Developers who wish to avoid paying main contractor's overheads and profit frequently manage their own development projects, employing the various trades contractors direct, without a main contractor. This approach can sometimes be viewed with scepticism by funders and their advisers, particularly when the arrangements between developer and trades contractor are not reflected in a formal contract.
Funders are generally much more cautious and demanding than they were before the 2008 downturn. Funders were then often prepared to lend on projects that were procured on an informal basis, with very scant documentation, provided that the borrower was known and had at least some track record of successful development. As a result of many unfortunate experiences in the downturn, most funders now expect projects to be procured in an appropriate way and to be properly documented, and are very concerned to ensure that they are able to step in and complete the project if the borrower goes into default.
DIY construction management, where the developer acts as its own construction manager, is a perfectly valid approach to procurement, provided that the developer has the necessary skills, experience and resources to properly manage the project. It is all too easy for an inexperienced developer to underestimate the resources and skills needed to properly manage a construction project, and inadequate management is always a recipe for disaster. Any funder will therefore need to be satisfied that the developer is up to this task. They will expect the developer to demonstrate expertise in managing construction projects, for example by a successful track record of developments carried out on this basis. If this is not available, they are likely to insist that the developer "buys in" the necessary skills and resources.
One problem for the funder is that under this method of procurement there is no single main contractor with overall responsibility for the works. The developer may well have worked successfully over the years with its team of small trades contractors, but a history of long established working relationships will mean little to a funder concerned to protect itself against the risk of the developer going into default, and thus facing the possibility of having to step in to complete the project. They will want to ensure that they have proper step in rights, and that a proper contractual matrix of rights and responsibilities is in place.
The standard JCT trade contract, intended for use in a construction management situation, comprises a printed booklet which is some 124 pages long, and it is quite likely that the average self employed roofer or bricklayer will shy away from such a document. Most funders, and their advisers, will recognise this and will be prepared to be flexible, but it is very likely that they will require a properly executed short form of contract or, at very least, a properly acknowledged order with an acceptable set of terms and conditions for each trade contractor, however small. They will probably take the view that a collateral warranty from a tradesman, or a very small contractor, is worthless and will not insist on this in every case, and will not be too concerned as regards step-in rights in respect of the normal building trades.
However, where the trade contractor is responsible for major elements of the works (such as the major structural elements or specialist services) or has taken on any design responsibility, it will almost invariably be the case that the funder will require full step-in rights. The funder will therefore insist on a more formal trade contract being used and on receiving collateral warranties.
This article by David Johnson originally appeared in UK Construction in January 2014.