Procurement models

Overview

• The D&C procurement model can lead to adverse outcomes for architects, including increased exposure to legal risk.
• D&C contracts are typically bespoke and may include unfair contractual terms for architects that could limit the availability of professional indemnity insurance.
• The D&C procurement model has also led to a perception among some clients that architects do not have the technical skills to provide project management services, even though this is a core skill under the National Standard of Competency for Architects.
• Architects must take active steps to assert themselves in a D&C context and ensure that their rights, interests and regulatory obligations are effectively represented and protected throughout the negotiation and implementation of a D&C contract.

A. Background

52. Procurement models used in the construction sector can have a significant impact on project outcomes, including the time frames for completion as well as the cost and quality of building projects.[1] Certain models and associated processes can support high quality architectural design and documentation and help to foster effective and efficient relationships between client, architect, and other contractors. Conversely, poor procurement processes can lead to inefficiency, higher costs, and increase the likelihood of delays and defects, including defects caused by poor design.[2]

53. Alliance arrangements, where parties work together collaboratively and on the basis of sharing risk and reward, is a procurement model that has historically been used in Australia.[3] The touted benefits of these types of arrangements include the avoidance of adversarial relationships, minimisation of the duplication of processes, maximisation of innovation, and enhancement of skills sharing. In turn, these features are said to drive efficiency and minimise waste.[4]

54. However, over the past 20 years, the design and construct (D&C) model has become the dominant procurement approach in the Australian construction industry, particularly for large-scale residential and non-residential building projects. Under this model, the client enters into a single contract with a construction company, which provides both the design and construction of the project, based on the client’s initial design requirements and project brief.[5]

55. Novated design and construct (ND&C) contracts, which are a variant of the traditional D&C model, is the widely preferred method to procure construction projects across many countries, including Australia.[6] Under this model, the design team engaged by the client for developing preliminary design documentation is inherited by the contractor. Upon appointment of the design team by the contractor, the pre-existing agreement between the client and the design team ceases and a new contractual agreement is implemented between the contractor and the design team to complete the project.[7] This model may be favoured by architects because of a perception that certain aspects of design risk may be assumed by the contractor.[8]

56. In addition, an advantage of the D&C procurement model for clients is that it creates a single point of responsibility – namely, the contractor. This model typically involves a fixed lump sum payment from the client to the contractor for delivery of the project, which provides the client with cost certainty. The use of milestone payments will also incentivise the contractor to complete the project expeditiously, which could reduce the time for completion of the project.[9] Nonetheless, as cost is an important driver for contractors in the context of the D&C model, low-cost options may be prioritised over quality design solutions.[10] The prioritisation of cost over quality can result in various adverse consequences for architects and the delivery of architectural services, which are discussed below.

B. Key issues

Design and construct procurement models can lead to adverse outcomes for architects, including increased exposure to legal risk

Discharge of professional standards obligations

57. In 2019, the Australian Institute of Architects (AIA) conducted a national survey of its members on the outcomes of procurement methods that involve novation of a contract (the AIA Novation Contract Survey (2019)). A number of the findings in the AIA Novation Contract Survey (2019) relating to Victoria indicated that architects’ ability to deliver quality architectural services were hampered.[11] In particular:

• architects were less likely to be included in project control meetings, which limited their capacity to ensure the integrity and quality of the ultimate design[12]
• architects had limited access to information, which affected their ability to fulfil their duties. [13]

The report notes that ‘Respondents believed that maintaining the integrity of the design intent was a challenge when the contract was novated. There was concern about delivering design quality and regulatory compliance, contractor commitment to ecological sustainable design, maintaining quality control over finishes and construction methodology so that substandard finishes are not applied. There was also significant concern about material substitution in a bid to reduce costs’.[14]

58. While these findings regarding a possible link between the procurement model and design quality were made in an ND&C context, they are potentially also relevant to D&C contracts more generally. Khan et al (2021) note that ‘Quality in the construction industry is an important issue yet ignored during the initial stages of the life cycle of a project, that is, the design and construction stage. The contribution of stakeholders, especially the architects is generally suspended though it has huge significance in terms of cost and time related to quality’.[15] Further, in noting a ‘crisis of quality’, an architect involved in projects utilising the D&C model stated that ‘True cost savings – without the negative side effects on quality – are in fact made by proper collaboration between the design team and contractor at the outset of a project to embed value … Despite this obvious logic, we’re seeing design budgets and scope squeezed, alongside the rise in popularity of design and construct (D&C) procurement, with an associated decline in quality’.[16] Findings in the Khan study, which suggests a negative relationship between design budgets for D&C construction projects and quality,[17] supports the assertion regarding the quality crisis.

59. Notably, the ARBV and NSW ARB receive very few complaints about construction projects involving the D&C model, which means that the evidence cited above which tends to indicate a relationship between the D&C model and compromised design quality, cannot be corroborated. There are a number of possible explanations for the lack of relevant complaints. In particular, the D&C model is typically used for large-scale projects involving firms of a commensurate size, capability and expertise. These entities will generally be driven by commercial imperatives and may have limited motivation to report unprofessional conduct by architects to the regulator, especially given that they will not benefit financially from doing so, even if unprofessional conduct is established.[18] They may address unprofessional conduct using other mechanisms, such as private dispute settlement.

60. Anecdotally, the NSW ARB understands that professional indemnity insurers for architects are making losses and some are being driven out of business. This, coupled with insurance policy exclusions (such as for cladding claims), suggests that there may be some aspects of architectural services that pose high levels of risk. An area for further research could be to determine the prevalence of and underlying reasons for insurance claims against architects, particularly to identify whether they are linked to unprofessional conduct.

Unfair contractual terms

61. The current edition of Australian Standard AS 4122-2010 – General Conditions of Contract for Consultants was drafted by key industry bodies to meet the needs of sectoral participants through the fair and proportionate allocation of risk in line with industry best practice.[19] However, instead of utilising this standard, contracts employed in the context of D&C procurement models are typically bespoke. The AIA Novation Contract Survey (2019) notes the unfair contractual terms to which architects could be subjected in this context. In particular, it was found that unfair and onerous consultant agreements placed too much responsibility on architects, while also hampering architects’ ability to advise or instruct and, thereby ensure quality outcomes.[20]

62. Moreover, unfair contract terms can affect the ability of architectural businesses to produce high quality work, to run a successful practice, and to grow.[21] They can increase the cost of providing architectural services because of increased exposure to liability that can make insurance more expensive, and result in less collaborative, innovative and efficient outcomes.[22] And they can affect the health and well-being of architects. The AIA Novation Contract Survey (2019) found that architects were often unable to increase their fees to match increased workloads, leading to inadequate resource allocation for projects and adverse health and wellbeing outcomes for staff.[23]

Exposure to responsibility and risk

63. Some findings in the AIA Novation Contract Survey (2019) also indicated that architects’ exposure to responsibility and risk was increased. More specifically, the report notes that:

• architects had increasing responsibilities for all aspects of construction, yet had diminishing power to influence good design and constructability outcomes [24]
• architects were required to take on more risk/responsibility for sub-consultants, even where those sub-consultants were appointed by the contractor [25]
• rates of product substitution by the contractor were higher, which could compromise safety for end-users.[26]

64. Weir (2019) notes that a number of the findings in the AIA Novation Contract Survey (2019) are consistent with evidence given by the architect in the Lacrosse matter, which concerned a fire at the Lacrosse apartment tower in Melbourne that was linked to flammable cladding used on the building.[27] The architect in that case complained about the builder’s lack of consultation and failure to ask for or follow the architect’s advice.[28] The architect further said it was not treated as the ‘head design consultant’ and that it, therefore, should not be attributed responsibility for that role.[29] However, the Victorian Civil and Administrative Tribunal (VCAT) found that the actual relationship between the contractor and architect could not override the architect’s contractual obligations.[30] VCAT further found that the cladding specified by the architect in the original design failed to comply with the National Construction Code (NCC), as was the case for the substitute used by the builder during construction.[31] The builder, building surveyor, fire engineer and architect were all found to have breached their respective agreements by failing to exercise due care and skill.[32]

The design and construct procurement model has altered perceptions about architects’ role in project delivery

65. Historically, architects had responsibility for both the design and the construction of a building. However, that role has since evolved as construction projects have grown in complexity and scale.[33] Construction management firms have increasingly gained more authority and responsibility, whereas architects have assumed more of a subordinate role.[34] Ahuja (2020) refers to studies conducted in the UK, France and Australia that ‘confirm that marginalization of architects and the invasion of their professional role in construction projects is pervasive across different scales of engagement, from house building to large-scale projects’.[35]

66. In the AIA Client Survey (2021), 80% of clients said that they do not use architectural practices for project management.[36] For larger scale, more complex residential and non-residential projects, while the presence of an architect on-site was valued to support the client relationship, clients did not perceive value in architects also performing a project management role.[37] Significantly, many saw project management as a specialised skill, necessary to address risks in the entire ‘design to delivery’ process and preferred to engage organisations that possess this skill. Clients also said ‘The majority of architects lack delivery experience outside typical design or documentation role. Hard to compete with experienced project managers from a project management consultancy’.[38] In fact, a commonly held view appears to be that architects do not have the technical skills to provide project management services to the standard required.[39] Yet, project execution is a core skill in the National Standard of Competency for Architects (NSCA) and is examined as part of the Architectural Practice Examination as a precursor to registration as an architect.

67. The perception of an architect’s role in construction projects is also likely to be affected by the proliferation of various entities providing design services to clients. The UK RIBA Survey (2011) refers to the gradual residualisation of architects in favour of specialist service providers, who deal with specific design issues, such as cladding. The report suggests that the trend away from architects in favour of other specialists may be exacerbated as architects seek to reduce their exposure to liability and thereby lose influence and control in construction processes.[40]

68. A survey conducted by Burr and Jones (2010) of a panel of US experts involved in the architecture and construction process revealed that 50% of panel members felt that ‘If the architecture profession continues on its current path, the panel collectively agrees that its role will become more specialized and carry less responsibility’.[41] According to the panel, architects are stepping back and allowing construction management firms to assume their role.[42]

C. Findings

69. There is evidence to indicate that the procurement model employed for construction projects can have a significant impact on relationships, risk exposure and allocation, and outcomes.

70. The D&C model is dominant for large-scale projects. The enthusiastic uptake of this model was originally based on the assumption that it could deliver construction projects more quickly and at a lower cost compared to other procurement models. Indeed, this model offers clients cost and time certainty and the benefit of centralised responsibility for project delivery. While the contractor assumes responsibility for design and construction under its contract with the client, responsibility and risk are typically transferred from the contractor to sub-contractors, including architects, along the contract chain.

71. There is also evidence to suggest that cost can be prioritised over quality when a D&C procurement model is employed. This, in turn, has the potential to lead to bad relationships between the various entities involved in project delivery and, ultimately, can result in poor built outcomes. Sectoral surveys and anecdotal evidence also indicate that the model can lead to the imposition of disproportionate responsibility on architects, marginalise their role in construction projects, and expose them to undue risk.

Regulatory role

72. The analysis in this chapter suggests that the D&C model has the capacity to compromise the capacity of architects to discharge their professional standards obligations, which is of concern from a regulatory standpoint. Nonetheless, the regulatory frameworks administered respectively by the ARBV and NSW ARB do not include power to limit or hinder in any way the choices made by architects about whether or not to enter into a particular construction agreement, nor to dictate the procurement model that should be used for particular types of construction projects. Accordingly, the ARBV and NSW ARB will continue to provide architects with support and guidance regarding their non-negotiable professional conduct obligations, which apply regardless of the procurement model that has been employed.

E. Role of other stakeholders

73. Architects must take stock of what is at stake when a D&C procurement model is used and ensure that their rights, interests and regulatory obligations are effectively represented and protected throughout the negotiation and implementation of a D&C contract. Architects also need to take active steps to reassert themselves as the ‘vision maker’ and the ‘conductor’ of construction projects.[43]

74. Industry bodies have already sought to tackle the challenges faced by architects in the context of D&C procurement. For example, the AIA has recently published a Code of Novation, which defines standards of conduct that promote good design, safety and quality throughout the procurement process.[44] There could be scope for industry bodies to further support architects in navigating the challenges associated with D&C procurement, particularly to address unfair risk exposure and allocation of risk under D&C contracts. Providers of education and training also have a role to play in educating architects about the pros and cons of procurement models, particularly the relative risk exposure for architects under these models.

F. Implications and recommendations

G. Areas for further research

[1] Association of Consulting Architects (WA), Procuring Architectural Services: An Industry Discussion Paper (2017), at p. 5. See also F. Rahmani, T. Maqsood, & M. Khalfan, ‘An overview of construction procurement methods in Australia’ (2017) 24(4) Engineering, Construction and Architectural Management, pp. 593–609.

[2] Association of Consulting Architects (WA), n. 50 above, p. 5.

[3] F. Rahmani, T. Maqsood, & M. Khalfan, n. 50 above, p. 599.

[4] CFMEU, Solving the National Crisis in Construction (2019), at p. 8.

[5] Australian Institute of Architects, ‘Design and construct’, Acumen Practice Notes, 15 June 2022.

[6] H. Doloi, ‘Analysing the novated design and construct contract from the client’s, design team’s and contractor’s perspectives’ (2008) 26(11) Construction Management and Economics, pp. 1181–96, at 1181.

[7] Ibid. p. 1181.

[8] Ibid. p. 1194.

[9] These advantages of the D&C procurement model are outlined in G. Wood, ‘The Design and Construct System for Project Delivery – Critical Issues’, Australian Construction Law Newsletter, Issue #64.

[10] CRC Construction Innovation, Building Procurement Methods (2008), at pp. 11–3.

[11] These findings relate to a survey undertaken in Victoria of 71 architectural practices and 158 projects delivered between 2009 and 2019.

[12] Australian Institute of Architects, The Benefits and Challenges of Novation for Architects - Victoria, (2019), at 3.

[13] Ibid. p. 7.

[14] Ibid. p. 7.

[15] S. Khan, M. Saquib, & A. Hussain, ‘Quality issues related to the design and construction stage of a project in the Indian construction industry’ (2021) 1(2) Frontiers in Engineering and Built Environment, pp. 188–202, at 188.

[16] S. Ollmann, ‘A Crisis of Quality: The Disconnect Between Design and Delivery’, The Urban Developer, 18 November 2019.

[17] See S. Khan, M. Saquib, & A. Hussain, n. 64 above.

[18] It should also be noted that a possible disinclination to report unprofessional conduct to the regulator is not confined to the D&C context for large-scale projects. In the experience of the ARBV, many clients decide not to progress complaints with the regulator once they discover that compensation is unavailable for unprofessional conduct.

[19] Association of Consulting Architects (WA), n. 50 above, p. 23.

[20] Australian Institute of Architects, n. 61 above, p. 7.

[21] Association of Consulting Architects, n. 38 above, p. 1.

[22] Ibid. p. 1.

[23] Australian Institute of Architects, n. 61 above, p. 20.

[24] Ibid. p. 2.

[25] Ibid. p. 7.

[26] Ibid. p. 3.

[27] Weir, B. ‘Room for (in)novation: Responsibilities of and liabilities for architects’ (2019) 108(6) Architecture Australia, 17 referring to Owners Corporation No 1 of PS613436T v L U Simon Builders Pty Ltd [2019] VCAT 286.

[28] Ibid. para. 417.

[29] Ibid.

[30] Ibid. para. 443.

[31] Ibid. para. 7.

[32] Ibid.

[33] K.L. Burr & C.B. Jones, ‘The Role of the Architect: Changes of the Past, Practices of the Present, and Indications of the Future’ (2010) 6(2) International Journal of Construction Education and Research, pp. 122–38, at 122.

[34] Ibid. p. 133.

[35] S. Ahuja, N. Nikolova, & S. Clegg, ‘Professional identity and anxiety in architect-client interactions’ (2020) 38(7) Construction Management and Economics, pp. 589–602, at 24.

[36] Australian Institute of Architects, Stronger Insights for Stronger Practices: 2021 Client Feedback Report (2021), at p. 17.

[37] Ibid. p. 23.

[38] Ibid. p. 24.

[39] Ibid. p. 23.

[40] C. Jamieson, n. 23 above, p. 24.

[41] K.L. Burr & C.B. Jones, n. 82 above, p. 135.

[42] Ibid. p. 136.

[43] Ibid.

[44] The AIA Code of Novation is accessible on the AIA website accessible at: https://www.architecture.com.au//code-of-novation.