Novating design team to a contractor

Synopsis

Clients within the Construction Industry prefer to use the JCT Design & Build Contract rather than other traditional procurements methods. Novation is a process that allows Clients to oversee the early stages of design development of a project and then transfer the responsibility for the design to a Contractor after the contract has been awarded. By transferring the responsibility to the Contractor through novation the Client takes minimum risk contractually while retaining an influence on project design from the initial stages. This process transfers maximum risk to the Contractor as he becomes responsible for all future design of a project and all past design completed up to the point of a contract being awarded, this includes any design errors.

Both Contractors and Designers must work together closely on any design and build project, but particularly when novation has taken place. For a project to be profitable and be completed on time it is essential that there is a good working relationship between Contractor and Designer.

Research to establish if the process of novation has an adverse affect on the working relationship between Contractor and Designer was conducted. The aims were to identify factors that may affect the working relationship of the two parties and to understand the opinions of both Contractors and Designers about what affect novation has on their working relationship. The objectives of the research were to highlight specific problems within the process of novation and recommend improvements to industry. To achieve this research in the form of a literature review, questionnaires and an interview with Contractors and a Designer was performed.

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The report recommendations are aimed at Clients to hold more pre-contract meetings with Contractors not just Designers, and understand the criteria a Contractor follows when appointing a Designer to ensure compatibility between parties when in Design and Build contract together.

Acknowledgements

I would like to express gratitude to the following people and organisations for their time, knowledge and support in assisting the in the successful completion of this research project:

• My final year Supervisor Dr Ron Craig of the Civil and Building Engineering Dept of Loughborough University, for constructive criticism and guidance throughout the process of developing the dissertation.
• HBG UK Ltd for using a lot of Commercial Managers’, Design Co-ordinators’, Legal Correspondents’ and Personnel’s time in completing the literature review and aiding in the data collection.
• The Commercial Manager of the second Contracting Company questioned
• The Architect questioned for his experience and opinions of the process of novation.
• Mr Andrew Moss for proof reading the final draft of this report and suggesting possible alterations.

Chapter 1 – Introduction

1.1 Introduction to Subject

The Design and Build form of J.C.T contract (please see chapter 4.0) has become more popular with construction Clients that employ Contractors to construct new buildings and/or renovate existing structures. The Author’s research has shown that the percentage of contracts tendered for under a Design and Build form of J.C.T has increased over the last five years. In conjunction with this the traditional form of JCT contract has decreased in popularity with Clients.

In many cases the designs which make up part of the contract between the Client and Contractor, under JCT Design and Build, are completed by a Design Team on behalf of the Client before the contract between the Client and Contractor is made. To ensure that the Contractor who successfully tenders for a project retains the Design Consultant that the Client employed prior to the contract being made it is sometimes necessary for a Client to novate (please see chapter 5) the design team across to the Contractor. The purpose of this report is to investigate into the problems, if any, with the process of novating a design team to a Contractor from the Client and suggest solutions. This report will also detail the affects on the working relationship between the Contractor and the Designer, and how novation either aids or hinders the working relationship

1.1.1 Aims of Chapter One

• To introduce the Dissertation subject area.
• The reasons behind the investigation of this Dissertation.
• To outline the work carried out and a description of the contents of the Dissertation.
• Detail a well constructed hypothesis that the investigation will either prove or disprove.
• To outline a guide to the report, and introduce each individual chapter.
• To detail the aims of the report and the objective that must be achieved to meet the aims.

1.2 Rationale behind I nvestigation

The interest into the investigation of “Are there always problems with novating a design team to a contractor?” came about after the Author’s industrial placement. While working on site for a Contractor on a J.C.T. Design and Build contract where the design team was novated it became apparent to the Author that there were many differences of opinions between the Designers and the Contracting Company.

The main items of debate and disagreement between the Contractor and the Design Team were the Clients requirements. In the Author’s experience there was a large difference of opinion of how design changes and/or variations should be treated between the Design Team and the Contractor.

Whilst profit-driven Contractor seemed to always look for the cheapest and most cost effective way of bridging any design problem; where as the Design Team gave the impression that they were more concerned about the aesthetics of the design and the Clients design opinions rather than the buildability and cost.

Many design variations that were requested by the Client, or those forced upon the Contractor were not always as the Contractor had specified to the Design Team. The Contractor felt that his time was wasted by the Consultant not designing elements as originally specified. The working relationship between the Contractor and the Designer seemed to deteriorate from the project start date, until beyond the design completion stage.

After the Author had asked other members within the Contracting Company about the novation of a Designer to the Contractor it became apparent that the relationship between Contractor and Designer was similarly affected on other projects. The Author had discussions with the Client of the project he was placed on. The Client stated that more building work was being undertaken using the J.C.T. Design and Build form of contract as this reduces the risk to the client and/or the person funding the project.

The Author found that under Design and Build more risk was placed on the Contractor, and that management techniques had to change to appropriately manage higher risk projects. He also realised that as more contracts were being made under the Design and Build form of contract with the Designers being novated to work for the contractor a greater knowledge of the subject area would be beneficial to the Author in the management of Design and Build contracts.

1.2.1 Originality of Thought

The Author had discussions with his Supervisor before commencing the research about the subject matter. A hypothesis was agreed upon that gave the Author scope to research areas of the process of novation in design and build contracting that have not previously been discussed in an undergraduates research project for the Supervisor. The process of novation being used in the design and build contract has recently become popular with Clients. The aim of the research is to establish if Contractors and Designers have not yet fully adapted to the change and improvements in the working relationship between the parties must be made to ensure that they remain competitive and profitable.

1.3 Subject Definition

Novation is a process in which [1]a contract between party A and party C is turned into a new contract between party B and party C. This process can only be achieved if all three parties agree that novation can take place.

A Deed of Novation[2] is commonly used to terminate a contract between parties A and B, and then create a new contract between parties A and C. There are standard legal documents, blank deeds of novation, which are available as downloads from the internet, for example at (www.citysolicitors.org.uk/legal_activities as of 28/03/06).

A deed of novation has been used for many years before it became popular with Clients in the construction design and build context. It is used in the sale of manufacturing companies, where components made are used by other larger companies. For example, the purchase of a windscreen wiper company by a new owner whilst retaining the commitment to an existing customer car manufacturer.

Novation has many other wider applications other than construction; Porsche in their latest brochure[3] offer a novated lease for their new motor cars. In this case an Employee of a company (the lessee) signs a lease agreement with Porsche (the lessor). A Deed of Novation, then supplied by Porsche, is signed by Porsche, the Employee and the Employer. This then transfers the responsibility for the payment to the Employer.

Novation is used in a construction context where the relationship between two parties has developed over time and the introduction of a third or new party is necessary. There then needs to be provision to contractually protect the existing parties in the relationship.

1.4 Report Intention

The intention of this report is to investigate how the working relationship between the Contractor and the Designer novated to the Contractor from the Client could be improved to their mutual benefit, and to the benefit of the Client. However, the report may show that there is no improvement to be made, and that the process of novation as it presently stands is adequate.

1.4.1 Aims

• To identify clearly factors that may affect the relationship between the Contractor and the Designer under novation
• To discover any adverse characteristics that may cause a poor working relationship between the Contractor and the Designer
• To clearly understand the opinions of Designers and Contractors that has been involved with novation
• To understand the attitudes of Designers and Contractors towards novation
• To clearly understand the definition of novation and the context in which it is used within the construction industry
• To identify any differences in attitudes between Contracting Companies towards novation under a J.C.T. Design and Build contract
• To understand why Clients now prefer to use the Design and Build form of contract rather than the Traditional contracts they favoured to use
• To identify why Clients within construction novate the Design Team across to the Contractor

1.4.2 Objectives

• To highlight specific problems within the process of novation that requires improving
• To investigate how the process of novation may differ between contracts and/or with varying Clients
• To identify differences between the Contractor’s and Designer’s opinion of novation under the J.C.T. Design and Build Contract
• To highlight areas within construction where it is necessary to use novation in Design and Build contracts
• To advise the Contracting Companies of the most economic way of managing a Design Team that has been novated by a Client
• To identify if a Contractor and Designer have a better working relationship, i.e. have a greater understanding of each others objectives and needs, under a traditional contract rather than novation under a Design and Build Contract

1.4.3 Hypothesis

“The working relationship between Contractor and Designer is adversely affected by Novation.”

1.5 Overview of Research Methodology

The methodology of the research for this project will take the form of the following; please see the methodology in chapter three for a detailed discussion on the report methods used:

• A review of past and current literature concerning the background of novation within the construction industry.
• A review of specific literature concerning the working relationship of a Contractor and Designer.
• Discuss the definition of novation within construction, and where it is most commonly used in the industry.
• Design a questionnaire to send out to a selected Contractor and a Designer.
• Design an interview format and questions for a specific Contracting Company to answer on the subject of novation.
• Design an interview format and questions following the results of the previous interview to issue a separate questionnaire to a different Contracting Company to analyse company differences.
• Analyse results gathered in the interview to form a conclusion about the effect of novation in construction.
• Make suggestions or recommendations to the industry and Clients within the construction industry.

1.6 Overview of Main Conclusions

The Author’s completed research shows that there are ten factors that could adversely affect the working relationship between a Contractor and a Designer under a novation agreement. The Author found through analysing an interview and questionnaires completed by two Contractors and an Architect that the reasons for novation having an adverse influence on the working relationship of a Contractor and Designer were that:

1. The time allowed for Contractor to Tender is not increased
2. The loyalty of Designer to Client remains evident after novation to the Contractor
3. There is usually a large distance between the Designers head office and the project
4. Insufficient design fees are allocated at the tender stage
5. There is an increased risk of error in design
6. There could have been a previously poor working relationship between the parties
7. The Designer may be inappropriate for the project
8. The performance of the Designer is not consistent throughout the process of completing the design
9. Novation is usually late or rushed from the Client
10. There is an increased probability of conflict between the two parties

The Author found that many of these factors were specific problems which could be attributed to the process of novation under a design and build project. Therefore, the results support the hypothesis of the research. However, additional research is required if the hypothesis is to be proven to be correct.

1.7 Guide to the Report

• Chapter One: Introduction – This section introduces the study and outlines the hypothesis, aim and objectives of the research. It indicates the origin of the Author’s interest in the subject, why the hypothesis was chosen, and describes the methodology that was followed.
• Chapter Two: Literature Review – This section examines the literature research conducted by the Author. It is an investigation into the definition of novation, and describes where it is used within the construction industry. This section details the current view of the contractor in a novation agreement.
• Chapter Three: Methodology – This section of the report describes the methodology which was used to conduct this research. It shows how the information was collected. It also includes the topics covered within the interview and the design of questionnaires that were employed.
• Chapter Four: Design and Build Contracts – This section describes the forms of J.C.T. contract used and highlights the advantages and disadvantages to the Design and Build form of JCT contract. It provides an introduction into Design and Build and details the differences between the Employers Requirements and Contractors Proposals that are a key feature of the Design and Build contract.
• Chapter Five: Novation – This section of the report describes in detail the uses of novation within a construction context. It gives a definition to the process of novation as used in a Design and Build situation. This chapter details the conflict of interest the Contractor and the Designers tend to experience due to novation. It illustrates the problems that may arise in the design, payment of design fees and the varying levels of the Consultant’s performance.
• Chapter Six:Analysis – This section of the report is the analysis of the questionnaires sent to Clients within the building industry and their Project Managers and the Designers. It analyses the interviews conducted with the contractors and additional information gathered.
• Chapter Seven: Conclusion – This section of the report presents the Author’s conclusions based upon the findings within the analysis chapter of the report. It suggests solutions to the aims and objectives set out in the introduction, criticises the hypothesis around the report was based and highlights the possibility for further research.

Chapter 2 – Literature Review

2.1 Introduction

The literature review is a comprehensive analysis of all relevant articles, books and publications to this research project.

Derek Swetnam[4] describes the literature review as a report;

That is central to the dissertation and in all styles of work it has a number of functions:

• It shows that you have read widely around your chosen topic
• It demonstrates your critical understanding of the theory
• It acknowledges that work of others
• It informs and modifies your own research

The Literature review in this chapter is broken down into eight sub-headings. The chapter talks about the description of novation, then goes on to describe where novation is used today both in and outside the construction industry. The literature review describes the process of a Designer being novated to a Contractor. The final section of this chapter discusses and analyses in what way the literature which is reviewed is relevant to the Author’s research project.

2.1.1 General Aims

• To break down the causes of the problem highlighted in the hypothesis into logical stages.
• To collect and analyse previous research and literature to further investigate the subject area of this project.
• To research any previously made recommendations.
• Make recommendations which have been concluded from a detailed literature review.

2.2 Aim of This Literature Review

• What is the description of Novation and in what context was it used before in construction?
• Where is Novation used today outside of construction and what is its main purpose?
• What other uses are there of Novation within construction other than a Designer being novated to a Contractor?
• When did Novation of a Designer to Contractor become popular with Clients in the construction industry?
• Have there been problems with the novation of a Design team to a Contractor in the past?
• When is Novation practical in construction contracts?
• What are the risks to the Contractor in the novation process?

2.3 Contents of Literature Review

2.3.1 Description of Novation

David Janssens[5] stated that:

Occasionally, an Employer may stipulate that the successful Contractor is to engage one or more of the Employer’s consultants to complete the design and detailing of the project in the post-contract stage. Such consultants are employed by Contractors under ‘novation agreements’, i.e. a ‘novation’ agreement is a new agreement in substitution of a previous agreement between the Consultant and the Employer.

Novation exists when an agreement or contract between two parties is going to be broken and a third party enters to take the place the agreed or contract role of the party which is leaving the agreement or contract.

Novation can also exist when a third party enters into an agreement or contract without any other party leaving.

Jeremy Hackett[6] stated that:

“Novation” is a legal concept, formally providing for the re-employment of a Consultant by the Contractor, as part of the contract agreement between the Employer and Contractor. Should the Contractor merely choose to re-employ the same individuals who have previously sat the other side of the interview table from himself that would not be novation, but its effect would be very similar.

2.3.2 Uses for Novation.

Novation is not only used within the construction industry, the use of novation in law is much more commonly used in the buying and selling of manufacturing companies. In this context a novation agreement maybe drawn up by lawyers of a manufacturing company which intends to sell to buyer whilst still retaining the same business clientele. In this instance a customer of the business being sold would be novated across to the new buyer of the business, this ensures that the customer can always source what ever item the new buyer manufactures.

Ann Arbor[7] Stated that:

A hospital in Texas is taking electronic commerce beyond purchase orders and usage reports to adoption of digital contract management. The sooner hospitals are able to sign up to participate in new contracts, the sooner they are able to access contract pricing. Using the enhanced form management program, materials managers can submit forms online where suppliers can approve them, also online.

In this example a hospital in Texas is using the agreement of novation over the internet to sign up for new contracts much faster than it was able to previously.

This has benefited materials managers the most as they are able to source cheaper or higher quality materials from differing suppliers and simply transfer the agreement they have with one supplier to another using novation.

2.3.3 Alternative uses of Novation within construction.

The section above discusses how different forms of novation are implemented in areas other than the construction industry. However, within the realms of construction there are many more uses for the novation agreement to be used. The use of novation within construction has only been commonly used during the past decade or so, the main reason for this is the introduction of the JCT Design and Build Contract which made the novation of Designer to the Contractor much easier for the Client.

Before the introduction of Design and Build Contract novation was present in the same format it exists today in other industries as mentioned above. If during the construction process a Client was unable to fund any further necessary works and there was a willing buyer to stand in for the Client, it may be in the interest of the entering party to continue to use the existing Contractor. The easiest and least time consuming way to do this would be using the Novation agreement.

The second way in which novation occurred in a construction context before the introduction of the Design and Build Contract was if the Contractor was suffering from financial issues or the relationship between himself and the Client has been irreparably affected in someway. If a situation like this occurred it was beneficial for the Client to take on board a new Contractor through a novation agreement. This removed the necessity for the remaining works to be re-tendered, and the likelihood that the Client would have to pay an excess for the works to be completed.

2.3.4 When did novation become popular with Clients

Jim Smith[8] stated that:

The choice of a procurement method is probably the single most important decision the client makes, other than the decision to build. The various procurement methods can be described, as defined by Masterman (2002), under these three distinct categories:

• Separated and co-operative.
• Integrated.
• Management orientated.

In the last few years and particularly within the past decade the procurement methods for contractors have been moving away from the more traditional contracts as described above.

The change to a procurement method which uses the second and third categories above has largely been Client-driven; the main reason for this is that the Contractor has to accept a high level of risk if he is to tender successfully for a project. As more design development has been shifted across to the Contractor it is becoming easier and more cost effective for the Client to shift higher levels of risk to the Contractors. The Design and Build contract and all its variations have expanded considerably to accommodate a Client’s needs in recent times.

The Royal Institution of Chartered Surveyors (RICS) [9] in 2000 stated that:

Design and build and its variations have expanded considerably in the last decade. It has increased dramatically in the 1990s going from a 10 percent share during the 1980s up to a 35 percent share of the construction procurement market, with management contracting declining to a 10 percent share.

Chan stated[10] that:

21% of private Clients in the UK use the Design and Build system, of which 42% commonly use Design-Novate and Construct for their projects. Design-Novate and Construct has also been widely adopted in Australia and Hong Kong.

David Jaggar[11] Stated that:

The major advantages of design and build are that all the risks, both financial and period for completion, are transferred to the design and build contractor, with the client only dealing with one organisation, so eliminating the complexities and frustrations of dealing with a range of separate organisations. The approach also overcomes the problem of the separation of design and construction, so saving overall time and allowing the design to reflect improved buildability in the construction solution.

The argument against this is that a Contractor may be taking a higher percentage of higher risk projects. However, as a Client is off loading a lot more risk than what was traditionally not possible in the past they are able to fund much more projects and engage a lot more designers. The result of this is that the Contractor has more work to tender for and a much higher chance of winning projects as more tenders will be processed.

2.3.5 Issues arising from using Novation in construction.

Jim Smith[12] stated that:

There is considerable debate as to the merits and demerits of the approach and it is fair to say that many design professionals were unhappy about the approach, not least because there was a reduction in their own influence and independence. However, a valid view put forward, which undoubtedly design and build suffered from in the 1980s, was that the quality of the final building was often inferior and the role of design was devalued, as the design and build contractors “shaped” the design to suit their particular methods of construction. More recent views from clients noted above indicate that they were satisfied with the quality of their completed design build projects.

The Design Manager of a Contracting Company plays a critical role in the development of design to determine a contract value for a project. The role involves being able to balance cost and quality and time constraints within a framework. This is an essential skill for all Design Managers or Project Co-ordinators. The Design Manager will work closely with the Commercial Manager at the tender stage of a Design and Build contract when novation of the Design team is being used by the Client. It is crucial that both managers work together to reduce the amount of design and financial risk the contractor will have to carry through the contract period if the tender submission is to be successful.

Allinson[13] states that:

The developments in the construction industry, the continuing specialisation of professions and the rising application of alternative procurement methods have all contributed to the gap between design and management, but they have also emphasised the need for a design professional with management and technological skills. The management of the process should ensure a successful and deliverable project

When Design and Build contracts first became widely used by Clients in the 1990’s Contractors tended to manage the building works in the same way they managed traditional contracts. Here a Project Manager was responsible for the development of the construction and concluding the outstanding design issues as well as resolving any building sites day-to-day issues. Project Managers were supported by a number of other managers such as Services Engineers, Site Management and Quantity Surveyors.

Jim Smith[14] states that:

However, a single reporting source on all aspects of design and cost has not always benefited the client, contractor or the project. Projects have been organised in a very “flat” structure with numerous lines of responsibility reporting directly to the project manager. The larger projects would have over half a dozen separate factions directly beneath the project manager, including the above stated managers, structure coordinators, documentation managers, tendering coordinators, contract administration, project administration and occupation health safety and rehabilitation (OHS&R). In practice, this structure has proved to be an inefficient and ineffective form of management on many projects.