Following on from our February article on environmental issues affecting the procurement of industrial and logistics facilities, this article considers some of the key construction & engineering issues relevant to this growth sector in the UK. We look at issues associated with any required demolition and/or remediation before considering matters relating to the procurement of the supply chain for these ever more complex facilities.
Our February article highlighted a number of key ‘environmental’ issues such as land quality and the presence of high hazard industries when developing industrial and warehousing projects on industrial and brownfield sites that often give rise to the need for material demolition and/or remediation works to prepare the site for the main works. The demolition industry has traditionally used contracts such as the ICE and the NFDC forms of contract, although there is now a move towards other forms of contract such as the NEC4 with its emphasis on proactive project management. Whichever form is used, certain key issues will need to be addressed. They include:
- ensuring the desired site end state is clearly defined and informed by a robust remediation strategy and that a rigorous verification procedure is established
- confirming the interests of all stakeholders are adequately addressed including local authorities, the environment agency, funders, occupiers and investors
- agreement on the ownership of any scrap materials arising from the demolition and how they are to be valued
- the management of EHS issues on site including responsibilities under the CDM Regulations.
Constructing the team
The supply chain for the delivery of a warehouse or other industrial asset may be procured in a number of different ways and using various contract forms. The use of a single main contractor is still a common approach, but increasingly we are seeing a shift towards multi-contract or construction management strategies (see this article for further commentary on tier 1 design & build contracting and off-site construction, also discussed further below).
Whereas this sector has traditionally seen the deployment of relatively straightforward construction processes, technological advances (particularly in warehousing and logistics) has created an additional layer of complexity to the design, testing and integration of modern projects. For example, the use of sophisticated automated systems inside the latest distribution centres requires the floor slabs to be constructed to very fine tolerances requiring far more detailed testing and commissioning procedures to be included within the contract to ensure the contractor is held to those exacting standards.
Where a project adopts a multi-contract approach, interface provisions within the construction documents become all the more important. Most standard contract forms address interface issues to an extent, but for any multi-contract procurement we recommend this is considered in further detail and a suitable interface plan is developed with a clear allocation of responsibilities between all relevant parties.
Much of the key technology installed in modern industrial assets is provided by specialist overseas contractors, many of whom are unfamiliar with UK contracting requirements. A number will have experience of FIDIC based contract forms (used extensively in Europe and further afield) and MF/1 (which is well suited to the installation of plant and equipment into industrial assets), but given the niche nature of much of this equipment they are often able to insist upon the use of their own standard terms of business as the starting point for any negotiation. It is also common for suppliers to require payment of a non-refundable deposit before the main supply agreement has been finalised in order to secure a manufacturing slot to maintain the desired programme.
Where key technology is being delivered, clients will need to grapple with issues such as:
- security for failure to repay any advance payment they may be required to make (e.g. by way of an advance payment bond) as well as security for wider aspects of performance (e.g. by way of performance bonds and guarantees)
- timing of ‘delivery’ and the transfer of risk for loss and/or damage to the equipment; suppliers will often seek to deliver ‘ex works’, i.e. at their manufacturing plant, leaving the client to arrange transportation to site and associated insurance
- interface issues between the supplier, the client’s design team and other contractors and other stakeholders
- liability for defects – ensuring that the contractor remains liable to remedy defects for a reasonable warranty period post taking over of the equipment
- third party rights and the ability to request a direct agreement or collateral warranty in favour of any interested third party such as a funder
- training of operational personnel on the use of the technology
- the availability of spare parts in the event of supplier insolvency or ceasing that part of its business during the operational phase of the asset; this may require a technology escrow account where key technical information is held on deposit with a third party and available to be accessed by the client in those events or the provisioning of key spares as part of the initial supply
- testing of the equipment – both at the factory prior to ‘delivery’ and during installed performance
- liability of the contractor – including liability for delay, poor performance and third party liabilities (e.g. infringement of intellectual property rights).
The careful phasing of the works is often a key aspect of major warehouse and/or industrial asset procurements. It is common for clients to procure specific technology outside the scope of the main works with a need to ensure the equipment arrives on site to fit with the programme for the wider works to avoid any delay to completion. Appointing the right professional team to help advise on these matters and ensuring these issues have been accounted for in the construction contracts will help avoid unnecessary disruption and delay.
Boosting productivity with off-site construction
Off-site manufacturing and construction processes will play an ever more important role in the procurement of warehouses and other industrial assets.
In addition to our article on off-site manufacturing mentioned above, we recently wrote about design for manufacture and assembly (‘DfMA’). Employing a DfMA mind-set (and maximising the use of modern methods of construction) can reduce the cost and time for delivery as well as the amount of waste generated by such developments, and lower the risk to health and safety during construction and operation. However, the employment of such practise and techniques often results in a need to depart from traditional contracting models for engaging the supply chain. This can present a challenge to funders and investors who are used to the whole scope being awarded to one entity with overall responsibility for delivery. Over time, the industry will adapt to this disruption and new ways of contracting and managing risk will emerge. We are delighted to be involved with the work of industry bodies such as Constructing Excellence who are leading the discussion in this developing area.
This trend towards off-site manufacturing will increase the demand for well-located warehouses and transport facilities to enable the movement and storage of significant volumes of modular construction materials such as the logistics hubs under consideration for the expansion of Heathrow.
However, whilst it is clear that the construction process and contracting models are evolving, it is important for the procurement process itself not to become more complicated, costly and labour intensive. We were pleased to assist in the production of a briefing note on procurement best practice for the Civil Engineering Contractors Association informed by round table discussions between procuring authorities and major civil engineering contractors. Whilst that paper has a focus on public procurement, a number of the recommendations have general application. As always, the careful design of the procurement process, early and meaningful engagement with the supply chain, and access to appropriate technical, commercial and legal advice will help ensure the optimum outcome for both client and supply chain.