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30.07.2020 | KPMG Law Insights

Awarding contracts to general contractors – Guide for contracting authorities

Awarding contracts to general contractors – Guide for contracting authorities

The complexity of subsidy, construction and procurement law, as well as staff shortages in the administration, often lead to municipalities not using available investment funds. Particularly in the case of complex construction projects, awarding a contract to a general contractor (JV award) can simplify the tendering process without jeopardizing the achievement of the project objectives. Nevertheless, municipalities are reluctant to use JV contracts, mainly because they are concerned about violations of public procurement law.

In order to enable public clients to make a well-founded initial assessment for and against a general contractor award, KPMG Law, in cooperation with the Kompetenzzentrum für öffentliche Wirtschaft, Infrastruktur und Daseinsvorsorge e.V. (KOWID) and the Kompetenzzentrum für kommunale Infrastruktur Sachsen (KOMKIS), both at the University of Leipzig, has produced the guide “Awarding contracts to general contractors”. The publication can be downloaded here. The guide provides practical assistance to help public contracting authorities select and design their approach to public procurement law. The following is a brief overview of the main contents:

Which projects are suitable for JV contracting?

It will always have to be weighed up on the basis of the specifics and needs of a project whether the advantages of JV contracting outweigh the disadvantages in each individual case.

The awarding of construction contracts on a trade-by-trade basis entails a great deal of work for the client: He must precisely define the service interfaces of the various trades and coordinate numerous individual contractors. A JV award is therefore a good option if awarding the contract in batches would require a particularly large number of invitations to tender and the client does not have access to the necessary number of qualified and experienced employees for tendering and coordination.

JV contracting allows risk allocation that is advantageous for the client. The general contractor typically assumes significant construction execution and coordination risks along with his overall responsibility for construction. In addition, the customer only needs to contact one person in the event of warranty issues.

In construction projects with a high degree of standardization, a general contractor can adapt the construction process particularly efficiently to its individual approach and thus achieve cost and schedule advantages.

The client also has an increased degree of temporal and financial predictability. The total cost of a project is determined much earlier when a general contractor is awarded a contract than when individual trades are commissioned separately. In addition, a completion date is typically already agreed when the contract is awarded. However, general contractors charge a JV surcharge for their management services.

Under what conditions are general contractor awards legally permissible?

The statutory rule is the award of contracts in partial and specialized lots (Section 97 (4) ARC). This is intended to ensure procurement that is friendly to small and medium-sized enterprises. If there is a deviation from this guiding principle, clients are very concerned about being confronted with review procedures or funding reclaims. Concerns about reconsideration are not borne out in practice – out of approximately 40,000 reconsideration proceedings since 1999, there have only been 128 reconsideration proceedings on the award of lots (as of September 2019). Of these, only 39 were due to incorrect lot allocation.

When examining whether a general contractor award is possible, the contracting authority may first structure its procurement requirements on the basis of its right to determine performance. The next step is to determine whether an exception to the requirement to award lots is possible, considering economic and technical reasons. Should such reasons exist, an overall award is possible if the advantages associated with the JV award for the contracting authority outweigh the interests of SMEs in the award of lots. The client must always examine and evaluate this on the basis of the specific circumstances of the individual case. Technical aspects, such as in the case of a structural coupling or special cross-lot know-how, but also economic arguments such as a disproportionate fragmentation through lot splitting can be considered here.

The legal risks of JV contracting can be minimized by adhering to certain guidelines: The decision to award a JV contract must be documented in the award notice with detailed reasons and careful consideration. Clients can obtain a sufficient overview of the market through upstream market survey procedures to enable target-oriented project structuring. It is advisable to design the JV award as a two-stage procedure with a competitive bidding process and to explain the reasons for deviating from the lot award already in the announcement. For funded projects, early coordination with funding agencies is essential. Last but not least, the awarding of general contractor contracts can and should be designed to be as SME-friendly as possible.

How can a GU project be designed in partnership?

Construction projects are often accompanied by conflicts over deadlines, costs incurred and quality. Clients in JV projects are often well attuned to such situations and act at eye level with the client. JV projects are therefore perceived as particularly contentious. However, the potential for disputes can be defused with various approaches.

First of all, it is important to establish a culture of cooperation, for example through a jointly developed and signed project charter and joint kick-off meetings of the people involved. Some conflicts can be avoided by involving the construction company as early as possible in the planning process. Contractual incentive models such as acceleration and cost optimization bonuses can be particularly effective in aligning the interests of the general contractor and the client. Since rapid conflict resolution during construction is generally more cost-effective and better for the success of the project, it is expedient to establish out-of-court conflict resolution options. In particular, the parties may agree on internal dispute resolution mechanisms, mediation, adjudication by an independent expert, or ultimately an arbitration clause.

How can sufficient competition for a JV award be ensured?

Given the general decline in the number of bidders for public works contracts and the relatively small number of general contractors, strong competition is not always a given. To create more competition, contracting authorities must pay particular attention to the market attractiveness of their awards. This includes making procedures transparent, lean and cooperative. Here, too, integrating the expertise of construction companies into project planning brings advantages. Increasing attractiveness requires market knowledge, which can be obtained primarily through market exploration. In exceptional cases, it is also conceivable to choose a lot award with alternative admission of package bids, although this model creates uncertainties for the market and the potentials of a total lot award cannot be fully exploited.

Conclusion

JV contracts can be awarded in a sensible and legally compliant manner. Generalizations are out of the question; clients must deal with the advantages and disadvantages of the procurement models individually in each project. The guide is a tool that facilitates this assessment for public purchasers on a case-by-case basis and enables them to act according to their needs.

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