Design & construct procurement

Background

There are various procurement methods that may be used for the engagement of architects and architectural services and the delivery of construction projects. Design and construct (D&C) procurement is a project delivery method where a single entity – typically a construction firm or contractor – is responsible for both the design and construction phases of a project. The appointment of the contractor is preceded by initial or partial design work that is carried out by an architect for the client in order to obtain planning or development approval from the relevant authority. The contractor is then appointed to deliver the project. By assuming responsibility for design and construction, the contractor agrees to deliver the project within the agreed budget and schedule, although risks associated with delivery of the project are typically transferred by the contractor under contract downstream to consultants and other sub-contractors. Centralising responsibility in the contractor for design and construction can, in theory, increase efficiency and reduce project delivery time and costs.

A novated design and construct (novated D&C) contract is a variant of the D&C procurement model. The contract between the client and architect for an initial design for the construction project is subsequently novated to the contractor; in other words, the contractor steps into the shoes of the initial client through a deed of novation and becomes responsible for overseeing or coordinating finalisation of any outstanding design work. Under the novated D&C procurement model, the role of the architect evolves from initially being the primary designer for a construction project with a direct relationship with the original client to subsequently being part of a broader design team that is engaged by the contractor to provide design services for the project with less direct interaction with the original client.

The Systemic Risks Report deals with procurement models, including D&C procurement.[1] It notes that the D&C procurement model and, particularly, the novated D&C model, is the widely preferred method to procure construction projects across many countries, including Australia.[2] The Report explains how the D&C model can lead to adverse outcomes for architects, including the imposition of unfair contractual terms, increased exposure to unreasonable responsibility and risk, and compromising architects’ ability to discharge their professional standards obligations.[3] In addition, it discusses how architects’ role in construction projects can be marginalised when D&C procurement is used[4] and finds that the model can lead to the imposition of disproportionate responsibility on architects, reduce the scope of their role in construction projects and expose them to undue risk.[5] This chapter contains an analysis of the key issues discussed during the focus group deep dive into D&C procurement.

Key issues and findings

The focus group deep dive into D&C procurement considered how architects can be supported to overcome challenges and mitigate risks in the D&C context. The key issues that were discussed by focus group participants during the focus groups for this theme are summarised in Table 2 together with the main findings reached by the Steering Committee.

Table 2. Summary of key issues and main findings for focus group deep dive into D&C procurement

The next section of this chapter contains a discussion of the main insights and implications for this theme.

Insights and implications

Impact of D&C procurement on the design process

The Systemic Risks Report refers to the AIA Novation Contract Survey (2019) relating to Victoria as well as other sources which suggest that architects’ ability to deliver quality architectural services may be hampered in the novated D&C context.[6]

During the focus groups, participants were asked a number of questions to obtain insights about the impact of D&C procurement on the design process, including the manner in which architectural services are provided by an architect, and on the final design. In summary, participants identified the following inter-related issues in response to those questions:

• De-prioritisation of the design process: Time and cost pressures that exist in the context of D&C procurement in order to deliver a project on time and within budget may mean that design is de-prioritised. This may occur by limiting the scope of design services to an early schematic concept without commitment to detailed design documentation.
• Speed of the design process: The time imperatives implicit in D&C procurement mean that the design process may proceed more quickly than might otherwise be the case.
• Limited design documentation: Under D&C procurement, documentation is only completed to a stage required by the initial client; the extent of further design documentation that is required may be determined by the contractor. The level of design detail required at the time of novation, which may be limited, may affect the extent to which the original design intent is respected through the construction process. The contractor may be left to address gaps in the design documentation during the construction process.
• Inadequate contact with client: When responsibility for design is transferred from the architect to the contractor following novation, the consequent loss of direct contact between the architect and initial client means that the architect may not have a clear sense of the client’s position on specific design issues, including proposed contractor changes, and may be unable to control or guide project outcomes to ensure the client’s objectives are achieved in the built outcome.
• Lack of collaboration and integration of design: Following novation, siloing may occur among the various design consultants, which may impede their ability to collaborate and may consequently compromise development of a design that comprehensively and effectively reflects the views of the various design consultants.
• Use of building designers to take over design: Following novation, the architect may be replaced with low-cost, less qualified building designers, which could compromise the integrity of the initial design.
• Failure to ensure design intent carried through to the built outcome: Design consultants who are under the control of the contractor may have their site presence limited during the construction process, which may mean that design intent is not reflected in the final built outcome.
• Limited fees for architectural services: Architects’ fees may be reduced because they are not responsible for project delivery. In addition, fees may be reduced by limiting site presence, which will likely increase architects’ exposure to risk.
• Limited budget: After novation of a D&C contract, there be inadequate budget for design finalisation.

These points illustrate the various ways in which the features of D&C procurement may compromise the client-architect relationship, the quality of the design and design documentation and, consequently, the final built outcome. It is notable that these features of D&C procurement are largely out of architects’ control but, nonetheless, could hinder them from discharging their professional standards obligations – particularly those that relate to the management of the client-architect relationship and the obligations to act competently, professionally and with reasonable care.[7] In addition, these features could also affect NCC compliance and the quality of built outcomes (this issue is discussed in more detail below in Chapter 8 on Compliance with the National Construction Code).

When considered in this light, mechanisms to ensure that architects retain adequate control over the design process and are able to protect design intent during the construction process are critically important in the D&C context. This could be achieved if architects were to assume the role of lead consultant with responsibility for development of the overall design concept to ensure that it meets the client's requirements and aligns with regulatory standards as well as responsibility for oversight of the translation of the design into the built outcome. Legislating to provide for this role could be worth considering; architects would need to accept the risk and responsibility associated with the role and would need to be paid accordingly.

The novated D&C procurement context also raises questions about whether and how an architect can discharge the various obligations to the client under the regulatory frameworks because, in this context, the architect practically has two clients – namely, the original client and the contractor – although contractually the architect is only accountable to the contractor after novation. The significance of this issue may be particularly acute when the interests of the original client and the contractor do not coincide. Further consideration of how an architect can successfully discharge the professional standards obligations under the regulatory frameworks in this context would be useful and could help the architect balance competing interests and objectives as between the client and contractor in practical terms.

Factors that contribute to adverse outcomes for architects and the design process in the D&C context

Focus group participants identified the following main factors that could contribute to adverse outcomes for architects and the design process in the D&C context:

• Selection of inappropriate procurement model by client: Some clients may automatically opt for a particular procurement method without adequate reflection as to whether or not it is appropriate for the project.
• Poorly prepared developer: Developers may have unreasonable expectations for a project and/or are ill-prepared.
• Profile and approach of contractor: The extent to which design intent is adequately reflected in the final built outcome is likely to be linked to the profile and approach of the contractor, including how collaborative the contractor is, the extent of design oversight over the construction process, and the contractor’s attitude towards quality.
• Uncertainty created by D&C context: D&C procurement may involve significant uncertainty, including in relation to relationships between project participants, design changes, and adjustments to deadlines and budgets.
• Lack of adequate education and training about contract administration: Graduates and early career architects may lack the competency to navigate D&C contracts.

A number of the above factors relate to the culture and approach among project participants – specifically, the client, developer and contractor. Architects cannot control these factors. Nonetheless, architects could benefit from training on the pros and cons of different procurement models, which models are best suited to particular contexts, how professional standards obligations can be complied with in each of those contexts, and the possible impact on built outcomes in each case. Broader education among sectoral participants about the impact of these cultural issues on built outcomes is essential if adverse outcomes are to be minimised in the D&C context.

As for the issue of uncertainty, this is inherent in many aspects of architectural practice. Even though the nature and extent of uncertainty may be amplified in the D&C context, the architect’s professional standards obligations are not altered. Architects must employ strategic planning, thorough risk assessment and effective communication strategies to navigate uncertainty in this context so that their professional standards obligations can be discharged.

In relation to education and training, architects face a paradoxical situation in relation to obtaining experience about contract administration, particularly those early in their career. Engagement of architects for partial services under a D&C contract may limit experience in contract administration because the services will necessarily be confined to development of the initial design. While universities have a role to play by strengthening life-long education with more focus on procurement problems, adequate training and familiarisation with contract administration can only be obtained post-graduation in an actual project and under the supervision of experienced architects. This opportunity may not be available to all graduates. In any case, training may be more effectively directed towards risk management in the context of different procurement models, including D&C procurement.

Impact of D&C contracts on allocation of risk, liability and insurance

The Systemic Risks Report refers to the AIA Novation Contract Survey (2019), which notes the unfair contractual terms to which architects could be subjected in the novated D&C context, particularly terms that place too much responsibility on architects while hampering their ability to advise or instruct and, thereby, ensure quality outcomes.[8] The Report also notes that the unfair allocation of risk could increase architects’ exposure to liability[9] and the availability of insurance to manage risk may be affected by increased cost and limitations on coverage.[10] The discussion during the focus groups considered these issues in more detail.

More specifically, the focus group discussion highlighted an important dilemma faced by architects. The allocation of risk, liability and indemnities under D&C contracts can affect finance for a project; during the focus groups, developers suggested they have limited capacity to negotiate with the major lending bodies to deviate from standard contractual terms in D&C contracts. However, representatives from the insurance sector indicated that unfair contractual arrangements can also compromise architects’ insurance coverage. In particular, they stated that insurance cover may not be available when contractual arrangements contain clauses that distort normal common law obligations applicable to architects, such as contractual indemnities, disproportionate allocation of liability, and attempts to contract out of liability. In turn, this could lead to negative outcomes for clients if a claim is made against the architect’s insurance policy because the claim might not be covered. Without support and advocacy on their behalf, architects are unlikely to have sufficient leverage to negotiate more favourable terms in the D&C procurement context, even though these terms could affect insurance coverage.

Notably, representatives from the insurance sector also pointed out that D&C procurement can produce quality outcomes provided that there is an active commitment to quality, vigilant oversight, a good and experienced builder and a client/financier who is realistic about costs, as well as a good consultant team. They stated that, anecdotally, absence of these features in the D&C procurement context could give rise to more claims against architects, but there is no data to confirm this. By implication, architects could potentially face more claims if the cultural factors regarding the approach towards D&C procurement among key sectoral participants and the “mismatch” between the design and construction phases of a project are not effectively addressed.

Impact of D&C contracts on built outcomes

The Systemic Risks Report finds that, in the D&C context, cost can be prioritised over quality and that this, in turn, has the potential to lead to bad relationships between various entities involved in project delivery and, ultimately can result in poor built outcomes.[11] This finding was borne out during the focus group discussion. Participants stated that D&C procurement can lead to good quality built outcomes, but only where “buildability” is prioritised over time and cost. It is notable that the same factors that could compromise the quality of built outcomes could also undermine architects’ ability to comply with their professional standards obligations and may increase their exposure to legal risk. In light of these adverse outcomes, engagement with key lending institutions to highlight the risks that can arise in the D&C context could be helpful.

Mechanisms that can mitigate adverse impacts of D&C contracts on design and delivery of architectural services

The focus group discussion covered mechanisms that can help to mitigate the adverse impacts of D&C contracts on design and the delivery of architectural services, including the following:

• Client engagement: Clients need to remain involved throughout a project, engage with all parties on an individual basis, and make key decisions when required.
• Early engagement of contractor: Early engagement of the contractor can help enhance “buildability” by ensuring that construction and trade issues are accounted for in the initial design.
• More collaboration and open lines of communication: A more collaborative approach and open lines of communication among project participants and during the entire construction process can help align interests and outcomes.
• Clarity about the design process and design documentation: A clear design process and detailed documentation at the time of novation can help avoid poor built outcomes.

Core mechanisms to mitigate the adverse impacts of D&C contracts relate to communication, engagement and collaboration among the key protagonists in a construction project – namely, client, contractor and designers. Architects cannot control the way clients and contractors and other designers communicate and engage. However, there may be scope for industry advocacy about the benefits of more engagement among these participants. Sector-wide cultural change that focuses on early engagement and collaboration coupled with appropriate regulatory support through practitioner regulation may help to drive better outcomes from D&C procurement. One example that has proven to be highly successful is the NSW Public Works GC21 Contract that is based on co-operative contracting and enhanced communication.[12] A legislative response has been employed in NSW to drive a more integrated and collaborative approach to design and buildability through the Design and Building Practitioners Act 2020 (NSW DBP Act), but other less interventionist options may be available.

There may be benefit in clarifying the design process in the context of particular procurement processes. Existing resources about the design process, such as those prepared by the Australian Institute of Architects (AIA) and the Architects Accreditation Council of Australia (AACA) in the context of the National Standards of Competency for Architects (NSCA) could be used for this purpose.

Education and training to improve D&C outcomes

Overall, the full scope of education and training that is currently available to architects about D&C procurement and associated risks is unclear. A stocktake and analysis of current education and training about D&C procurement could be beneficial to ensure that future education and training is appropriately targeted. There may also be benefit in providing sectoral participants with case studies to illustrate good practice in the context of D&C procurement, including through the use of the AIA Code of Novation[13]. The case studies could also highlight alternative procurement models that demonstrate that the prevalence of D&C may not be justified, at least in certain contexts.

Concluding remarks

The deep dive into D&C procurement indicates that this model can work well and deliver quality built outcomes, but only if there is alignment of a number of factors, including a commitment to quality and an engaged and collaborative approach among key project participants, including the client, contractor, architect and other design consultants.

Various features of D&C procurement can result in a shift in responsibility for, and control of, the design delivery process away from architects, which can ultimately compromise the quality of built outcomes and may mean that architects are unable to discharge their professional standards obligations. High-level design documentation may be favoured under D&C procurement. This, coupled with limited on-site presence, may hamper the ability of architects to protect design intent during the construction process. These same features may also increase exposure of architects to risk and liability. Accordingly, mechanisms to ensure that architects retain adequate control over the design process and are able to protect design intent when the project is being built are critically important in the D&C context.

In addition, sector-wide cultural change that focuses on early engagement and collaboration among key project participants coupled with appropriate regulatory support through practitioner regulation may help to drive better outcomes from D&C procurement.