them with the
Project Construction Schedule.

* The CMr can reject non-conforming work, subject to review by the Architect.

* The CMr may determine reasonable time extension and recommend to the Architect for Change Order
purpose.

* The Architect determines values of Change Order, the Date for Substantial Completion, and even
termination of Contractor's employment in consultation with the CMr.

It can be seen from the above that the AIA standard forms confer just adequate power to the CMr to exercise
control on construction works, whereas the power for approving time, cost and quality issues still vests with the
Architect. Basically, these forms of contract can be easily adapted for use in the Asian setting (for example, by
amending the specifics of arbitration rules) but it appears that the Architect under these forms is still required to
perform some management function, rather than purely devolving on design work, as the definitions of CM would
imply.
 udv of a CM Project in Asia - The Indonesian Embassy Complex in Sinpapore

Description of the Project and its Participants

This project is for the construction of a complex for the lndonesian Ambassador in Singapore. The works
comprised the complex building, swimming pools and a tennis court. The Employer retained a fm called Jaya-
Penta as Construction Manager, TSP as Architect and Rider Hunt Levett & Bailey
as Quantity Surveyor. Other consultants included an Engineer, lnterior Designer and Landscape Architect.

Contractual Arrangement

The Architect was retained for the design, submission of drawings to the authorities and quality control, whereas
other contract administration duties rested with the Construction Manager (CMr). The Conditions of Contract were
based on the Singapore Institute of Architects (SIA) Form (1979 edition) with revisions to cater for the CM
approach. All works were arranged in separate work packages, which were direct contracts with the Employer:-

Packages Scope of Work

Piling and hoarding

The relationship between the parties are depicted in Fig. 4. It can be seen that the Architect was mainly responsible
for co-ordinating the design team whereas the Construction Manager was responsible for construction co-
ordination.

The salient aspects of contract administration are illustrated in flowcharts. Fig.5 shows the regualr reporting system
through the CMr, who had resident site staff receiving and checking daily reports and weekly reports. These
reports were then passed onto the Architect for approval as the latter was officially responsible for quality control.
Monthly reports to the Employer covering design status, fmancial situation and construction aspects were compiled
and distributed by the CMr.

The quantity surveyor prepared bills of approximate quantities for all packages and recommended payments for the
work done by remeasurement. Unlike the AlA contract, payment certificates then prepared by the architect had to
be approved by the CMr before passing onto the Employer for payment. After that, the CMr monitored the
payment status to ensure that the Employer met his contractual obligations. (Fig. 6)

If any change or variation is initiated by any project participant, the proposal had to be vetted by a Project Control
Group comprising the Architect, the CMr, the QS and the Employer. After approval by the Employer, the formal
Change Order was issued by the CMr. Negotiation of the exact cost involved was then followed up by the QS.
(Fig. 7).

In respect of material sample submission, the CMr acted as the co-ordinator to facilitate approvals by the Architect.
(Fig. 8).

The CMr also played a key role at the hand-over stage, by carrying out final inspection, testing and commissioning
as well as collecting all maintenance manuals and as-built drawings from the package contractors.

One notable exception to the CMr's role in this project is his secondary position in the procurement of package
contracts. The QS was primarily responsible for prequalification of tenderers, preparation of tender documentation
and evaluation of tenders.

This project saw the requirement for each package contractor to provide performance bond to 100% value of the
package contract sum, reducing monthly by the certified value of work executed by the package contractor during
the preceeding month. This requirement was inserted presumably to reduce the risk of default of individual
package contractor, which Employers face in CM contracts.
The project was completed smoothly with no major claim or dispute.

Conclusion

Construction Management as a procurement method has been widely used in the US, UK and Australia. However,
it is a relatively new procurement method in thi Asian construction industry. In essence, CM is a contract to
manage rather than a contract to build. It is a very versatile procurement system which provides many advantages
for the client and the contractor. However like all other procurement methods, it has some limitations which need
to be carefully addressed before full benefits can be realised. In the Asian context, this procurement method is
more likely to find application in developed countries where the default risk of individual package contractors is
comparatively lower. As well-proven standard forms of contract are available, it is a reasonable expectation that
Asian contractors will take the CM approach as a new direction for their growth.

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